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The ready-to-eat cereal giants are turning their marketing battle into one of new product growth and innovation now that a line has been drawn on couponing and price promotion.

A steady stream of new cereal products has entered the market this year: 91 through August, compared with 73 for the same period in '94, according to New Product News. Industry watchers believe this is just the tip of the research & development iceberg; the numbers also don't include industry expansion beyond the cereal aisle in the supermarket.

The redirection comes after Kellogg Co. and General Mills scaled back spending on couponing and price promotion, marketing tools affecting pricing.

Big G additionally pared its prices on 40% of its cereal line by an average 11%, beginning April 1994, while reducing promotional spending by 30%.

Typical promotions up to that point had been $1 coupons, buy-one/get-one-free offers along with heavy trade discounts. Only Quaker Oats Co. among the major cereal marketers continues to press forward with strong market spending ratios favoring promotion.

"General Mills' focus is getting rationalization back into the business, so the cereal market is not being artificially propped up over the long haul but will continue with solid growth," says Kenneth Harris, partner at Cannondale Associates, a sales and marketing consultancy. He believes the strategy will pay off over time.

As expected, Big G's dollar share in '94 dropped 2.4 share points to 26.6% of market as its pound share slipped 1.5 points to 23%.

Kellogg grew 0.6 share points in dollars to 35.6% of market and its pound share slipped 1 point to 35%, according to John C. Maxwell Jr., analyst with Wheat First Butcher Singer.

The Maxwell numbers put all-store retail cereal sales at $9.3 billion, up 4%, compared with the Information Resources Inc. totals of $8.1 billion (see chart) for just supermarkets.

A direct result of promotional cutbacks was a reallocation of those dollars into media. Media outlays surged 18.1% to $957.3 million in 1994. Kellogg's media grew 19.2% and General Mills 15.5%. Kraft Foods' Post division boosted spending a whopping 30.4%.

Kellogg, for example, upped the media ad tally for its No. 1 Frosted Flakes by 25%, to $40.1 million; media support for its Special K and Corn Pops brands grew 44% and 78%, respectively.

The Post line-up 1.4 points in dollars to 17% of market, and 1.7 points in poundage to 16.8%, according to Maxwell data-also pumped larger sums into the advertising of veteran brands like Grape-Nuts.

But Post's focus was mainly on new products-Blueberry Morning, Banana Nut Crunch, Bran'ola and Frosted Wheat Bites, marketing freshmen in '94 along with Kellogg's Apple Cinnamon Rice Krispies and Pop-Tart Crunch and Big G's Sun Crunchers.

General Mills is introducing Frosted Cheerios this fall, targetting the No. 1 cereal brand, Kellogg's Frosted Flakes. Post has a '95 entry called Golden Raisin Crisp.

A number of co-marketing ventures have eased the burden of heavy development and marketing expenditures required of new products. Last year, Kellogg and ConAgra united to bring out Healthy Choice cereal, named after the $1 billion multi-item, multi-category ConAgra brand; General Mills and Hershey Foods Corp. collaborated on Reese's Peanut Butter Puffs.

Marketers are no longer looking at cereal consumers as just falling into two segments-adults and children.

The industry is segmenting its users into smaller and smaller niches.

Kellogg is doing this with a "dessert" cereal called Temptations, introduced this year and targeted at an upscale adult audience. The Temptations line sports flavors like honey roasted pecan.

Cereal brands continue to slip into the snack food aisle, too. After giving out the recipe for 54 years, Kellogg took pre-packaged Rice Krispies Treats squares to market this March.

The cereal leader also introduced Pop-Tarts Minis and Nutri-Grain bars.

"To grow the business, cereal marketers have to encourage consumers to eat cereal for lots of different occasions," says Mr. Harris, noting that this strategy interfaces with eating patterns of many Americans who consume fewer main meals in favor of more little "meals" throughout their day.

"The threat of private label has made General Mills and Kellogg a lot smarter about what they have in the arsenal," says Mr. Harris.

The Maxwell data put private-label cereals at a growing 7.5% of market in dollars, nearly 60% of that credited to Ralcorp. Private label was only 3% of the dollar market five years ago.

Kellogg recently moved its $30 million Raisin Bran account from Leo Burnett USA, Chicago, to J. Walter Thompson USA, New York.

Also, Post has put its $27 million Grape-Nuts cereal account up for review. Candidates are incumbent Grey Advertising, Ogilvy & Mather and FCB/Leber Katz Partners, all based in New York.

Analysts believe the big cereal makers must continue to promote heavily and focus on mature brands.

"The pendulum is swinging back to brands and away from private label," says Mr. Harris. "Cereal marketers can't drive the business without strong brand assets."

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