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MINNEAPOLIS-What snaps, crackles and pops; comes in clear plastic bags; and costs about a dollar less than you'd expect?

Malt-O-Meal Co.'s ready-to-eat cereals, which are low-cost, high-quality clones of the nation's biggest selling, heavily advertised cold cereals.

"Ready-to-eat cereals is a huge category that's not growing very much," said John Lettmann, president of the $250 million, privately held company. "But as cereal prices go up .... there's plenty of room for value-price cereals."

There is so much opportunity that Quaker Oats Co. late last year began putting its familiar logo on bags of value-price cereal it previously sold under the Popeye brand. That move has yet to eat away at Malt-O-Meal's market share, but it's not a situation company executives casually dismiss.

"It's gotten us to really focus on what our core mission is," said James Sophocleus, Malt-O-Meal marketing manager. "And that mission is delivering price and quality to the consumer, profits to the trade."

Eschewing most of the bells, whistles and in-box freebies that Kellogg Co. and General Mills lavish ad budgets upon, Malt-O-Meal instead offers grocers generous profit margins of 15% to 20%, compared with 12% from the big brand name cereals.

"Our position in the market has not changed in quite some time," Mr. Sophocleus said. "Our goal has always been national brand quality. We sold value before value was trendy."

Moving into ready-to-eat cereals has proven to be a shrewd choice for Malt-O-Meal, which has marketed Malt-O-Meal hot wheat cereal since 1919. In the 1960s, the company began making Puffed Rice and Puffed Wheat ready-to-eat cereals at its Northfield, Minn., plant. By 1975, Malt-O-Meal was producing a Cheerios clone, Toasty O's, as well as producing store brand cereals for chains like Kroger Co., Safeway and SuperValu.

Now, only 15% of the company's sales are from the four-flavor Malt-O-Meal hot cereal line, and the ready-to-eat cereal line includes 13 clones: Golden Sugar Puffs (like Golden Crisp); Tootie Fruities (Froot Loops); Coco Roos (Cocoa Puffs); Marshmallow Mateys (Lucky Charms); three versions of Toasty O's (original, honey and nut, and apple cinnamon); Crispy Rice; Puffed Wheat; Puffed Rice; Frosted Flakes; Corn Flakes; and Raisin Bran. Malt-O-Meal this fall will introduce Corn Bursts, its version of Corn Pops.

Altogether, the company's ready-to-eat cereals posted $127.7 million in sales for the 52 weeks ended April 2, 1995, a 34.2% increase from the year-earlier period, according to Information Resources Inc. Malt-O-Meal holds a 1.6% share of the $8.2 billion ready-to-eat cereal category, which pales in comparison with Kellogg's 36.2%, General Mills' 25.7% and Quaker's 13%.

In terms of unit volume, Malt-O-Meal gained 36.1% to 62.7 million pounds of cereal sold during that same time period, giving the company a 2.4% share.

Private-label cereals now account for 5.8% of sales, a 12.5% gain, IRI reported. Quaker, which is adding varieties to its bagged cereal line, believes consumers will be more inclined to buy bagged cereals if they have a national brand name on the packages.

A national brand name automatically conveys high quality, a Quaker spokesperson said.

Ralcorp Holdings, the largest maker of private-label cereals, has told industry analysts it doesn't believe Quaker will have much impact on its private-label business. Instead, it believes Quaker will bite into national brands, including, perhaps, Quaker's own.

But it's Malt-O-Meal that industry analysts are keeping an eye on. "Malt-O-Meal is well positioned in the segment of the category that's growing the fastest," said Tim Ramey, senior VP at C.J. Lawrence/Deutsche Bank Securities, New York. "Price is still the issue in the category, especially for products like frosted flakes, corn flakes, raisin bran and bran flakes that look more and more to the consumer like basic commodities. Everyone who's selling on price is gaining share, while the higher-price brands are losing."

"While [Malt-O-Meal's] success will invite more competition, there seems to be plenty of room at the value end of the category," said George Dahlman, food analyst at Piper Jaffray, Minneapolis. "That's the end of the category that's growing 11% to 12% annually, compared with the single-digit gains overall."

Recently, Malt-O-Meal has moved to take advantage of the tremendous growth in the value segment by airing a TV commercial directing consumers to the part of the supermarket aisle in which its cereals can be found.

The "Walk This Way" spot shows regular folks doing a duck walk-squatting down and waddling by the lower shelves of the cereal aisle, where Malt-O-Meal cereals are usually found. "We wanted to show that people are changing the way they shop the cereal aisle," said Jerry Fury, partner and copywriter, Clarity Coverdale Fury, Minneapolis, Malt-O-Meal's agency.

In all, 140 people of all shapes, sizes and colors were filmed in a Santa Monica, Calif., shopping mall doing the duck walk.

Malt-O-Meal, which Competitive Media Reporting said spent $3.2 million in TV advertising last year, this year will air "Walk This Way" in 13 key markets, including Kansas City, Mo., Minneapolis, Phoenix, Portland, Ore., and Seattle, as well as network cable.

"We don't have the advertising and promotion budgets that the national brands do. We'd rather use those dollars to give the [retail] trade and consumers a better price," Mr. Sophocleus said. "We use our advertising to generate.... We believe the price will entice, and the quality will keep them coming back."

If consumers indeed keep coming back for more Coco Roos, Tootie Fruities and Toasty O's, it shouldn't be difficult for Malt-O-Meal to meet Mr. Lettmann's goal of doubling sales by the year 2000.

"We look at 3M as our model," said Mr. Lettmann, a former General Mills executive. "If that multibillion-dollar company can double its sales and have 25% of sales from products that were introduced in the last five years, surely that's something we can do, too."



Headquarters: Minneapolis, Minn.

Leadership: John Lettmann, president

Estimated sales: $250 million

Agency: Clarity Coverdale Fury, Minneapolis, handles a more than $3.2 million primarily television account.

Recent successes: Convinced most retailers to stock its newest ready-to-eat cereals, Coca Roos, a version of Cocoa Puffs, and Marshmallow Mateys, a clone of Lucky Charms. Up next is Corn Bursts, a Corn Pops clone.

Challenges for 1995 and beyond: Identifying long-term sales trends among the big nationally advertised cereal brands, and staying one step ahead of competitors like Quaker Oats Co., which is gaining distribution for its Quaker brand ready-to-eat value-price clone cereals, and Ralcorp, the nation's largest manufacturer of store brand cereals.

Source: Advertising Age and company reports

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