Kellogg Plans British Invasion, Introduces Crunchy Nut to U.S.

No 1. Cereal Maker Banks on Import to Help Put Distance Between It and Gaining General Mills

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CHICAGO (AdAge.com) -- Kellogg Co. is banking on a British import to help lift its sagging cereal sales in the U.S. with the introduction next year of Crunchy Nut, a sweet-tasting brand that's been sold in the U.K. since 1980.

The January launch -- expected to be accompanied by a significantly sized advertising campaign -- comes at a tumultuous time for the cereal giant and within a category that has of late shown lackluster innovation. Kellogg's share gap has been narrowing with No. 2 General Mills and the company recently lowered profit forecasts, citing weaker performance in core cereal markets, competitive pressure and lingering impact of the recall this past summer of some brands due to odd smells.

Although recession-driven discounting has depressed cereal performance across the category (cereal dollar sales dropped 2.68% in the year ending Oct. 3, while unit sales were down 0.22%, as the average price per box fell by 7 cents to $2.95, according to SymphonyIRI), analysts contend Kellogg is lagging Big G, its chief U.S. competitor. Kellogg remains the U.S. market share leader in the more than $6 billion cold cereal category at 33%, according to SymphonyIRI data. But General Mills is close at 31%, gaining 0.39 points in the year ending Oct. 3 compared with a 0.51-point loss for Kellogg, according to the data, which excludes Walmart, club and convenience stores.

"As the dominant player in the domestic breakfast-cereal category, Kellogg is not immune to aggressive competition, but its inability to get its hand around these issues concerns us," Morningstar analyst Erin Swanson wrote in a recent note to investors.

Kellogg declined to discuss specifics of the cereal launch, other than to confirm its entry into the U.S. market in January. Kellogg roster agency Leo Burnett, which is handling the campaign, also declined to reveal details.

"Crunchy Nut's unique honey and nut flavor has made it one of the top cereal brands in the United Kingdom since its debut in 1980," Mike Morrissey, Kellogg's manager of brand PR, said in a statement. "We are confident that Crunchy Nut cereal's international popularity will continue in the U.S."

Crunchy Nut -- corn flakes drizzled in honey and encrusted with chopped nuts -- is a $154 million brand in the U.K., according to Kellogg. It is the third-ranked cereal by market share, behind Special K and Weetabix, according to Euromonitor International. The brand is also sold in Ireland and Australia.

The cereal comes in several varieties, including clusters and chocolate curls. Recent TV advertising makes the cereal the subject of late-night cravings, with the tagline "ludicrously tasty." In one ad, a man asks for the cereal at a gas station, where the late-night attendant pours it through a small space in a glass-enclosed walk-up window.

By bringing Crunchy Nut to the states, Kellogg can save on the research and development costs associated with a brand-new offering -- but still get the lift of a new product, said Thomas Graves, who covers the company for Standard & Poors. "You've already invested some money in a product. To the extent you can attach more sales revenue to that investment, it should be a good thing," he said.

Also, the risk is low because the brand has thrived in a country with similar tastebuds as the U.S., said David Palmer, a UBS analyst. But "on the other hand, this is a new brand for the U.S., so it will likely not be as low risk as a trademark extension. And this new product will likely require some pretty good execution on the marketing," he added.

A U.K. ad for the new Crunchy Nut cereal.
A U.K. ad for the new Crunchy Nut cereal.
As of late, Kellogg's consumer promotion and ad budget has fallen, from 13.2% of sales in 2005 to 11.6% in 2009, according to a Goldman Sachs report, which notes that "some of these cuts may need to be restored to rejuvenate the top line."

The Crunchy Nut introduction continues the recent trend of cereal brand expansions, rather than completely new products. General Mills' most recent launches are Total Plus Omega-3s, introduced in June, and Wheaties Fuel and Chocolate Cheerios, which both debuted in January. Big G has cited the new offerings for recent sales gains. Kellogg's most recent launch was the June debut of FiberPlus cereal, a breakfast-bowl version of FiberPlus Antioxidant Bars.

But overall, cereal innovation is down, with only 15 line extensions or new products launched through the third quarter, compared with nearly 44 in 2008 and 29 last year, according to a UBS report. Instead, price promotions have dominated. But the discounting is producing diminishing returns, notes the UBS report, called "What Went Wrong With Cereal." General Mills recently announced price increases for some brands, citing higher ingredient costs. So far Kellogg has not followed.

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Contributing: Emma Hall

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