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Food giants mine the gluten-free gold rush

The nation’s largest food conglomerates are looking to cash in on what was once a tiny niche: the growing number of Americans avoiding gluten, a protein found in wheat, rye and barley.

Until recently that market was addressed by a host of small health-food specialty companies. Now, as the market grows to an estimated $5 billion in 2015 from $2.6 billion in 2010, diversified food giants like General Mills (GIS), Kellogg’s (K) and Post Foods (RAH) are aggressively pushing gluten-free versions of their own products, as well as looking at acquisitions to expand their gluten-free footprint.

Their moves are breaking gluten-free products out of the specialty health-food aisle with re-formulations of brands like General Mills’ Bisquick, as well as re-branding existing rice-based products like Post’s Cocoa and Fruity Pebbles as gluten-free.

Just as the big players wade into the gluten-free territory, some smaller players are hoping that combining forces will help them better compete. Earlier this month Smart Balance (SMBL) bought Quebec-based Glutino for $66.3 million.

“We would explore launching something internally as well as through acquisition,” says Michael Krishnan, senior brand manager of Kid’s Cereals at Post Foods, which is in the process of being spun-off from Ralcorp, a frozen bakery food and pasta maker.

Kellogg’s is also looking to strategically widen its reach, says Doug VanDeVelde, the firm’s senior vice president of morning foods marketing and innovation. Kellogg’s recently retooled its Rice Krispies recipe, launching a gluten-free version to consumers in May. And VanDeVelde says that Kellogg’s is open to buying companies that fit into existing product lines. “We don’t have any plans to share at this time, but as part of our strategy, we continue to look for potential bolt-on, versus transformational, acquisitions,” he says by email.

Nicolas McCoy, managing director at the Sherborn, Ma.-based Silverwood Partners, who co-led the sale of gluten-free baking mix maker Cherrybrook Kitchen to energy drink maker Cell-nique in June, says there’s a lot of activity in the gluten-free space — but not a lot of consummation yet.

“You’ve got a lot of very large firms that strategically want $50 million revenue companies,” he says. “Even the largest pure play gluten free company doesn’t approach that.”

As larger gluten-free company’s get snapped up, conglomerates like General Mills and Kellogg’s could eye others for a minority investment to help the brands strategically grow, notes McCoy. In May, General Mills launched, an online gluten-free store and community providing the food conglomerate with a marketing test kitchen to watch how consumers interact with its products as well as those of competitors.

An estimated three million Americans suffer from celiac, an autoimmune disease that can be controlled by eliminating the gluten protein from the diet. Eating gluten for celiacs can lead to cancer, infertility, neurological disorders and other autoimmune diseases. Growing awareness of the disease is expected to spur more diagnoses, which will help the gluten free food market expand to $5 billion by 2015, says market researcher Packaged Foods. Eating gluten-free has also become a popular – if not widely successful – weight loss regimen, which is helping boost sales as well.

For consumers, the cost difference between a normal product and its gluten-free twin can be sizeable. Boxes of Betty Crocker brownies retail for about $3.19, while its gluten-free cousin comes in at $4.69. Specialty baker King Arthur brand sells its gluten-free brownie mix for $6.95. A dollar here and there is one thing. But a $4 premium adds up, and gluten-free consumers in particular are very vocal about the price they pay for their products.

Post didn’t raise the cost of Pebbles after labeling much of the cereal line gluten-free, but the firm doesn’t promise it won’t tag new gluten-free products at a higher price-point going forward — or find a competitive mid-point between a regular product and a higher-end specialty item. “The pricing sensitivity is less driven around the single benefit of gluten-free and more driven around the competitive environment,” says Krishnan.

While they may price their brands competitively — they’re selling the gluten-free story, targeting that mom who’s watched her celiac child’s face after another birthday party where they couldn’t eat the cake. In that situation, the extra $1 or $2 does go unnoticed, and the opportunity for the conglomerates to mine the current gold rush continues.

“I would say the priority has ramped up over the last two years,” says Post’s Krishnan. “For us [Pebbles] felt like lower hanging fruit. But I think as we are looking at other opportunities, the priority here has escalated.”