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WHETHER YOU ATE YOUR WHEATIES® TO GROW STRONG, PREFERRED THE LEPRECHAUN'S LUCKY CHARMS® OR DEVOURED LIFE® BECAUSE FINICKY MIKEY LIKED IT, EATING CEREAL HAS LONG BEEN AN AMERICAN INSTITUTION. While traditional flavors remain solid, specialty cereals are now driving growth in the market. Emerging gluten-free, soy and nourishing hot varieties for the health-conscious and dietary-sensitive, as well as organic children's choices, have grown the specialty segment by 21.5 percent to $486 million. That is versus a 0.5 percent drop for all cereal, according to Specialty Food Magazine's 2007 State of the Industry report.

The New Fast Food
One sure sign that this category is robust is the rise of cereal-only cafes. Many of these casual eateries, with menus devoted to hot and cold varieties and toppings in made-to-order combinations, are clustered near college campuses to give students a nostalgic fix of some of their favorite childhood breakfasts. Some even feature retro settings complete with Saturday morning cartoons playing in the background.

But the audience is hardly limited to homesick students. The Cereal Bar, located near the University of Miami, is also popular with families and professionals. With 16 additional stores slated to open in Washington, D.C., by early summer and another 30 franchises under development nationwide, new locations won't be limited to college areas. "Cereal targets a lot of the general public," notes co-founder Michael Glassman.

Cereality® Cereal Bar and Cafe, a chain that opened in 2003, recently launched a Cereality Express location at Terminal A1 and A2 at Newark's Liberty International Airport. The site caters to business people as well as the families that make up a large portion of the customer base at Cereality's other seven cafes in Arizona, Chicago and Pennsylvania. "Cereal feels like home to people who are traveling. It gives them a sense of the familiar," says Kate Guess, senior manager, pr and business affairs for Kahala Corp., the franchising corporation that owns Cereality. The company is considering expanding with additional airport kiosks.

The menus at many cereal cafes overflow with mainstream brands that many adults grew up enjoying from Cap'n Crunch® to Fruit Loops® to toppings like malted milkballs. But with concerns about excessive sugar and obesity, selections include healthful organic or natural varieties with specialty toppings such as fresh or dried fruit, nuts and soy, rice or almond milk. "We want to make sure no one is left out," explains Glassman, who offers organic granolas and gluten-free cereals as part of a 35 cereal and 50 topping mix. The granola is popular mixed with cereal or in a parfait with yogurt and fruit. Another leading product is the Oatie, raw oats blended in a smoothie.

"We offer an array that lets you do sweet or healthy or both," he adds. "Kids often want a sugary cereal as a treat, while adults can take a healthier option and sweeten it with fruit."

At Cereality franchises, customers' sugary-to-healthy mix of selections is split about 50-50, reports Guess. Crowd-pleasing specialty items among the 30-cereal menu include organic or gluten-free Panda Puffs and Health Kick™, which contains Nature's Path Optimum Power, with flax, soy, nuts and dried berries.

Health Halos

Among adults, the big cereal sales motivators are the health benefits offered. According to market research firm Mintel International in its August 2007 Breakfast Cereal report, health halos—cholesterol reduction, heart health, intestinal health—drive the market. Mintel reports that more than 1,300 new cereal products were launched worldwide in 2006, with many of them hitting health-related "touch points" such as whole grain. "High-in" claims (as in high in calcium), "low-in" messages (low in sugar, salt, etc.) and functional claims (probiotic, Omega-3) also lead new rollouts, as did products that addressed allergens.

Gluten-Free Expands
The next big thing in specialty circles, as gluten intolerances such as celiac disease grow more prevalent in diagnoses and awareness, is gluten-free hot cereal. While gluten-free cold cereals have already hit the market, hot versions are an untapped segment particularly in oats, where sourcing can be an issue.

Bob's Red Mill Natural Foods, a Milwaukie, Ore.-based stone grinding miller of whole grains, recently released some of the first gluten-free oat products on the market, Gluten Free Steel Cut Oats and Gluten Free Rolled Oats. Oats are naturally gluten-free, explains Marketing Manager Matthew Cox, but they are often cross contacted if a farmer rotates crops with wheat or barely. Cross contact is an equal risk during transportation if the same trucks first carried a gluten-containing grain, or when milling or packaging. "You need what we call a farm-to-table continuum," Cox continues. "We found a collective of farmers in Canada who grow pure oats; they have dedicated transportation, equipment for milling and they conduct gluten testing throughout the process."

Prior to launch, the company did samplings with celiac support groups, and worked closely with dietary experts such as Shelley Case, B.Sc., R.D., a celiac disease dietitian and author of Gluten-Free Diet: A Comprehensive Resource Guide, who promotes iron- and fiber-rich oats as a healthful addition to a gluten-free diet.

"Gluten-free is the hot thing now," agrees Holly DiMauro from Holly's Oatmeal, Torrington, Ct., who sources oats from Cream Hill Estates in Quebec to produce two gluten-free hot cereal varieties in Plain and Cranberry. "It's expensive to produce, and as demand goes up in gluten-free, prices will too," she notes.

