But the slash will extend beyond that-to ad expenditures for cereals, historically one of the food industry's heaviest spending categories.
The cuts could total more than $40 million in media spending in the fourth quarter alone.
"A billion [dollars] in profits has been taken out of the category," said DLJ Securities analyst William Leach. Cereal marketers "have to face up to it."
After an initial burst of TV advertising by both Kellogg and Kraft Foods' Post to introduce their price cuts to consumers, the marketers will scale back ad spending to keep profits up. Kellogg is reducing cereal prices by 19% and Post by 20%.
General Mills, the third domino to fall in the cereal price wars, declined to say whether it would cut ad spending to fund its price cut, which analysts say averages about 4%. But it's believed the company will follow suit.
$50 MIL EARNINGS HIT
"General Mills says their price cut will reduce earnings by $50 million and revenues by $100 million," said Mr. Leach, noting that the money must be made up in other areas including advertising.
Big G spent $195 million in measured media last year, according to Competitive Media Reporting, mostly via Saatchi & Saatchi Advertising, New York.
Thomas Knowlton, Kellogg North America president, called the ad spending drop short term. But the brands affected-Frosted Flakes, Frosted Mini-Wheats and Froot Loops-are among its largest in ad outlays. Frosted Flakes received $51 million in measured spending last year, while Frosted Mini-Wheats got $49 million and Froot Loops $21 million-all through Leo Burnett USA, Chicago.
Post also declined to detail the percentage by which it planned to reduce media advertising, but the cuts are expected to be significant.
$21 MIL CUT POSSIBLE
In the first quarter of 1995, Kellogg spent $108 million on cereal advertising. If Kellogg's ad cut equals that of its price slash, and presuming the company planned to spend about the same amount in the fourth quarter of this year, its ad expenditures would drop by $21 million. Spending could fall $8 million at Post and $13 million at General Mills for the quarter.
But chances are the ad cuts will last longer than a single quarter. A yearlong drop for Kellogg, which spent $353 million in 1995, according to Competitive Media Reporting, could mean a $70 million plunge in ad spending while Post's $203 million budget would decline by $40 million.
Promotional spending and couponing have also been re-evaluated (see story on Page 9), but Mr. Leach said the effect of the cuts doesn't bode well for advertising.
"If the industry goes away from building quality and image, that's a mistake," he said, and could lead to the commoditization of the category.
The price cuts are already putting the squeeze on suppliers to Kellogg, and may soon affect agencies Burnett and Young & Rubicam, New York.
"If we are cutting our prices 19%, we can't really afford advertising that isn't working," Mr. Knowlton said. "This year, we are going to be more demanding with our brands, and only proven ad campaigns will get full funding."
`HARD-NOSED' TOWARD ADS
He said Kellogg is doing more test marketing of copy and has become "very selective and hard-nosed in determining what [advertising] is driving our business."
Mr. Knowlton said there will be more in-market testing of media advertising as well.
Still unclear is if there will be more pressure regarding compensation for Kellogg's shops.
"We are, on an ongoing basis, looking at where we can be more efficient," he said. "Simply in principle, we are looking at [cutting costs among] all our suppliers," but "there's been no initiation" of talks with agencies.
The price declines aren't likely to cross over into other packaged foods. Cereal marketers passed on some of the steepest price hikes in the 1980s and early '90s, throwing the category far out of touch with the consumer value equation.