Another cereal producer with roots in the nineteenth century was the Quaker Oats Company. In 1873, the North Star Oatmeal Mill built an oatmeal plant in Cedar Rapids, Iowa. North Star reorganized with other enterprises and together they formed Quaker Oats in 1901.
The Washburn Crosby Company, a predecessor to General Mills, entered the market during the 1920s. The company's first ready-to-eat cereal, Wheaties, was introduced to the American public in 1924. According to General Mills, Wheaties was developed when a Minneapolis clinician spilled a mixture of gruel that he was making for his patients on a hot stove. The clinician approached the Washburn Crosby Company with his product and, following many tests and refinements, Wheaties was born. Other General Mills cereals followed in rapid succession. In 1937 Crispy Corn Kix was introduced. The company also launched the world's first ready-to-eat oat cereal in 1941. Originally named Cheerioats, the product later became "Cheerios."
During the 1940s cereal makers benefited from improved methods of puffing cereal products. Puffing methods employed a principle somewhat analogous to popping corn. Cereal ingredients were cooked and formed into pellets with precisely monitored amounts of water. The product was heated in an enclosed container called a "gun." As the heat increased, the water within the pellets turned to steam. The steam expanded and built up pressure within the gun until the intensity of the pressure caused the end of the gun to open. When the gun opened, the force of the escaping steam propelled the pellets out of the gun into a receiving bin and, as the steam erupted from the pellets, it left them permeated with thousands of air holes. These air holes caused the pellet to become larger and less dense. For example, one type of puffed product made with a pellet measuring 0.156 inches in diameter measured 0.5 inches after puffing. During the first decade of the 1900s, before the development of modern puffing procedures, puffed products were actually shot from cannons.
Many kinds of cereal were manufactured with a device called a food extruder. The extruder mixed and cooked cereal ingredients in a process that also shaped and colored the mixture. Ingredients were added at one end of the extruder and conveyed through its inner mechanisms by spiraling screws. A die at the other end of the extruder squeezed out cereal shapes and a blade cut the pieces at a predetermined size.
These food extruders were similar in operation to meat grinders. The first extruders, used during the 1930s, had only a single screw and often had problems caused by dried pieces of food. The machines were improved by the development of twin screws. Twin-screw extruders had two screws that intermeshed and cleaned each other as they propelled the cereal mixture.
The second half of the twentieth century brought rapid increases in brand offerings and growing national interest in ready-to-eat cereals. Many popular presweetened cereals aimed at the children's market were introduced during the 1950s. Trix and Lucky Charms were launched in 1954. Cocoa Puffs made its first appearance in 1958. Adult cereals made an impact during the 1960s. Total, touted as a product containing 100 percent of the officially established U. S. recommended daily allowance (RDA) of vitamins and iron, was introduced in 1961. In 1970, the ready-to-eat cereal market was valued at $659 million, and it had reached $1.9 billion by 1979.
In the 1980s and on into the 1990s, U. S. consumers became increasingly interested in health issues and, consequently, in improving their diets. In response, Kellogg introduced Nutri-Grain, the first line of flaked, whole grain, ready-to-eat cereals with no sugar or preservatives. Other Kellogg offerings aimed at the health-conscious market included Crispix in 1983, Just Right in 1985, and Smart Start in 1998.
In 1985, Kellogg held a 40 percent share of the total ready-to-eat cereal market, which had grown to $4.35 billion. General Mills held a 22 percent share, followed by Post (14 percent), Quaker Oats (8 percent), and Ralston Purina (6 percent). All other cereal manufacturers combined held the remaining 10 percent. According to a report published by Prepared Foods, 92.4 percent of U. S. households used ready-to-eat cereal. The average household had four packages, and the country consumed more than 20 billion bowls annually.
According to figures published by the U. S. Department of Commerce, the cereal breakfast foods industry shipped $6.6 billion worth of products in 1987. The total included $5 billion of products considered primary to the industry and $1.3 billion of secondary products. Miscellaneous transactions accounted for $319 million. These figures yielded a specialization ratio of 79 percent, an increase from the 77 percent specialization ratio recorded in 1982.
The largest and most rapidly growing segment within the industry consisted of ready-to-eat (RTE) cereals. By the end of the 1980s, the RTE market was estimated at $4.8 billion. By 1992, industry analysts valued it at $7.3 billion.
A much smaller segment, hot cereals, experienced virtually no growth between 1982 and 1987. In 1988, however, the hot cereal market garnered sales of $600 million, a 20 percent increase over figures for the previous year. The sudden surge was attributed to a national focus on the reported health benefits of oat bran.
Much of the growth within the ready-to-eat cereal segment during the later part of the 1980s was attributed to interest in oat bran. Products specifically labeled "oat bran" were valued at $34.9 million in 1987, $105.2 million in 1988, and $328.2 million in 1989. Oat bran's popularity, however, was short-lived. A study published in the New England Journal of Medicine debunked advertising claims that oat bran possessed the ability to lower cholesterol levels. The study led to consumer skepticism and a downturn in the success of new products based on key ingredients. In 1990 ready-to-eat cereal sales increased only 0.2 percent.
