Are consumers fed up with stratospheric cereal prices? Or have they become hopelessly addicted to cents-off cereal coupons and half-price sales?
General Mills and the rest of the $8 billion U.S. cereal industry are about to find out.
The answers could affect the level of profits for the food industry's most profitable major category -- and could alter the way America shops for its flakes, loops and brans.
Starting this month, General Mills, the second-biggest cereal maker, is cutting prices on eight of its most popular brands -- including Cheerios, Wheaties, Total and Lucky Charms -- by 30 cents to 70 cents a box. At the same time, it is cutting back sharply on discount coupons and eliminating buy-one-get-one-free sales. Those enticements have become standard for many cereal buyers, but an expensive way for cereal companies to lure them.
General Mills' action is "a bold strategy and it is risky," said John O'Neil, a food industry analyst at the Wall Street firm Oppenheimer & Co. "It's a complete change from what the industry has been doing for years."
So far, industry leader Kellogg -- which has raised prices four times since January 1993 -- says it is not following General Mills' example. But analysts say that could change if Kellogg fails to stem a five-year erosion in its market share.
The increased focus on coupons has been aimed in part at combating the attractiveness of discount "private label" brands, which have grown to nearly 10 percent of the cereal market in terms of volume. The discount cereals cost an average of $1.80 a pound, compared with $3 a pound for big brands, on average. Some brands cost a lot more.
At a Manhattan supermarket last week, prices were as high as $4.99 for a 20-ounce box of best-selling Frosted Flakes, $5.99 for a 20-ounce box of Total Raisin Bran and $6.39 for a 19.7-ounce box of Froot Loops.
In the cereal arena, a brand can succeed by capturing as little as 1 percent of the total market -- which translates to more than $80 million. That's why some 80 and 100 brands or variations of cold cereal have been introduced in each of the past four years, according to New Product News. Each dollar in revenue translates to an impressive 17 cents in profit after expenses for a cereal maker like Kellogg, Mr. O'Neil said.
General Mills' action is one of several significant changes that cereal companies are making in their strategies. Others include:
