General Mills sweetens deal: cuts cereal prices

April 20, 1994|By Harry Berkowitz | Harry Berkowitz,Newsday

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:

* Kellogg, whose Heartwise cereal failed four years ago and whose Oatbake and Fiberwise also have not caught on, is hooking up with ConAgra to introduce a Healthy Choice line of cereals.

* General Mills, which last year bombed with a combination cereal and snack called Fingos, which may be dropped, has high hopes for a new chocolate cereal for kids called Reese's Peanut Butter Puffs, based on the Hershey candy. The company also has boosted fruit and nut levels by 25 percent in five adult cereals.

* Post, aiming at a similar audience as the Healthy Choice line, is heralding its new Blueberry Morning with a heavy TV ad campaign. Just added more brands

For years, cereal companies have competed more on the basis of adding new brands and flavors -- and on marketing -- than on price. In fact, in the late 1980s, when consumers were more loyal to brands and focused less on discounts, cereal companies tended to raise shelf prices by 5 percent to 6 percent every eight months, Mr. O'Neil said.

The growth of discount brands, and consumer resistance to higher prices, has slowed increases to 4.1 percent a year in the 1990s -- still way above the increases for most other grocery items. To offset that, cereal makers have pushed coupons and sales.

"The practice of pricing up and discounting back has become more and more inefficient for manufacturers and retailers, and burdensome for consumers," General Mills President Steve Sanger said in announcing the cuts.

While the new price cuts -- averaging 11 percent on the big brands -- are expected to pare $110 million from the company's revenue, the coupon and sale cutbacks are expected to save $175 million.

General Mills is not the only company pulling back on its coupons. Last year, the number of coupons issued by all U.S. companies fell 3.7 percent, to 298 billion, the first drop in 23 years, according to NCH Promotional Services, a consulting firm. (Of the total issued, 6.8 billion were used.) Companies also shortened the eligible periods from an average of 4 months to 3.1 months.

"It will be flat or down this year," said NCH senior vice president Jane Perrin. "The General Mills announcement will prompt some other companies to do some thinking."

But the trend to fewer coupons could quickly die if it results in fewer customers.

Coupon conscious

XTC

"People have become so accustomed to buying cereals on promotion that General Mills risks losing customers who were buying on a discount," Mr. O'Neil said.

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