×

Puffs, Flakes and Dollars: Why Your Breakfast Cereal Costs So Much

It's far from the most expensive item Americans put in their grocery carts, but the climbing price of cereal seems to draw more than its share of consternation.

Cereal manufacturers are on the ropes. Euromonitor International estimates that demand for cold cereal has fallen in four out of the past five years.

Market research firm Mintel predicts U.S. shoppers will spend a total of $9.5 billion on cold cereal this year. That sounds like a lot, but it's nearly 7 percent less than the $10.2 billion we laid out in 2012.

General Mills cereal products
Getty Images

The reduced spending has occurred despite a steady rise in the average price of breakfast cereal — the cold variety, not oatmeal and the like — which has climbed from $2.89 a pound in 2010 to $3.09 a pound in the second quarter of this year, according to market researcher Packaged Facts. That's an increase of just under 7 percent.

And the price of cereal has climbed faster than grocery prices overall for years, government data show. For every dollar a shopper spent on breakfast cereal in 1980, today you'd have to spend $2.93.

That means some high-end cereal prices now carry price tags more reminiscent of steaks than flakes, with unit prices that top $8 a pound.

At a Food Emporium store in midtown Manhattan, for example, an 11.2 ounce box of Bear Naked Original Cinnamon Granola costs $5.69, or 51 cents an ounce. A Safeway store in Alameda, California, sells 10.5 ounces of Kellogg's Frosted Flakes for $5.49, or 52 cents an ounce. On Walmart's website, a 9.5 ounce box of Cascadian Farm Organic Honey Nut O's costs $5.01, an equivalent of 53 cents per ounce.

But those figures don't tell the whole story. Cereal companies have also have been shrinking package sizes to disguise higher prices and cutting back on issuing money-saving coupons try and boost profits.

"If you think about the breakfast cereal category overall, it is a category that's been challenged," said Morningstar equity analyst Erin Lash.

Some of the damage is self-inflicted, he said. Cereal manufacturers were slow to invest in innovating their product lines when consumers were looking for something new and exciting. "Within cereal, in particular, that happened at a time when an array of breakfast alternatives stepped up their game," Lash said.

The three biggest name-brand cereal manufacturers — Post, General Mills and Kellogg — all declined to comment on their product pricing when contacted by NBC News.

Read more from NBC News:
Years of stockpiling seen behind dip in Halloween spending
Whole Foods to cut 1,500 jobs in bid to fend off stiff competition
Burger King launches Halloween Whopper with black bun

According to outside experts, there are a few culprits for the declining demand for cereal: People are consuming less milk, eating fewer carbs and looking for lower-sugar foods to feed their kids, while favoring higher-protein alternatives like Greek yogurt or protein shakes for breakfast.

Cereal is also losing ground to easier, more convenient items such as protein bars that can be tossed into a briefcase or eaten in the car.

And competition from fast-food chains is increasing as the economy improves and more people hit the drive-through in the morning.

"Manufacturers … face a ton of competition," said Jared Koerten, research analyst at Euromonitor International. "In that environment, raising prices is one way they can try to combat the volume losses."

But raising prices can be a double-edged sword, Lash pointed out. "Higher prices could constrain volume growth, particularly if customers balk at the higher price tag," she said. "Consumers aren't willing to pay up if they don't see the added value… (They) are willing to pay up when they do see that."

To make higher prices more palatable, companies have been aggressively catering to the consumers who demand high-protein, minimally-processed products by rolling out new products like granola and muesli, not to mention overhauling their traditional recipes to cater to shoppers who want gluten- and GMO-free options.

Cereal companies also are using a new sizing trick to raise prices right under our noses by selling us more large packages.

When Post Holdings told investors that profit declines had slowed in its most recent quarter, President and CEO Rob Vitale said the sale of bigger packages played a role.

"We continue to see a migration of larger package sizes which bodes well for our combined business," he said, noting that extra-large boxes and bags both saw increases.

Shoppers are conditioned by a warehouse-club mentality to think that bigger is a better value, but they likely don't realize that this isn't generally the case when it comes to cereal, said Teri Gault, founder and CEO of TheGroceryGame.com, a coupon and saving website.

"Rarely do we find that the biggest box is cheaper per ounce," she said. "Usually the medium size is less per ounce."

Smaller boxes are another way they can earn more: Spot-checks of historical cereal prices across the country in TheGroceryGame's database show that the sizes of many small- and medium-sized cereal boxes or bags have ticked down by an ounce or two over the past couple of years.

In response to a complaint posted by a customer last year on its community message board, a Kellogg's employee moderator acknowledged that some boxes had shrunk, saying, "Some package sizes have been reduced due to high commodity prices and other related costs. We do this instead of raising the price of our products."

And Kellogg executives the company's last quarterly conference call told investors that avian influenza was having an impact on how much they paid for eggs.

Rising commodity increases often get pushed down the line to customers, said Koerten, the Euromonitor analyst.

"More volatility in weather has caused price spikes and (fluctuations) going on in some of these commodity markets," he said. "You can definitely see that reflected in the retail price."

Manufacturers are also trying to stem their losses by pulling back on promotions. "Promotion spending isn't a sustainable or profitable strategy longer term," Morningstar's Lash said. Instead, cereal companies are concentrating their coupon campaigns on product launches, for instance, trying to entice consumers to put something new in their carts, she said.

According to Kantar Media, paper coupons (the most popular kind) for cereal have gotten both scarcer and skimpier since the recession. In 2009, around 4.1 billion cereal coupons were distributed, with an average face value of $1.02. Last year, the number of cereal coupons had fallen to 3 billion, and the face value had dipped to 91 cents.

Paul Norman, president of Kellogg North America, acknowledged as much during the company's last quarterly conference call.

"We're seeing a little bit of price realization," he said in response to an analyst's observation that the amount of cereal sold on promotion seemed to be falling. "I don't think there's going to be a lot more heavy promotion, per se."

While shoppers can still find coupons, TheGroceryGame's Gault said, they're more likely to come with conditions such as a minimum purchase or a requirement to buy multiple boxes. They also expire faster, she said — an average of nine weeks instead of the 12 to 15 that was typical just a few years ago.

Grocery stores have also encouraged customers to use digital tools to download coupons directly to their loyalty cards, but this convenience can come with a price, Gault warned. A coupon that automatically registers when an item is scanned will supersede a paper coupon, even if the hard copy is worth more.

"The digital coupons are for sometimes less value than the printed or paper coupons," she said. "I can only surmise they do that because they can make it for less because people are really into digital. … They know it's easier to make a sale."