Soy Sales Boost
According to Mintel, soy-based cereal products, with their high levels of protein and fiber, gained 20 percent in sales in 2007. Kellogg's Kashi cereal is the fastest growing soy-based product currently on the market. Its sales make up 75 percent of the $177 million Other Soy Foods category, which includes cereals, cheese and yogurt. (To read more, turn to Research Spotlight on p. 36.) Mintel notes that a number of weight management cereal products are new on the market, patterned after the Kashi brand in that they use soy as a source of protein to promote satiety.

Hot and Healthy
Hot cereals, a segment that Mintel says has seen sales increase 5 percent to $865 million since 2005, are leading a move back to basics with healthy whole grains, high fiber and complex carbohydrates. "We've seen a lot of crossover of mainstream consumers among whom hot cereal didn't used to be so popular," notes Cox. "USDA dietary guidelines on whole grains, interest in preventing heart disease and diabetes—it's all getting attention."

However, consumers are looking for premium varieties that remind them neither of the glue-like gruel of their youth nor tasteless just-add-hot-water instant versions. "It's about getting people to eat things that aren't overly sugared or processed," notes DiMauro, who began packaging oatmeal that she served in her restaurant in Connecticut. "It's more like porridge because it has seven kinds of grains. I combine rolled oats and grains and cook it in soy milk or milk with water to get a creamy, chewy texture," she explains.

Kid Appeal
Childhood obesity and diabetes concerns have spurred a movement to reach a younger market with premium cereals and steer children away from sugary counterparts. Annie's Homegrown in Napa, Calif., for example, has launched Breakfast Cereal Bunnies, which are organic breakfast bites (in bunny, heart, flower and ring shapes) made from toasted whole grain oats and with only natural and organic ingredients, in Oat, Honey and Cinnamon flavors.

Price point can be an issue in the segment, with families wanting budget-friendly cereal choices. "Parents are looking for a healthy alternative, but there often isn't a variety in some of the organic lines that would appeal to kids, and not every family can afford premium prices," notes Staci Mattson, a spokesperson for Mom's Best Naturals in Minneapolis. The company has positioned its line, which includes new flavors Honey Grahams and Toasted Cinnamon Squares, as all natural and affordable with a suggested retail price range of $2.29 – $3.29. The price point falls between 20 percent and 50 percent less than other natural and organic brands, and the cereal is packaged in family-sized boxes rather than smaller versions. According to Mattson, Mom's Best utilizes production efficiencies and keeps advertising costs minimal in order to pass savings to the consumer.

Snack Solutions
Mainstream knowledge of different grains is also growing in sales of muesli, porridge and granola. "Muesli is Bob's most popular product," says Cox. "There's a lot of customization in that market. You can eat it hot or cold, soaked in milk, yogurt or hot water." Three Bears Porridge's Cranberry Almond is the most popular in the five-flavor line, reports Chrystie Hjectness, owner and founder. In early 2008, the company plans to introduce an apple-juice-infused blueberry and a cherry flavor. Three Bears has seen some crossover into the portable snack category. "As people become more educated on different grains, we added to our label that it can be used as a muesli. You can take it with you to the office and stir in yogurt—it's convenient and you don't have to cook."

Granola too has made further inroads as a snack, says Susan Kleinpell, owner of Kingslake and Crane, which offers portable packaging with a 10-ounce resealable pouch or a 4-ounce snack bag as a grab-and-go product. "There's a demand for good tasting healthy snacks that are not highly processed," she adds. Positioning cereals for snacking occasions could offer future growth potential. More than four in ten respondents to Mintel's research report that they eat cereal as a mid-morning or mid-afternoon snack. It's a habit especially prevalent among younger respondents under age 35 who are turning to cereal as a quick meal beyond the morning hours. Notes The Cereal Bar's Glassman, "We're open until 10 p.m. because people will look for cereal throughout the day for breakfast, as a snack or as a dessert."

Denise Purcell is the editor of Specialty Food Magazine.

Merchandising and Packaging Trends
As a convenience food, cereal faces competition from portable bars and grab-and-go breakfasts. Twenty-one percent of respondents to Mintel International's August 2007 Breakfast Cereal survey say they take cereal with them in a bag or container so they can eat it on the go, opening the door for portable packaging innovations.

Mintel's merchandising and packaging suggestions include a breakfast kit with cereal, granola bars and drinkable yogurt. Taiwan's Kuang Chuan Dairy offers a version with a to-go cup of soy milk and cereal, according to Mintel's Global New Products Database (GNPD). In restaurants or prepared foods counters, Mintel also recommends using cereal as an ingredient in a breakfast parfait with yogurt and fruit, or baked with eggs and cheese.

Additionally, cereal manufacturers may consider going beyond single-serve cereal bowls and adapt a 100-calorie pack model used in snack foods such as cookies and crackers to encourage sensible snacking among children, teens and adults.

Many retailers have leveraged consumers' habit of pairing cereal and fruit by cross-merchandising bananas in the cereal aisle. Cereal could also become a fixture in the produce section, either during specific times like blueberry season, or to coincide with products that are highlighting superfruits in its ingredients, such as Barbara's Bakery's new Ultima Organic pomegranate flavor or Holly's Goji Berry Oatmeal.