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BREAKFAST CEREALS IN INDIA Euromonitor International November 2011

LIST OF CONTENTS AND TABLES Headlines ...................................................................... ............................................................... 1 Trends ......................................................................... ................................................................. 1 Competitive Landscape .......................................................... ...................................................... 2 Prospects ...................................................................... ............................................................... 3 Category Data .................................................................. ............................................................ 4 Table 1 Sales of Breakfast Cereals by Category: Volume 2006-2011 ............... ....... 4 Table 2 Sales of Breakfast Cereals by Category: Value 2006-2011 ................ ......... 5 Table 3 Sales of Breakfast Cereals by Category: % Volume Growth 20062011 ........................................................................... .................................. 5 Table 4 Sales of Breakfast Cereals by Category: % Value Growth 2006-2011 ....... .. 5 Table 5 Breakfast Cereals Company Shares 2006-2010 ............................. ............. 5 Table 6 Breakfast Cereals Brand Shares 2007-2010 ............................... ................. 6 Table 7 Sales of Breakfast Cereals by Distribution Format: % Analysis 20062011 ........................................................................... .................................. 6 Table 8 Forecast Sales of Breakfast Cereals by Category: Volume 2011-2016....... . 7 Table 9 Forecast Sales of Breakfast Cereals by Category: Value 2011-2016 ....... ... 7 Table 10 Forecast Sales of Breakfast Cereals by Category: % Volume Growth 2011-2016 ...................................................................... .............................. 7 Table 11 Forecast Sales of Breakfast Cereals by Category: % Value Growth 2011-2016 ...................................................................... .............................. 8

BREAKFAST CEREALS IN INDIA

HEADLINES . Breakfast cereals is expected to grow by 24% in current terms to reach Rs7.5 b illion in 2011 . Growing awareness of the benefits of oats for heart health drives demand for b reakfast cereals . Hot cereals is likely to lead breakfast cereals with value sales rising 33% in 2011 . Price promotions partially offset rising production costs, as average unit pri ces increase by 2% . Kellogg remains the leader in 2010 in breakfast cereals although its share is in decline . Breakfast cereals is projected to grow by a CAGR of 16% in constant value term s over the forecast period

TRENDS . Breakfast cereals are gaining popularity as an alternative breakfast option to traditional staples such as rice and bread. This trend is particularly strong in urban areas where consumers have higher spending power and the price of cereals is less of a probl em for them. Due to increasingly hectic lifestyles, many urban consumers and double-income ho useholds are choosing breakfast cereals, as these consumers do not have time to prepare b reakfast, and are opting for breakfast cereals for their ease of preparation. Consumers ar e also becoming more aware of Western food and lifestyle trends. Moreover, an increasin g number of manufacturers have fortified breakfast cereals with vitamins, added health fo od ingredients and promoted their health benefits through educational and social programmes, th us creating a favourable perception of cereals among consumers. . Breakfast cereals. value sales are expected to rise by 24% in current value te rms in 2011. This will be driven mainly by demand for convenience and increasing consumption among urbanites as they become more aware of the health benefits of breakfast cereals. However, the growth in 2011 will be slower than the 29% growth recorded in 2010, because the base has increased and there is now competition from baked goods, especially cakes an

d pastries. . Hot cereals is expected to be the fastest growing category up 33% in current v alue sales in 2011. The growing popularity of this category is mainly due to increased awarene ss of the health benefits of oats and the ease of cooking. The leading brand Quaker by Fri to-Lay is a well-known brand in India and enjoys a wide distribution network in urban areas through supermarkets/hypermarkets. Sales of hot cereals were also boosted by active prom otions. For example, Quaker Oats regularly offered bonus packs (with additional free vol ume) or promotional packs (three bags of cereals at a discounted price). Quaker also con tinuously educated consumers by printing the health benefits of the oats on the product pa ckaging. . The worldwide increase in grain and other raw material prices coupled with dom estic inflationary pressures adversely affected input costs and put pressure on margin s. There is expected to be a moderate increase in average unit price by 2% in 2011, because in the hot cereal category, oats has been reduced to a commodity due to the large number of players and intense price competition. On the other hand, the prices of other types of c ereals, such as mueslis, were relatively high and manufacturers could still absorb the cost hike s. To counter rising costs, manufacturers such as Kellogg.s have also introduced small packs a t affordable prices.

