Cereal makers feel profit and health crunch

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Clifford The Big Red Dog had breakfast with kids on Capitol Hill early last month as part of a promotion for General Mills' organic, whole-grain kids' cereal, Cascadian Farm Clifford Crunch.

But if the PR stunt was designed to fend off the rising tide of lawsuits, complaints and potential legislation surrounding childhood obesity, it failed to prevent General Mills' Shrek cereal from being singled out weeks later by Sen. Tom Harkin, who is fighting for severe limits on food marketers' initiatives to reach kids, especially to promote the less nutritious products in their portfolios.

Kid brands make up nearly half the $6 billion U.S. cereal market. That puts cereal marketers General Mills, Kellogg Co. and Kraft Foods in the center of the obesity debate and forces them to devote more resources and attention to more nutritious products that consumers are slow to warm to. Meanwhile, private-label competitors are fast eating away at national brand cereal sales, proving that the real motivator in the category is price.

lawsuit

A lawsuit filed in California last week against the top three cereal marketers claimed their low-sugar versions of popular kids' cereals were not actually healthier. That underscores the difficulties the marketers face. By all accounts, those cereals have done little to boost lagging profits. Retailers report they only sell at steep price discounts, and now their positive PR value has also been diminished.

"We believe this case is entirely without merit," a Kellogg spokeswoman said. Low-sugar varieties demonstrate Kellogg's commitment to "providing consumers a range of offerings that meet their taste and nutritional preferences," she said, a sentiment echoed by a Kraft spokeswoman. A General Mills spokeswoman, who declined to comment directly on the suit, cited 2003 research data from the Journal of the American Dietetic Association that showed frequent eaters of cereal-even pre-sweetened varieties-have healthier body weights and do better in school.

One Midwest retail executive said that for all the talk about organics and nutrition, a cereal such as Clifford Crunch is "limited in its appeal because people shop for price, and this is more expensive." General Mills last month said its U.S. cereal volume dropped 9% in the quarter that ended Feb. 27 following price hikes of nearly 3%. Private label grew roughly 11% in the same period.

Kellogg, which has also raised prices, has also been hurt by private label, although neither of the top two players has backed down on price. Their hope is that private label prices will be forced to rise, or that consumers will pony up more to buy innovative premium brands.

But if that innovation is nutrition-based, which it is likely to be, the odds are slim. Neuberger Berman analyst Bill Leach said marketers "could come out with healthier kids' cereals, but nobody would buy them."

no choice

Likewise, John Stanton, professor of food marketing at St. Joseph's University offered that "there is no evidence people want these healthy foods," though he said cereal marketers have no choice but to come out with them, "even at a loss," to deflect critics.

Kellogg's launch earlier this year of whole-grain Tiger Power, intended to pull sales away from Cheerios by targeting toddlers, has so far failed to drum up a loyal enough following to command purchase without price discount, said one West Coast retailer. "It's by no means a runaway success and it hasn't put a dent in Cheerios," she said.

Clifford, like Tony the Tiger, has his work cut out for him. Sales for General Mills' Cascadian Farm organic cereals for the 52 weeks ended Feb. 20 rose 58%, but still totaled only $13 million. The animated character might well shout from the shelf about five grams of dietary fiber, minimal fat and sugar and only 100 calories per cup, but that may not be enough to fend off competition from the Froot Loop knockoff further down in the display.

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