Last year, Kellogg and General Mills spent an estimated $1.6 billion on promotion.
General Mills Chairman-CEO Bruce Atwater last week dropped some amazing numbers on analysts: Cereal marketers distributed more than 25 billion coupons in 1993, up 6 billion in three years. Despite the huge increase, the number of cereal coupons redeemed stayed at 500 million-a redemption rate of less than 2%. At the same time, 30% of cereal volume was sold with a trade discount, compared with only 17% in 1991, he said.
Promotion spending ultimately rose to 28% of General Mills' cereal sales, up from 20% in 1991 -- a number the company could no longer tolerate.
Specifically, General Mills President Steve Sanger said buy-one-get-one-free offers will be eliminated, and trade promotions will be reduced.
"The action here is a logical extension of what we've been saying since last summer," Mr. Sanger said in an interview. "The escalation of promotion spending on the part of all cereal manufacturers has been an increasing concern to us ... It's clear to us that this will be good for consumers and for our shareholders. "Gaining market share was not our goal here. We need the market share we do have to be more profitable."
"General Mills has taken a major step in the right direction," said Michael Mauboussin, First Boston Corp. analyst. "The overall industry structure-the price increases that only fund more promotion spending-has become worrisome. Kellogg has been talking along the same lines as General Mills and will use this opportunity to scale back some of its promotion, too."
Agreed Timothy Ramey, analyst with C.J. Lawrence Inc.: "The industry had to do something to break the spiral of increasing prices and then dealing that back to consumers in coupons."
But despite the warm response from analysts and the media, it's unlikely the No. 2 cereal marketer would have taken such a risky move if it were dealing from a position of strength.
Through poor management and a series of lackluster new products, General Mills has lost momentum. Its smaller-scale moves, like adding 25% more product to some items and lowering larger-size package prices on others, haven't been enough to help Big G begin growing its market share again. Sales of some key brands, like Cheerios, are down (see chart on Page 3).
General Mills and Kellogg underperformed the rest of the cereal business last year. While the category grew 5.4%, General Mills sales rose only 3.5% to $2.3 billion and a 29.2% share, according to Information Resources Inc. figures for the 52 weeks ended Feb. 27. Despite four price increases in less than two years, Kellogg's sales still rose, albeit only by 3.2% to $2.8 billion, representing a 35.2% share.
Even before last week's announcement, there was a chance General Mills could have ended its fiscal year in May with cereal volumes down.
"The effects of cutting promotion and the price cuts can be absorbed into what already was not a particularly good year," Mr. Ramey said.
Kellogg has told retailers it plans to reduce use of buy-one-get-one-free offers as well but is unlikely to institute lower prices after living through the angst of its 1992-93 price cuts.
General Mills will pour $110 million of the promotion savings into lower prices, ranging from 10% to 14%, on eight leading brands. Though each retailer sets its own prices on cereal, General Mills will flag packages with "Now lower priced" banners to guarantee consumers see the reduced prices.
The marketer hopes to use the rest of the savings on additional advertising and new-product development. Charles Gaillard, who took over as Big G president in December, told analysts last week the division will have more and "better quality" advertising in its fiscal year starting in June.
Mr. Sanger admitted Big G has not gotten its share of new-product sales in the past two years. Mr. Atwater told analysts the industry's 3.2% 20-year compound annual growth has been driven almost entirely by product improvements and new products.
"One of the things affecting us is that our competition has been doing a very good job with new products that have strengthened them," Mr. Sanger said.