. Mueslis was the second fastest growing breakfast cereal category. Mueslis are among the most popular types of breakfast cereals, because they were easy to prepare (no c ooking required) and many consumers prefer the taste (sweetened and have added ingredie nts such as raisins and nuts) to hot cereals. Mueslis witnessed strong penetration of int ernational brands including Alpen and Familia in 2011. The majority of imported internation al brands were more expensive than domestic brands, such as Bagrry.s and Avee.s, as they p rimarily target affluent households in cities such as Bangalore, Hyderabad and Chennai. . Growing consumer knowledge of nutrition and health drives innovation in cereal s. There is growing awareness of cardiovascular health in India due to media publicity on he art diseases and the effects of obesity. This trend has boosted demand for cereals, especiall y oats, which have the benefits of improving cardiovascular health. Another health trend is gr eater awareness on the benefits of nuts. Hence, more cereal manufacturers are offering cereals containing nuts. Other niche products have emerged in the market, such as bran f lakes, oatmeal squares and low fat granola, but their sales will be limited to urban ar eas because they are currently only available in large supermarkets/ hypermarkets.

COMPETITIVE LANDSCAPE . Kellogg led breakfast cereals with a 48% share of value sales in 2010. It was the leading player in several cereal categories, including flakes, RTE cereals and family br eakfast cereals. The company advertised and promoted its products actively in the mass m edia. It also expanded its distribution network to penetrate deeper into existing markets (urban) and enter newer markets (tier-two and tier-three cities) in 2010. In October 2010, t he company announced plans to introduce more affordable products targeted at the mass marke t segment to penetrate deeper into India. . As one of its strategies to expand its customer base, Kellogg positioned its b reakfast cereals as an ideal snacking option for afternoon and evening. However, this is a relati vely new concept to consumers, and it remains to be seen if Kellogg.s attempts to move ce reals into snack food will be fruitful. . Frito-Lay with its Quaker brand achieved the largest increase in value share i n 2010 due to its aggressive marketing of the health benefits of Quaker Oats. For example, Quaker

Oats in association with Apollo Hospitals, launched Mission to Make India Heart Healthy in 2009. The mission encouraged people to undergo an online heart health test. Quaker Oat s also partnered with the Chennai Police and various corporate houses where the engagem ent involved an online health check-up, personalised diet counselling by nutritionis ts and a Quaker Oats Heart Healthy breakfast for all personnel. . International producers of breakfast cereals focused on educating consumers ab out the health benefits of cereals through advertising, campaigns and sponsored activiti es. Domestic companies, with fewer financial resources, tended to leverage on the educational efforts of the international players to grow their market share. The leading players also i ntroduced new products or new flavours to capture a wider customer base and strengthen existin g customer loyalty. For example, over the review period, Kellogg launched one new product a lmost every year. . International manufacturers, such as Kellogg and Frito-Lay (under PepsiCo), co ntinued to dominate breakfast cereals in 2010. This is because consumers consider cereals a Western food and trusted imported brands more. International companies also had more res ources to develop new products and introduce existing brands from overseas markets. They a lso had more visibility among consumers, as they frequently organised health campaigns o r

