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Cereal killers (chart) BIG G'S CEREALS SAG, DRAG ON THE BOTTOM LINE SOME RETAILERS POCKETING 11% PRICE CUT

By Published on .

Big G has lost the big mo.

In the late 1980s, General Mills rode smart management and the nation's oat bran craze to recognition as one of the nation's premier food marketers.

The Cheerios line boomed, helping Big G to record market shares in cereal; its Betty Crocker division proved a whiz at growing sales in mature businesses; and its Olive Garden restaurants seemed just the ticket for baby boomers graduating from fast-food.

But the Minneapolis-based marketer has sputtered of late.

Having officially closed the books on a "disappointing" fiscal year last week, General Mills' biggest challenge lies ahead: turning around its Big G cereal division, which accounts for 40% of sales and more than half of profits.

Though General Mills' package-food sales were up 4%, to $5.55 billion, for the year ending May 29, profits fell 1%. The company blamed heavy promotion in the competitive $8.4 billion ready-to-eat cereal category.

General Mills said it has addressed the profit drain with its ambitious $175 million plan to cut the shelf price of many of its best-selling cereals by 11%, and reduce the amount and value of the coupons it circulates (AA, April 11).

In addition, Chairman-CEO Bruce Atwater told analysts General Mills hopes to boost cereal sales with "more and better advertising," product improvements and a more aggressive new-product program. Big G will soon introduce a crispier, reformulated "yellow box" Cheerios. Late this summer, it will roll out a new brand, Sun Crunchers cereal-corn-and-wheat flakes with sunflower seeds baked in, supported by advertising from DDB Needham Worldwide, Chicago.

But it has a long way to go. Sales of some of its core brands, like Cheerios, have been flat or down, and recent new cereals have been lackluster performers.

Mr. Atwater last week admitted Sprinkle Spangles, a kids cereal that made its debut last fall, wasn't meeting sales goals. Both chief rival Kellogg Co. and Kraft General Foods' Post division have bested Big G with strong new cereals.

And though the price-cut plan was announced in April, implementation is going slowly. General Mills can only control the wholesale price it charges retailers, and an informal poll of retailers by Advertising Age last week showed spotty response to the initiative: Some retailers have cut General Mills cereal prices but not all by 11%.

"It's a tough, tough issue," said the VP for a Midwestern supermarket chain. "We've made most of the price cuts, but we have to stay competitive."

In some major markets, prices haven't been reduced at all even though cereal boxes boast "Now! Lower price!" and TV spots proclaim the same. That means at least some of the $110 million General Mills planned to give back to consumers is ending up in retailer pockets.

"We have not taken our retail [prices] down at all," said an executive for a West Coast chain. "We're following our competition in this market, and they haven't cut prices either."

General Mills said 70% of retailers nationwide have implemented some or all of the price-cut plan, and the timing seems fine. But analysts are worried.

"If you take the price decrease and don't get follow-through from retailers, it's a problem," said Timothy Ramey, analyst with C.J. Lawrence Inc., New York.

Another Wall Street analyst said, "What General Mills is saying to retailers is: You'll have less money because we're cutting trade promotion, and we'll use that to build our brands and thus increase your sales in the long run. I'm not sure retailers want to hear that. And at the same time, consumers are asking, `Hey, what's happened to cereal coupons?' They're being asked to pay prices without those discounts.

"You have to ask, then: What is going to happen to growth in the cereal category?"

This analyst points out that though cereal unit volume sales rose more than 5% in 1993, General Mills' share "has gone nowhere," remaining near 29% of dollar sales and 24% to 25% of pound volume.Kellogg has done no better, with its share hovering between 36% and 37%.

Still, the pricing strategy has already netted some positive results. Mr. Atwater last week told analysts the number of events featuring cereal coupons with a value of $1 or more has fallen to eight this summer compared with 38 last summer. In particular, both General Mills and Kellogg have virtually eliminated "buy one, get one free" coupons.

"I could get bullish on the idea that predatory pricing on major cereal brands is coming to a halt," Mr. Ramey said.

General Mills does have good news elsewhere. Its Yoplait yogurt brand has responded to price cuts, aggressive advertising and new products and is doing "extremely well," with unit volume up 21% for fiscal 1994, said Les Pugh, an analyst with Salomon Bros.

Continually buoyed with new flavors and varieties, the Betty Crocker brands posted an overall unit volume increase of 1%. In the $374 million fruit snacks category virtually abandoned by Thos. J. Lipton Inc., General Mills has nearly 60% of sales.

"Aside from cereal, the rest of the company's consumer foods will be driven hard in the next year but have respectable growth prospects," Mr. Pugh said.

Caity Olson contributed to this story.

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