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The year 2000 might well go down in cereal history as the date No. 2 player General Mills overtook leader Kellogg Co. in dollar sales. There's only a tiny gap between the two -- Kellogg had a 31.8% category share in dollars compared to General Mills' 31.5% for the 52 weeks ended June 18, according to Information Resources Inc. And Big G is inexorably closing in.

Just four years ago Kellogg led the pack at 36.3%, followed by Big G at 26.4% and Post at 12.8%, says IRI.


Kellogg's stumble can be traced, in part, to a lower-than-usual, new-product batting average. At least three launches -- Breakfast Mates milk-and-cereal combination, upscale Country Inns cereal and high-psyllium Ensemble cereal -- were scaled back or discontinued recently. On the plus side, Kellogg picked up one share point for Raisin Bran Crunch and half a share point for Smart Start.

"The price rollback made the economics [of new-product introductions] unbelievably difficult. Marketers are struggling with a way to introduce new products that's financially viable," says an executive familiar with the category in reference to how the 1996 price rollback still looms over the industry.

That rollback cut overall brand prices about 20%, narrowing the price gap between brands and private label and cutting into margins out of which spending for advertising and new-product development are pulled. Price promotion also soared. As such, marketers in the wake of the rollback have sought to restore margins by offering new products worthy, in the consumer's eye, of higher price points.

That, in part, is leading to more conservative line extensions, which are more "efficient and productive" than completely new launches, notes Big G's Senior VP-Investor Relations Eric Larson.

Indeed, among the new cereals coming this fall at General Mills: Millenios under the Cheerios brand name and new Brown Sugar & Oat Total; at Post, it's Grape-Nut O's and a relaunch of Alpha Bits with Calcium; at Kellogg, it's Special K Plus, with added calcium.


Positioning Cheerios as a tool to help lower cholesterol hiked the brand's volume 12% in pounds this year (through June), up from a 5% gain in the same period in 1998, says Big G's Mr. Larson. The marketer is also touting the high folic acid content of Total and is trying to capitalize on a recent U.S. Food & Drug Administration ruling on the value of whole-grain cereal as it applies to Cheerios, Total and Wheaties.

Two of Big G's truly new lines in the U.S. were Sunrise organic cereal, which it claims garnered about 0.4% share of market, and Nesquik, a kids' brand that moved into the market from Canada.

"Last year, we were planning on more [new-product intros] than we launched," says Mr. Larson, noting capacity constraints were the culprit. That, he says, will be remedied this year.


Post, too, says it plans an aggressive new-products program.

"We've got to spend behind ideas that excite and innovate," says Mike Polk, exec VP-general manager, Post cereals.

The company's Oreo-O's, an all-family product with a built-in appeal to kids, scored $100 million in sales in its first year. Mr. Polk hopes to duplicate that success with Grape Nut O's, adding "we're taking more risks in new-product development." That includes "in and out" cereals -- limited time-editions of brands that include Reptar Crunch and Create-A-Crunch. Post has also united all its kids' lines under a single Post Kids' marketing banner with an ad campaign that brings together all its ad icons from Post Waffle Crisp grannies to Sugar Bear.

Also more active on the new product front is Quaker Oats Co., introducing this year Soccer Golden Goals, an oat-and-corn combo cereal marketed in conjunction with the U.S. Soccer Federation. The linkup will place the U.S. women's soccer team on the cereal box.

Rivals believe Quaker, at 9.2% share, may step up new-product activity as momentum slows in bagged cereals due to a narrowing of the price gap between private label and branded cereal.

"Quaker has built a big distribution base in the last year and a half. The challenge now is how to build from that [base]," says Mr. Polk. "It's not a challenge I'd want to take on."

The wider issue for all is the need to expand the total category, headed south for several years. Current-year sales are off 4.2% from those four years ago just prior to the rollback. Given that it's in the industry's best interest to push sales higher, Mr. Larson predicts a much stronger focus on brand-building.


He says trade spending has remained consistent at about 28% of total marketing dollars. "Kellogg last year was very aggressive and this summer it wasn't matching the levels [it expended on trade promos] a year ago," he says, adding, "it's become a relatively rational environment for promotional spending."

Kellogg, which at press time still had not filled the exec VP-general manager ready-to-eat cereal position vacated by Fred Jaques, must come up with a strong new-product slate and a solid marketing commitment to blunt Big G's inroads, however.

"General Mills has a focused agenda," says an exec connected with a rival cereal marketer. "They also have a more well-thought out trade program and promotional strategy" than their competitors.

In the end, though, it's the 1996 cereal price rollback that put Big G firmly on the category leadership track. Then, both Kellogg and Post cut spending to make up the margin shortfall, a temptation Big G resisted. Confirms Mr. Larson: "We

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