sponsored health related activities, while domestic companies had a lower profil e and mainly used in-store promotions instead of publicity campaigns. . In 2010-2011, Kellogg introduced two new variants to its portfolio (Rice Krisp ies and Fruit n Fibre) to improve customer segmentation and retention rates. In August 2010, it launched Kellogg.s Heart To Heart Oats, made with 100% wholegrain oats, marking the compa ny.s foray into the hot cereal category in India. . In January 2011, Britannia India, a leading biscuits manufacturer, introduced its own range of breakfast cereals covering both Western breakfast cereal products, such as oats and traditional Indian breakfast cereals including upma (semolina based). Its range includes Healthy Veg Poha, Chinese Poha, Broken Wheat Upma, Manchurian Upma, Tomato Spina ch Upma, Savoury Oats, Strawberry Oats and Classic Oats. . In December 2010, Kellogg signed Bollywood actor Lara Dutta as the brand ambas sador for its Kellogg Special K variant primarily focusing on weight conscious consumers. The advertisement tagline stood as Daily low fat breakfast with Kellogg Special K kee ps you fit and slim . The advertisement was primarily aired on national television channels, such as Star TV and Sony TV. In February 2011, Kellogg signed Bollywood actor Karishma Kapoor as the brand ambassador for the Kellogg Chocos extension. The television advertisement with tagline, Chocos provides benefits of a whole grain breakfast to mothers was aired on regional and local television networks across South India. . Frito-Lay/PepsiCo launched a 30-day Smart Heart Challenge in September 2011 to promote Quaker Oats. The initiative encouraged Indians to lead a healthier and a happier life by improving their nutritional habits as well as adopting active lifestyles. The ch allenge involved consuming two bowls of Quaker Oats, 30 minutes of daily exercise and allowing th emselves some fun and stress-free time every day. Quaker Smart Heart Challenge was undert aken in corporations across different cities in India. The challenge will help identify employees with a high risk of heart disease through cholesterol checks in partnership with Apollo Clinics. . Breakfast cereal packaging continued to be dominated by folding cartons as wel l as flexible packaging. There were no significant packaging innovations in 2011. . Budget-conscious consumers prefer mass market standard brands, while high-inco me demographics prefer premium brands, such as niche imported brands, for their gre ater variety and better quality. The presence of private label was limited over the review pe riod, with only a 1% value share in 2010. The Trent Hypermarket group introduced a range of brea kfast

cereals in flakes under the brand name of Star Bazaar. Chained grocery retailers were slow to enter private label for cereals because the presence of international brands act ed as a strong barrier to entry.

PROSPECTS . India has one of the highest rates of coronary heart disease in the world and the incidence is increasing. Caring for the heart is set to become an important concern among con sumers. Breakfast cereal producers, especially oats manufacturers, will benefit from thi s trend with more consumers will become aware of the benefits of oats. Cereals with other hea lth or nutritional benefits, such as reduced sugar, high fibre or vitamin enriched cere als, will also grow faster than traditional corn flakes or rice flakes, because one of the key decision factors for consumers to purchase cereals is their health benefits. Such demand will dri ve innovation in breakfast cereals with more new launches and the introduction of internationa l brands over the forecast period. . Breakfast cereals is projected to grow at a CAGR of 16% in constant value term s over the forecast period. Growth will be driven by increasing demand from urbanites for h ealthy and

convenient breakfast options, and from rural dwellers for affordable cereals. Wi th a growing focus on healthy eating, breakfast cereals may also gain a more prominent positi on as a snack that can be consumed at any time, and not just at breakfast. . Hot cereals will be the fastest growing category over the forecast period, fol lowed by mueslis and children.s breakfast cereals. The products, which are positioned as healthy breakfast options or healthy snacks, are expected to perform well due to the growing consu mer focus on healthy eating. . Children.s breakfast cereals will also see rapid growth, because more Indian h ouseholds are becoming double-income households. Mothers may have less time to prepare breakfa st for children and could switch to children.s breakfast cereals for their convenience. Children.s breakfast cereal is currently a nascent category. Its projected high growth will also be a result of the small base. However, demand for children.s breakfast cereals will remain limited over the forecast period due to their limited distribution channels (mainly through supermarkets/hypermarkets in the large cities). . The average unit price is projected to decline at a CAGR of 1% in constant val ue terms over the forecast period. This is mainly because the unit prices of flakes and hot ce reals, two major categories in breakfast cereals, are projected to decline or see little ch ange, respectively. Flakes and hot cereals are used by manufacturers as entry level pr oducts to enter rural markets due to their relative affordability. Manufacturers will be m otivated to keep prices low to capture a larger customer base. The other categories, such as mues lis, are expected to see a slight increase in unit prices, because the rise in input cost s will be partly offset by new entrants to the market offering products at competitive prices to compete with incumbents. . Distribution of breakfast cereals is either through small independent grocers or supermarkets/hypermarkets. Over the forecast period, supermarkets/hypermarkets a re expected to become more important with expansion of chained grocery retailers to tier- two and tier-three cities. Small independent grocers will remain the most important channel, due to their widespread presence across India. Manufacturers are expected to strengt hen their distribution links with independent small grocers in order to penetrate the larg ely untapped rural markets. . Over the forecast period, one of the strategies of manufacturers will be to la unch small packs at affordable prices to increase penetration to rural areas. According to indust ry sources, the majority of the dominant breakfast cereal manufacturers, such as Kellogg and Nes

tlé, will introduce small value for money packaging in the short to medium term. . The new launches in 2010-2011 are expected to intensify competition among lead ing players. This will stimulate domestic companies to strengthen their distribution networks , especially if they are not strong in terms of new product development. Kellogg.s Heart To Hear t Oats is unlikely to threaten to leading position of Quaker Oats in the short term, becau se the Quaker brand is well established in India. Hence, Kellogg will need more time to streng then the positioning of its Heart To Heart Oats and increase awareness of the product.

