Post-Pepsi, Quaker Sales Experiencing a Morning Slump

With Share in Breakfast Category Shrinking, Does Giant Marketer Still Need This 'Orphan' Division?

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Once a fast-rising star, The Quaker Oats Co. is looking more like an also-ran these days, as the cereal, oatmeal and snack-bar maker struggles to find its place 10 years after it was gobbled up by PepsiCo.

A small cog in the cola giant's machine, Quaker remains profitable, but slumping revenues and market-share losses have one analyst wondering if PepsiCo might dump the unit if it can't reverse the trends. "I just think it needs a revamp," said Philip Gorham, who covers PepsiCo for Morningstar. "There's a long way to go before a sale becomes the obvious option, but in the next couple of years, if they can't turn it around, it will just be a drag."

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Quaker vs. the competition

What a difference a decade makes. When PepsiCo made its Quaker acquisition 10 years this August, it was a headline-grabbing deal. Though Gatorade -- which has been folded into Pepsi's beverage business -- got most of the attention, executives heralded the addition of cereal, oatmeal and snack bars as a strategic leap into the morning-snacking business. It was also seen as a good get considering that Quaker at the time had a strong reputation as an innovator: In 1997, for instance, the company benefited from the first food-specific health claim by the Food and Drug Administration, when it said the fiber in oatmeal may help reduce heart-disease risk.

So what went wrong?

When PepsiCo took over, it already had the Frito-Lay business under its wing, but the entry into the breakfast segment meant PepsiCo had to learn new categories and food occasions. "It took them a number of years before they actually tried to influence the Quaker business and get more engaged," said a former Quaker employee.

Meanwhile, others moved on. Quaker today faces some new competition in oatmeal from private label and chains such as McDonald's and Starbucks, as well as cereal, where most brands are down. But Quaker is still trailing others. Analysts and those who have worked on the brands in the past suggest Quaker has become an afterthought for PepsiCo, failing to lure the kind of marketing dollars it takes to grow a brand.

"Quaker is kind of viewed as an orphan division within PepsiCo," said Rick Shea, a food-marketing consultant. "They've been under-marketing it for years and it's showing up in their results." One ad executive who once worked on the account said: "You have to continually invest in the brand, and they have not. There's no doubt Pepsi doesn't put the same amount of priority on the Quaker products. They demand a lot from it, but they don't have it in their heart like they do carbonated beverages."

PepsiCo, for its part, says Quaker remains a key driver in its strategy to push nutrition and that it is accelerating marketing spending. Plans are in the works for a campaign this fall that will build on last year's "Amazing Mornings" effort, which sought to remind Americans about the importance of breakfast. "The next wave of work will continue to highlight core products and begins in the fall with Quaker oatmeal, since this is the start of the brand's key season," the company said in a statement to Ad Age . "Quaker Oats, along with Tropicana, plays a key role in PepsiCo's health-and-wellness strategy to grow the nutrition portfolio from $10 billion to $30 billion by 2020. While it's too early to go into detail, under the Quaker brand there is continued investment in new products."

Quaker is also making personnel changes. Kirsten Lynch, Quaker's chief marketing officer since late 2009, recently left and PepsiCo is actively searching for a replacement, a spokeswoman told Ad Age . Quaker is also bringing in global PepsiCo talent. The interim CMO is Kathryn Matheson, a 15-year veteran of PepsiCo in Canada, where the company says she has helped grow Quaker market share in key categories. Also coming to the U.S. is Alberto Fernandez, previously with the Quaker Baking Center of Excellence in Mexico, where he "helped accelerate the Quaker snack business," the company said. Quaker accounts for only about 5% of global PepsiCo revenue. Measured media spending on the unit dropped from $118 million in 2008, or 15.4% of all PepsiCo spending, to $56.4 million, or 9.9% of total spending last year, according to Kantar Media. But PepsiCo is pouring more money into Quaker this year, with $24.5 million in measured media in January and February, up from $14.3 million the same period last year, according to Kantar. The company said it anticipates further investment in 2012.

So far the new attention has not boosted the division. In the first quarter, PepsiCo reported a 6% revenue drop for Quaker Foods North America, while the company's other units all had positive growth that met or exceeded analyst expectations.

TAKING IT TO HEART: A decade ago, the company profited from the FDA praising the health benefits of oats.
TAKING IT TO HEART: A decade ago, the company profited from the FDA praising the health benefits of oats.

PepsiCo, in its first-quarter earnings statement, blamed the recent revenue and volume drop on "declines in center-of -store categories," including cereal. The cereal category has suffered for sure, partly a result of more people eating breakfast out of home and competition from other products such as yogurt, according to a UBS report. But sales of Quaker cereals -- whose top brands are Life, Cap'n Crunch and Oatmeal Squares -- have fallen faster, dropping 3.2%, compared with the category-wide 2.6% drop in the year ending April 17, according to SypmphonyIRI data, which do not include Walmart.

More worrisome is that Quaker's flagship hot-cereal and oatmeal business is lagging behind the competition. While still leading the market with 56.2% share and $476 million in sales, Quaker brands lost 1.9 share points as sales dropped 4.5% in the year ending April 17, according to Symphony IRI. Quaker lost ground to B&G Foods, maker of Cream of Wheat, whose sales jumped 2.3% to $61.3 million. Meantime, private-label brands have gained, now accounting for more than a quarter of the market, up from 21% in 2007, according to Mintel. Quaker is also facing increased competition from chains such as McDonalds, Starbucks and Jamba Juice, which are aggressively pushing oatmeal.

In the granola-bar category, Quaker sales fell 3.32% to $301 million, while sales for category leader General Mills, maker of the Nature Valley brand, leapt 15.5% to $353 million. And in the cereal-bar segment, where Kellogg dominates, Quaker sales fell 27.6%. The company now holds just 3.1% share in the category, a drop of more than a point from a year ago, according to SymphonyIRI.

Phil Lempert, who runs SupermarketGuru.com, said newer bar brands are "are really out there pushing, and I don't see a lot of marketing behind [Quaker]." It "almost seems like they feel putting the Quaker face on a product will sell it -- but those days are over." Mr. Gorham went so far as to suggest Quaker dump the iconic Quaker man, which he said might not appeal to younger consumers. "It is not the cool snack brand that it might have been a couple of decades ago. As a result of that , it's not really hitting the right consumer," he said.

Still, marketers who have worked on the brand say the Quaker man -- known internally as "Larry" -- still has tremendous cachet with consumers. "Consumers trust [the Quaker brand] more than any brand I've seen," said one former Quaker employee.

As of late, Quaker has tried a variety of executions for "Larry," who in the past three years has been steered by a couple of different ad agencies. In 2009, Quaker launched "Go, humans, go," by Omnicom's Goodby, Silverstein & Partners, which took the account in 2008 from Omnicom sibling and longtime Quaker agency Element 79, Chicago. The effort sought to pump up Quaker's entire portfolio -- and the health claims of oats. Such a broad effort is a tricky proposition, diverging from most packaged-food company efforts, which tend to run brand- and product-specific campaigns. And Quaker apparently wasn't satisfied, moving the account in late 2009 to another Omnicom agency, Juniper Park, Toronto, which launched "Amazing Mornings" last August.

Even in the midst of the changes, Quaker is still generating cash for PepsiCo, with profits up 9% in the first quarter, PepsiCo reported. While small compared to other PepsiCo units, "it's a nice big margin business for them," said Jonathan Feeney, who covers PepsiCo for Janney Capital Markets. "I don't think a company needs to be dominant in a business. They need to make money in a business and right now they're making pretty good money in it."

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