Only General Mills has inched up prices since Kraft Foods' Post cereals threw down the gauntlet in May 1996 by cutting prices and ultimately sending category profitability into a tailspin. Since then, total category volume has recorded annual growth of only 1%. That compares with 3% five years ago, albeit a time cereal marketers were less into non-breakfast lines.
SPENDING DOWN $1.5 BIL
"About $1.5 billion in marketing spending has been taken out of the category by the majors since 1994," says Eric Larson, senior VP-investor relations at General Mills. His estimate is based on a decline of 5.5 percentage points in spending on marketing as a percent of sales.
No competitor shares the onus of static category growth more than Kellogg Co., posting an 11% volume decline in first-half '98 despite several new launches, including the $40 million rollout of Smart Start.
This year Kellogg joined the movement away from cereals toward more portable snacks with its Breakfast Mates, a spoon, bowl and milk combination and Snack Packs.
The Battle Creek company fired up a new campaign in January for Special K, moving it from diet to health positioning. It also launched a TV and print effort designed to kick-start the category. Observers say this is the first time in years the category leader acted like one.
"But I'll tell you who's acting like category leader," says Ken Harris, consultant with Cannondale Associates. "It's General Mills."
KELLOGG'S SHARE SLIDES
It's an unassailable fact Kellogg's share has consistently fallen, from a 45% share in the early '70s to a current 32%, a period in which General Mills' share climbed from 17% to 26%, says Big G in citing IRI data.
Rebuilding share, moreover, will be harder than ever for Kellogg if it continues not to blink in the staring contest with Post. "The margins in branded cereal are unsustainable," says David Nelson, analyst with Credit Suisse First Boston. "If you're sitting in Kellogg's shoes, how long do you accept this water torture?"
POST EASES STICKER SHOCK
Post for its part, isn't giving up its strategy. The marketer reduced prices about 20%, reasoning consumers were leaving the category or trading down to private label due to sticker shock. Post maintains the strategy cost it some ad spending (used to fund price reductions) but helped it raise share from 15.3% before the cuts to 17% by year-end '97. IRI reports Post's current share at 16.4%.
Competitors say the net impact of Post's move depressed margins. Cereal marketers matched the price cuts, funding cuts from ad coffers while maintaining relatively high levels of trade promotion. The result: Continued low profitability. Post may be able to sustain this level of "price-supports" longer than most because of the deep pockets of parent Philip Morris Cos.
Big G may have figuratively taken over category leadership, but Post has taken the reins in new product development. Its newly launched Oreo O's is the new product hit of the year. It reached a 1% share even before the faucet was officially turned off on its $40 million media budget. Big G has gone the flavor extension route with Team Cheerios and Cinnamon Grahams, and is rolling out Honey Nut Chex.
BIG IN BAGGED CEREALS
Quaker Oats big story is bagged cereals that continue to rise in volume and popularity and push Quaker's dollar market share to 9.7% as compared to private label's 11%, according to ACNielsen Corp. data for the 52 weeks ended Aug. 1.
Quaker is focusing most of its marketing on hot cereals, although it is including a cold cereal -- Quaker Toasted Oatmeal -- in an umbrella campaign playing up the cholesterol-lowering benefits of oatmeal. Health will play an even bigger role among all marketers next year.
The price-cutting turmoil has brought new-product discipline to the category. "There's less seeing if a new product will stick," says Mr. Harris, noting new products are now "more technology and nutrition driven."
Yet trade promotions still hold profitability hostage. Kellogg has been showing some growth signs, says Credit Suisse's Mr. Nelson, but the gains appear to be coming from heightened promotional spending. "It seems to be working," he says "but at what price?"