CATEGORY DATA

Table 1 Sales of Breakfast Cereals by Category: Volume 2006-2011

tonnes 2006 2007 2008 2009 2010 2011

Hot Cereals 1,950.0 3,193.3 4,685.5 6,855.3 9,490.2 12,254.6

RTE Cereals 7,282.6 8,248.7 9,849.8 12,233.6 14,886.4 17,408.7 - Children's Breakfast 391.6 438.9 496.2 557.3 623.1 693.6 Cereals - Family Breakfast 6,891.0 7,809.8 9,353.6 11,676.3 14,263.3 16,715.1 Cereals Breakfast Cereals 9,232.6 11,442.0 14,535.3 19,088.9 24,376.6 29,663.3 Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 2 Sales of Breakfast Cereals by Category: Value 2006-2011

Rs million 2006 2007 2008 2009 2010 2011

Hot Cereals 385.1 640.1 959.9 1,423.1 1,993.0 2,643.7 RTE Cereals 1,838.6 2,136.2 2,603.1 3,292.1 4,071.5 4,870.9 - Children's Breakfast 127.9 145.4 166.9 190.6 216.1 244.0 Cereals - Family Breakfast 1,710.7 1,990.8 2,436.2 3,101.5 3,855.3 4,626.9 Cereals Breakfast Cereals 2,223.7 2,776.3 3,563.0 4,715.2 6,064.5 7,514.5 Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 3 Sales of Breakfast Cereals by Category: % Volume Growth 2006-2011

% volume growth 2010/11 2006-11 CAGR 2006/11 Total

Hot Cereals 29.1 44.4 528.4 RTE Cereals 16.9 19.0 139.0 - Children's Breakfast Cereals 11.3 12.1 77.1 - Family Breakfast Cereals 17.2 19.4 142.6 Breakfast Cereals 21.7 26.3 221.3 Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 4 Sales of Breakfast Cereals by Category: % Value Growth 2006-2011

% current value growth 2010/11 2006-11 CAGR 2006/11 Total

Hot Cereals 32.6 47.0 586.4 RTE Cereals 19.6 21.5 164.9 - Children's Breakfast Cereals 12.9 13.8 90.8 - Family Breakfast Cereals 20.0 22.0 170.5 Breakfast Cereals 23.9 27.6 237.9 Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 5 Breakfast Cereals Company Shares 2006-2010

% retail value rsp

Company 2006 2007 2008 2009 2010

Kellogg India Ltd 57.3 52.2 49.9 49.2 47.5 Frito-Lay India 0.6 4.5 9.8 15.7 16.9 Bagrry's India Ltd 10.7 15.0 15.2 14.4 15.2 Mohan Meakin Ltd 10.7 9.4 8.5 6.8 5.7 Hindustan Vegetable Oil 4.9 4.1 3.2 2.2 1.8 Corp Ltd Express Foods Pvt Ltd 1.5 1.5 1.4 1.2 1.2 Avesta Good Earth Foods - 1.0 1.2 1.3 1.2 Pvt Ltd Avee's Products India Ltd 0.4 0.5 0.5 0.5 0.4 Pantaloon Retail India 0.1 0.1 0.1 0.1 0.1 Ltd Other Private Label 0.1 0.1 0.1 0.0 0.1 Good Earth Foods 0.7 - - - Others 12.9 11.6 10.1 8.5 9.9 Total 100.0 100.0 100.0 100.0 100.0 Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 6 Breakfast Cereals Brand Shares 2007-2010

% retail value rsp Brand Company 2007 2008 2009 2010

Kellogg's Corn Flakes Kellogg India Ltd 37.6 35.4 35.0 33.8 Quaker Frito-Lay India 4.5 9.8 15.7 16.9 Bagrry's Bagrry's India Ltd 15.0 15.2 14.4 15.2

