Consumers feel crunch of increased cereal costs

June 23, 1993|By Ginger Munsch Crichton | Ginger Munsch Crichton,Information Resources Inc.)Dallas Morning News

If you suspect that you're paying a lot more for cereal now than you used to, your instinct is right on target.

Since 1983, cereal prices have gone up more than 75 percent -- more than twice the average price increase for all foods eaten at home, according to the U.S. Department of Labor.

Many cereals now cost $3 to $4, and some larger boxes are shooting toward $5.

The good news for shoppers is that the value of cereal coupons has also climbed, with a handful approaching $2 -- as much as a whole box of cereal cost a few years ago.

"You're crazy to buy cereals without coupons," says John McMillin, a senior analyst at Prudential Securities in New York.

A consumer who scans the ingredient list on a typical cereal box may well wonder: Do a few scoops of grains and a handful of sugar, fruit and nuts really cost that much to make?

Of course not, price analysts say.

But raw materials are only one factor in pricing. Others include advertising, marketing, processing, freight, packaging -- and profit.

"It's a capitalistic society. You take the price increase if you can get away with it," says Mr. McMillin.

"Why can you get away with it? At an average of 20 cents a bowl, cereal is still a good value . . . and your alternatives are low. These products are very distinctive. . . . Private label is developing in this category, but they haven't duplicated all the products."

Still, he and some other analysts feel the cereal price increases may have been overstated -- particularly when coupon use is considered.

"It's wrong to look at cereal prices just on the list price basis," says Nomi Ghez, an analyst with Goldman Sachs and Co. in New York. ". . . There's a tremendous amount of coupons in the industry. This is lowering the price" that many consumers actually pay.

Using coupons

About 35 percent of ready-to-eat cereal is purchased with a coupon, according to Nielsen Household Services. By comparison, coupons are used for only 14 percent of grocery purchases overall.

With coupons factored in, says Mr. McMillin, "I'm not sure . . . that pricing has gone up in the last three years anywhere near as much as it went up the previous seven."

The cereal industry has had 13 major price increases since November 1984, with the latest being a 3.1 percent upswing in January, according to Prudential Securities data. Like many other industries, when one manufacturer raises prices, others tend to go along.

Two companies dominate the $7.3 billion cold cereal market: Kellogg's, with a 37 percent market share, and General Mills, with about 30 percent. General Mills claims the nation's top-selling cereal -- Cheerios -- and Kellogg's is right behind with the No. 2 and No. 3 sellers, Corn Flakes and Frosted Flakes.

Asked about the latest price increase, Donna Thede, product publicity manager for Kellogg's, said that "pricing is influenced by many factors: raw materials, research and development, transportation . . . So it's inflation."

Kathryn Newton, public relations manager for General Mills, said the January price increase was due to a growth in "overall operating costs."

The companies won't say much else about their pricing strategies. But analysts say that among the factors in higher cereal costs are the intense advertising and promotion (including couponing) necessary to launch new cereals and keep old ones afloat in a highly competitive market.

Competitive business

The cereal makers won't say how much they spend on such activities, though Ms. Newton acknowledged that the business "has been [competitive] for a long time, and it continues to be."

General Mills, which markets 32 cereals, has introduced several new flavors or cereals since last year, including Multi Grain Cheerios, Berry Berry Kix and Fingos, a cereal meant to be eaten with your fingers. The latest addition is Bunuelitos, a cinnamon-flavored puff that's the first General Mills cereal targeted to Hispanics.

More new cereals

Kellogg's, which has 40 cereals, recently introduced Rice Krispies Treats Cereal -- so popular some stores weren't able to keep it on the shelves at first -- and last year brought out Low-Fat Granola and Frosted Bran Flakes.

The company recently promoted its entire cereal line with Kellogg's Half-Price Shopping Sprees at stores across the country. For three hours on one day only, consumers could pick up coupons in the stores and buy any Kellogg's cereal for half-price.

"One way we try to help people look at the cost of cereal is the per serving cost," says Ms. Newton of General Mills. "Unlike some of the other foods you buy, cereal has many servings in a package. If you break it down to a per-serving cost, it is at least as little or, in many instances, less than many other breakfast items you have. The average price per 1-ounce serving is in the neighborhood of 22 cents."

Many consumers, though, eat more than the serving size recommended on the label.

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