Small Business: In a Real Crunch

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Roth says that Cereality, which is nearing national expansion and has 46 employees, is in a different league from the Cereal Bowl, a small shop run by recent business school graduates. He welcomes healthy competition, though. "We're happy to see competitors show up to serve cereal away from home, because it adds legitimacy to the idea," he says. But when others imitate Cereality's slogans or serving buckets, Roth says his responsibility to investors requires him to fight back. And any company that files a patent application, Roth notes, is obligated by law to inform potential rivals of its prior claim.

But Cereality's attempt to crack some Grape-Nuts may have backfired with at least one part of its most loyal customer base--college students. A group from the University of Florida launched a "Cereal Solidarity" campaign last summer on the website freeculture.org criticizing Cereality for bullying rival restaurants with those warning letters. The protests led to an online petition--drawing hundreds of signatures--calling for an end to business-method patents and asking Cereality to withdraw its patent application. Roth says the group is more concerned with ideology than cereal toppings. "Freeculture turned Cereality into a poster child for anti-patent protest," Roth says. "We're just two guys trying to protect ourselves from big companies that could steal our intellectual property."

However absurd the cereal wars may appear, Roth says he is simply trying to act before the really big guys muscle in on his highly expansible idea. "Starbucks could easily start selling cereal, catering to a sophisticated palate, to complement their coffee," says Laurence Knight, president of Fletcher-Knight, a marketing consultancy based in Greenwich, Conn.

That's another reason Cereality is trying to grow as quickly as possible, through franchising, partnerships with hotels and other retail chains, online sales and catering. The Cereality concept has generated so much buzz that Roth and Bacher say they have received more than 6,000 applications from all over the world. In April, Roth and Bacher began meeting with applicants to select the first operators, and they hope to have 30 new partners by 2008, with each running several restaurants. The Cereal Bowl, for its part, says it has collected 250 e-mail inquiries about franchising.

Expansion won't be easy for either of them, analysts say. "Are there enough cereal eaters nationwide to support a whole cereal chain?" asks Candace Corlett, a principal at WSL Strategic Retail, a consulting firm based in New York City. "I'm not so sure." The cereal cafés say their research shows that millions of Americans, particularly young ones, eat cereal multiple times a week. Knight says after the novelty wears off, Cereality may struggle to convince consumers it offers more than what they can get at home. "Starbucks has unique recipes. Jamba Juice has unique 'boosters.' But I'm not sure if Cereality is going to be able to put a specific stamp on cereal," he says. Roth is confident he can, with baked cereal bars, smoothies and novel mixes he hopes will leave his competition soggily behind.