Mohun's Mohan Meakin Ltd 9.4 8.5 6.8 5.7 Kellogg's Chocos Kellogg India Ltd 3.2 2.9 2.5 2.2 Champion Hindustan Vegetable Oil 3.7 2.8 2.0 1.6 Corp Ltd Kellogg's Mueslix Kellogg India Ltd 0.6 1.1 1.2 1.4 Express Foods Express Foods Pvt Ltd 1.5 1.4 1.2 1.2 Good Earth Avesta Good Earth Foods 1.0 1.2 1.3 1.2 Pvt Ltd Kellogg's Frosties Kellogg India Ltd 1.4 1.2 1.0 0.9 Avee's Avee's Products India Ltd 0.5 0.5 0.5 0.4 Tasty Treat Pantaloon Retail India Ltd 0.1 0.1 0.1 0.1 Other Private Label 0.1 0.1 0.0 0.1 Farm House Good Earth Foods - - - Breakfast Cereal Others 21.5 19.8 18.2 19.3 Total 100.0 100.0 100.0 100.0 Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 7 Sales of Breakfast Cereals by Distribution Format: % Analysis 2006-2011

% retail value rsp 2006 2007 2008 2009 2010 2011

Store-Based Retailing 100.0 100.0 100.0 100.0 100.0 100.0 - Grocery Retailers 100.0 100.0 100.0 100.0 100.0 100.0 - - Supermarkets/ 38.5 39.5 40.8 41.3 41.3 41.5 Hypermarkets

- - Discounters - - - - - - - Small Grocery 61.5 60.5 59.3 58.8 58.7 58.5 Retailers - - - Convenience Stores - - - - - - - - Independent Small 61.5 60.5 59.3 58.8 58.7 58.5 Grocers - - - Forecourt Retailers - - - - - - - Other Grocery - - - - - Retailers - Non-Grocery Retailers - - - - - - - Health and Beauty - - - - - Retailers - - Other Non-Grocery - - - - - Retailers Non-Store Retailing - - - - - - Vending - - - - - - Homeshopping - - - - - - Internet Retailing - - - - - - Direct Selling - - - - - Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 8 Forecast Sales of Breakfast Cereals by Category: Volume 2011-2016

tonnes 2011 2012 2013 2014 2015 2016

Hot Cereals 12,254.6 15,706.6 19,962.7 24,896.8 30,929.7 38,274.4

RTE Cereals 17,408.7 19,681.7 21,690.1 23,243.6 24,604.3 25,882.9 - Children's Breakfast 693.6 768.6 848.0 931.3 1,018.2 1,108.2 Cereals - Family Breakfast 16,715.1 18,913.1 20,842.2 22,312.3 23,586.1 24,774.8 Cereals Breakfast Cereals 29,663.3 35,388.3 41,652.8 48,140.4 55,534.1 64,157.4 Source: Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

Table 9 Forecast Sales of Breakfast Cereals by Category: Value 2011-2016

Rs million 2011 2012 2013 2014 2015 2016

Hot Cereals 2,643.7 3,348.7 4,225.6 5,311.5 6,650.7 8,295.4 RTE Cereals 4,870.9 5,377.8 5,889.8 6,388.4 6,876.1 7,356.0 - Children's Breakfast 244.0 263.4 289.3 321.7 361.0 407.0 Cereals - Family Breakfast 4,626.9 5,114.4 5,600.6 6,066.7 6,515.1 6,949.0 Cereals Breakfast Cereals 7,514.5 8,726.6 10,115.4 11,699.9 13,526.8 15,651.4 Source: Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

Table 10 Forecast Sales of Breakfast Cereals by Category: % Volume Growth 20112016

% volume growth 2015/16 2011-16 CAGR 2011/16 Total

Hot Cereals 23.7 25.6 212.3 RTE Cereals 5.2 8.3 48.7 - Children's Breakfast Cereals 8.8 9.8 59.8 - Family Breakfast Cereals 5.0 8.2 48.2 Breakfast Cereals 15.5 16.7 116.3 Source: Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

Table 11 Forecast Sales of Breakfast Cereals by Category: % Value Growth 2011-20 16

% constant value growth 2011-16 CAGR 2011/16 TOTAL

Hot Cereals 25.7 213.8 RTE Cereals 8.6 51.0 - Children's Breakfast Cereals 10.8 66.8 - Family Breakfast Cereals 8.5 50.2 Breakfast Cereals 15.8 108.3 Source: Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

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