Kellogg tries to put snap in sales Market share sags to historic lows

February 17, 1997|By BLOOMBERG NEWS

BATTLE CREEK, Mich. -- Kellogg Co. was in a jam. Sales of its cereals were already slowing as consumers switched to alternatives such as bagels and granola bars. Then its rivals started slashing prices.

That left the world's biggest cereal maker little choice but to follow suit, and hope the lower prices would lure back customers.

It's not working. Kellogg's portion of the breakfast cereal market continues to shrink to historic lows.

To make matters worse, gains by No. 2 General Mills Inc. threaten to topple Kellogg's dominance over the industry it invented a century ago.

The price cuts have taken a toll on Kellogg's earnings, which have dropped three straight quarters and aren't expected to improve until after the first quarter.

The root of Kellogg's problems, analysts say, rests not with the price cuts. Instead, the maker of best-selling brands such as Rice Krispies and Frosted Flakes has been hurt by its refusal to match competitors' discounts such as cents-off coupons to attract customers.

That has brought Kellogg's share of grocery aisle sales to about 32 percent in October and November, according to Information Resources Inc. data provided by an industry analyst. That's down from about 36 percent in June -- and about 40 percent just a few years back.

Few analysts or investors expect Kellogg to sit idly by.

The Battle Creek, Mich.-based company will likely consider another round of price cuts, analysts said, similar to the average 20 percent reduction it took in response to markdowns by Philip Morris Co.'s Post / Nabisco unit.

If Kellogg can't rebuild market share any other way, it could carry out a price war of attrition: A restructuring has cut 1,200 jobs and $120 million from this year's expenses. And it carries only $1.8 billion in total debt.

"If they should do it, it won't get them very far," said Merrill Lynch analyst Eric Katzman. "To throw coupons and discounts at the situation isn't going to do anything."

Kellogg will also introduce new products to drum up interest -- including Coco Frosted Flakes this year -- hoping to mimic its success with Honey Crunch Corn Flakes.

The new Corn Flakes line has garnered a 1 percent share of the $7.5 billion market since its introduction, making it Kellogg's strongest new product in some time, Galbraith said.

Bringing out new products indicates that Kellogg "won't price bomb," he said.

General Mills, for its part, has fared well during the price war.

The maker of Cheerios and Wheaties said in December that its second-quarter earnings rose 7.5 percent.

Among other cereal companies, Quaker Oats Co. has shown some improvement, with 8.5 percent of the market in October and November, compared with 7.7 percent for the full year.

Philip Morris' Post/Nabisco unit, which started the price war, had 15 percent of the market, down from 16 percent. Private-label brands' share was unchanged at 7 percent.

The price war has already claimed one victim. Ralcorp Holdings Inc., with 3 percent of the market, is selling brands such as Chex to General Mills to focus on private-label cereals.

Small competitors without deep pockets could follow if the price war intensifies.

"The smaller guys can't play that game," said Tom Pirko of BevMark Inc., a consulting firm.

Pub Date: 2/17/97

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