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, campaignlive.co.uk, 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
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
’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.’
SALES OF READY-TO-EAT CEREALS YEAR TO JULY 97RANKED ON DOLLAR SALES
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%
(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 campaignlive.co.uk
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