Another ingredient to suffer from health controversies was psyllium. Psyllium, a grain grown mainly in India, was said to help reduce cholesterol and thereby reduce risks of heart disease. A study done by the University of Minnesota, reporting a 9 percent reduction in cholesterol levels among people who ate a cereal containing psyllium, was used to document the claims. Subsequently, General Mills incorporated it in "Benefit" and Kellogg used it in "Heartwise."
The Food and Drug Administration (FDA) had previously approved psyllium for use as a laxative, but its use as a food had not been certified. The FDA expressed concern that it could result in damaging health consequences to the intestinal tract such as constipation, fecal impaction, depletion of necessary colon bacteria, and shifts in the body's ability to absorb nutrients. Allergic reaction posed another problem related to psyllium use. Consequently, General Mills discontinued Benefit in January 1990, and Kellogg encountered problems with regulatory challenges to its advertising. Six states—Iowa, California, Florida, Minnesota, Texas, and Wisconsin—brought suit against the company regarding the health benefit claims for Heartwise and other products including Special K, 40. Bran Flakes, and Frosted Flakes. In addition, Texas banned Heartwise. The suits were settled in 1991 when Kellogg agreed to pay each of the six states $30,000 to use for consumer or nutritional education and changed the name from "Heartwise" to "Fiberwise."
The 1990s were notable for shifts in traditionally held markets. Kellogg's Frosted Flakes had lost its top position to General Mills' Cheerios, and the cereal giant's previous 40 percent market share slipped to 32 percent in 1998. At the same time, General Mills' market share increased to 31.4 percent. Fortune magazine estimated each percentage point was worth about $75 million dollars per year.
In addition, many of the country's major cereal manufacturers faced problems because of changing patterns regarding brand loyalty. Customers preferred purchasing a variety of cereals rather than one favorite. Another challenge was the growing percentage of market share being captured by private labels marketed by a supermarket or grocer. Private labels accounted for 7.8 percent of the ready-to-eat cereal market.
Another change noted during the early 1990s was a shift away from products promoted solely on the basis of health benefits. Although consumers continued to look at nutritional content, other factors such as taste, variety, convenience, and price were also important. The "all-family" cereal segment held almost half of the ready-to-eat market. All-family cereals were not as sweet as children's cereals but had more sugar than traditional adult cereals. Examples included General Mills' Wheaties Honey Gold and Kellogg's Frosted Bran.
The snack market, which was estimated to be more than three times larger than the ready-to-eat cereal market, represented an emerging growth area for cereal makers. Following the U. S. Department of Agriculture's (USDA) release of its recommendation that Americans eat 6-11 servings of grain per day, cereal makers began promotions touting their products as tasty treats with positive health benefits. An estimated 7 percent of ready-to-eat cereals were consumed as snacks throughout the day. For example, Cheerios was promoted as a snack for toddlers, and an estimated one-third of all Chex cereal was purchased for use as an ingredient in snack mixes rather than for breakfast consumption. Two new products aimed directly at the snack market were Kellogg's Rice Krispies Treats and General Mills' Fingos.
Although cereal sales grew by 7 percent a year throughout the 1980s, growth came largely from price hikes. A price war erupted in the U. S. breakfast cereal market in 1996 following a long period of high cereal prices. According to The Financial Times, analysts said that producers had been greedy and continued to raise prices in the belief that their brands were so strong that consumers would pay inflated prices. When cereal prices were as high as $5 per box, consumers balked and began looking at alternatives to the brand names cereals such as the private label offered by the supermarket or bagged cereals. As a result, according to Supermarket Business, private cereal brand name products have seen market share grow by 60 percent since 1990, to total 7.8 percent in 1998. According to John McMillin, Prudential industry analyst, "Consumers are buying more bagged and boxed private label cereals. And alternative breakfast foods, like bagels and bakery products, clearly have had an impact on cereal sales."
At the end of the century, cereal makers were looking at new ways to market and advertise products, particularly toward adults who ate cereal in the morning, at lunch, and for snacks. New products and marketing campaigns aimed at adults seemed to pay off. New products made up for 11 percent of the $7 billion cereal market in 1997, up from 4.6 percent in 1996. Kellogg's introduced Honey Crunch Corn Flakes as the sponsor of a NASCAR auto race in 1996. In 1997, it was a $72-million brand with a 1 percent market share, which is respectable for a new brand. Kellogg's also promoted their cereal by partnering with Microsoft to offer software for both kids and adults. General Mills' Cinnamon Grahams and Old Navy paired up to offer coupons for Old Navy on the back of the cereal boxes and featured Cinnamon Grahams in Old Navy stores. "The old way of launching a new product, through promotions and coupons, is not sufficient any-more," noted Debbie Scott, a marketing manager for General Mills. Patrick Schumann, a food industry analyst for Edward Jones Investments in St. Louis, said "the ready-to-eat cereal segment in the United States is going to remain very challenging in 1999 and into 2000."
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