INTERNATIONAL ISSUE: Cereal giants call truce in price war that failed to appetise - Karen Benezra on a clash that hurt competitors but didn’t move the US public

By KAREN BENEZRA,, Friday, 26 September 1997 12:00AM

The battle for the American breakfast table is taking another turn as the nation’s largest cereal manufacturers try desperately to improve the slashed profit margins and battered market shares from their costly price war.

The battle for the American breakfast table is taking another turn

as the nation’s largest cereal manufacturers try desperately to improve

the slashed profit margins and battered market shares from their costly

price war.

After 18 months of lower prices that sharply reduced earnings, as well

as stiffer competition from bagels, muffins and other convenience foods,

the cereal titans have quietly begun pushing ahead with modest price


Even better, marketing expenditures are at last on the rise again, as

the bruised competitors scramble for new consumers.

That’s a sharp contrast to April 1996, when the major producers, led by

third-ranked General Foods’ Post range of cereals, slashed prices across

the board by 20 per cent. Back then, they also vowed to rely less on

coupons and promotions.

These cuts were originally forced by consumers who balked at spending

more than dollars 5 for a box of cereal and were gravitating to cheaper

private-label brands. But the cereal giants came to regret the price war


Since the move, total dollar sales have dived 10 per cent to dollars 7.2

billion from nearly dollars 8 billion last year. And fickle consumers

haven’t responded well to the pricing manoeuvres either.

So bad did the situation get that the second largest manufacturer,

General Mills - which has lately fared better than its rivals - broke

ranks in July to raise the price of its cereals by an average 2.6 per

cent to adjust for inflation. Wall Street hailed the move as an end to

the price war, sending its shares soaring to a 52-week high of dollars


Overall, analysts are split over what impact the Post-inspired price war

has had on the cereal market. Post’s initial move seems to be a carbon

copy of price cuts made three years ago by Marlboro cigarettes, a sister

brand to Post in the giant Philip Morris conglomerate. These initially

rocked the cigarette market on what’s now referred to as ’Black Friday’

with a 40 per cent price cut, and also sent Philip Morris shares

tumbling, wiping dollars 6 billion off its equity in a single day.

However, Marlboro eventually emerged from the resulting free-for-all as

an even stronger brand, while its competitors faltered.

The difference with the Post cuts is that Marlboro didn’t just drop

prices but raised incremental marketing support as well, a move

described as a ’balanced reaction’ by Gary Stibel, president of the New

England Consulting Group, of Westport, Conn., whose global client roster

includes Unilever, Coca-Cola, Hallmark and R. J. Reynolds.

In contrast, Post put its faith almost solely on price action, a crusade

which pushed its dollar sales down 12 per cent over the past year,

though its market share has increased to about 16 per cent.

So Marlboro’s success was not repeated in the cereal aisle. Although

early signs were good, the lower prices did not increase the market for

branded goods.

’The initial swell was rapid and large,’ Ken Harris, a packaged goods

industry consultant at Cannondale & Associates in Illinois, says. ’Post

gained market share right out of Kellogg’s hide and closed the gap with

private label. But they did a disservice to the branded manufacturers

because they didn’t bring in more users to the category.’

In the end, General Mills felt bold enough to end the price war. For

nearly two years, Mills had been steadily nibbling away at the industry

leader, Kellogg, whose once-commanding market share had slipped to 33

per cent in July from 35.7 per cent a year earlier. On the strength of

acquisitions and innovative marketing campaigns, such as limited-edition

cereals tied to the Olympic Games and this summer’s blockbuster movie,

The Lost World: Jurassic Park, General Mills now controls 28 per cent of

the ready-to-eat market, up from a 26.5 per cent share in 1996.

’I think Mills smells blood,’ Harris sums up.

Mills, best known as the maker of Cheerios, Wheaties and Kix, also added

to its share gains last year by purchasing Ralcorp’s name-brand cereal

line, including Chex, for roughly dollars 330 million in stock.

Kellogg, which has suffered most from the price cuts, has been searching

for the right mix of new products and marketing support to reassert its

leadership. Two recent successes have been simple line extensions, Honey

Crunch Corn Flakes and Cocoa Frosted Flakes. Yet despite the

introductions, supermarket sales of Kellogg’s cereals have dropped 15

per cent to dollars 2.4 billion for the 52 weeks ending July 13,

according to the industry tracker, Information Resources Inc. On one

level, Kellogg is also wrestling with itself, having purchased the

Lender’s frozen bagel business last December. That’s left some observers

wondering whether the company has bought into the wrong end of a segment

whose explosive growth has come from fresh, not frozen, offerings.

On the propaganda front, Kellogg is fighting back this month with a

major new advertising campaign that promotes the health and nutritional

benefits of its entire cereal portfolio, including its sugary brands

that are popular with children. The campaign from Leo Burnett, Chicago,

uses bold visuals to highlight specific product attributes like vitamin

and calcium content.

One ad depicts a woman playing with a child above copy that reads: ’A

bowl of cereal may help reduce the risk of osteoporosis.’ Another shows

an image of an older man holding a surfboard above the question: ’Can

cereal reduce the risk of heart disease?’ The campaign, whose budget is

believed to exceed dollars 10 million, will appear in parenting, health

and news magazines, with the tagline, ’Cereal. Eat it for life.’

Kellogg officials say the umbrella campaign, which features such brands

as Corn Flakes, Special K and Fruit Loops, is based on its research on

various ailments and suggests that cereal can serve as a beneficial

weapon against disease. ’People have forgotten a lot of facts that make

up the whole nutrition story,’ Jon Wilson, executive vice-president for

consumer and customer engagement at Kellogg USA, says. ’By putting

together these diverse health benefits into one comprehensive campaign,

we hope to remind consumers just how good cereal is for them.’


Total US            US dollars  dollars Sales     Unit sales  Unit sales

                                     % change                   % change

                                  over 1 year                over 1 year

Kellogg          2,354,763,264         -15.0%    786,548,096      -10.2%

General Mills    2,007,841,536          -3.9%    641,140,864       -1.1%

General Foods

 (Post)          1,138,202,752         -11.8%    410,392,192       -0.4%

Quaker             590,375,488          -1.5%    216,351,152       11.8%

Store Brands       520,919,936          -1.5%    248,923,360        0.3%

Ralston            264,901,968         -20.0%     81,120,280      -18.8%

Malt O Meal        181,842,656          12.3%     83,277,248       15.3%

GRAND TOTAL      7,129,294,848          -9.2%  2,494,919,168       -3.3%

Source: Information Resources Inc.

This article was first published on


You must log in to use Clip & Save

Before commenting please read our rules for commenting on articles.

If you see a comment you find offensive, you can flag it as inappropriate. In the top right-hand corner of an individual comment, you will see 'flag as inappropriate'. Clicking this prompts us to review the comment. For further information see our rules for commenting on articles.

comments powered by Disqus

Additional Information

Campaign Jobs