CEREALS SHOULDN'T SQUEEZE AD BUCKS

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Cereal companies are in a precarious position.

The price cuts they've initiated on many of their most popular brands probably will force them to cut back on advertising spending. At the same time they've got to fend off not only private label cereal products, but also breakfast alternatives like bagels and muffins.

So how long can they keep a low profile without losing further ground to these competitors? Marlboro Friday's cataclysmic price cuts will seem a no-brainer compared with the cereal companies' dilemma.

Third-place General Mills, marketer of Cheerios and Wheaties, might be in the best position of the Big 3. The company was the first cereal maker to cut prices, an unannounced reduction in 1994, and since then, it's gained 1.2 share points. This time around General Mills cut its cereal prices an additional 4% (compared with 19% for Kellogg and 20% for Post), so it's in an ideal position to say it's reduced prices-again-while affording to keep ad spending steady. Since Post and Kellogg have effectively neutralized each other, General Mills could turn out to be the big winner.

One thing is for sure, however. Neither Post nor Kellogg nor General Mills can afford to curtail ad spending for long . One securities analyst had it right when he told us: "If the industry goes away from building quality and image, that's a mistake" and could lead to commoditization of the category."

It wasn't so long ago that neither Wall Street nor top management was too enthralled with the importance of building brands. In 1991, we ran a special issue entitled, "Are brands dead?" In it we said, "Marketers have made it easy for consumers to trade down and tune out presumably venerable brand names-by siphoning ad dollars to fund trade promotions, by producing all too similar ad messages, by losing the edge in production innovation."

In a prophetic warning, a retail consultant added, "If everyone takes advantage-like the cereal people do-by raising prices at every opportunity, there will be a problem for brands. Marketers will have created too many price voids for private label to move in." As we reported at the time, brand loyalty in the cereal category declined from 47% in 1990 to 42% in 1991. Store brands were eating the cereal giants' lunch.

It took the jolt of Marlboro Friday to bring marketers back to their senses. At the time Philip Morris' drastic price cuts were seen as proof-positive that the national brands couldn't compete with the lower-price generic brands, but the move showed how price cuts could help the major brands recoup lost share of market. And then Procter & Gamble Co., in an equally bold step, introduced everyday low prices, which also involved diverting promotional funds back towards the consumer and eliminating marginal brands that didn't have clear-cut advantages.

The cereal companies have too much at stake to let their Post and Kellogg's and Cheerios brands languish for lack of advertising. The price cuts will enable them to regain lost business, as Marlboro did, but continued strong advertising support is the other essential part of the equation.

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