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Prices in the cereal industry-and ultimately ad dollars-are going snap, crackle and pop.

Picking up the gauntlet thrown down by Kraft Foods' Post, market-share underdog in the declining $7.84 billion ready-to-eat cereal category at midyear `96, the major players have slashed prices significantly this year.

Yet Kellogg Co., Post and General Mills say their boost in the advertising ante is temporary, acknowledging that reduced revenue streams from unit price cuts are likely to be made up by a constriction in ad budgets.

Price hikes, indispensable in the industry since the '80s, have pushed consumers increasingly to private-label entries. Last year, private-label cereals rose 10.9% in dollar sales when no major marketer showed an increase, according to Information Resources Inc., which says the overall market was down 2.3% in dollars in '95.

For the year, leader Kellogg was down 1.3% to $2.89 billion sales; General Mills off 3.8% to $2.1 billion; and Post down 6.4% to $1.02 billion (not included are its Nabisco brands, which had $273 million in sales). First-half '96 shows even further dollar declines in the total market.


General Mills this year will gain three percentage points in market share as a result of buying Ralcorp's Chex and other minor brands this summer. Ralcorp, the major private-label producer, was a victim of the price wars, unable to match the price cuts announced by Post, Kellogg and Big G.

General Mills quietly lowered prices in 1994-the first to do so. That shift showed up in year-to-date share data ended mid-May 1996. Big G growth in the period rose 0.6% in dollars and 2.7% by volume, according to IRI. Only store brands show similar movement on the positive growth side.

It was the Post cuts this May, though, that delivered the biggest bang. Called "the largest price rollback in the history of the category" by President Mark Leckie, Post sliced prices 20%-a drop virtually matched by Kellogg's 19% across-the-board cuts a month later.

Kellogg cuts were in response to its own sales decline, as well as the Post move.


IRI reports Kellogg's dollar sales down 4.8% and volume sales off 2.2% for the year-to-date period ended in mid-May, 1996. Kellogg's share of dollar sales was at 35.9% in that period, down from 36.3% in the corresponding year-ago period.

Post's cut was heralded in a sentimental commercial showing company employees and talking about Post's pride in giving less-expensive prices to consumers. The company claims its volume rose 20% in the month following the announcement.

The cuts weren't early enough to show up in market share pulled by IRI on Post for year-to-date ended mid-May: Post's dollar share hit 13%, down from 13.6%, on a 7.6% decline in sales.

Kellogg accompanied its price slash with a series of commercials, one showing Tony the Tiger's claw ripping away at a universal product code symbol with the tagline, "Now the best to you each morning costs less to you."

But greater spending now is likely to result in reduced marketing budgets down the road. Concerning Big G, for example, DLJ Securities analyst Bill Leach says General Mills estimated a $50 million reduction in earnings tied to the price cuts and a $100 million shortfall in revenue that must be made up somewhere. Advertising is a likely target.

Reporting it expects lower earnings for the third quarter, Kellogg warned its competitors to back off of special promotions (two-for-$4 offerings) at the trade level or else it will be forced to retaliate. General Mills is believed the culprit, offering the trade specials to push its new product intros during and after the Olympics. No inordinant rise in couponing at the consumer level has surfaced.


Looking ahead, expect new products to hit from all the major players, beginning with General Mills' Betty Crocker red spoon line of baked cereals this fall.

Post is testing Cranberry Almond Crunch on the West Coast for possible rollout.

Kellogg, mum on new product plans, needs to revive its lineup to keep pace, having lost the new-product spotlight to General Mills with its Frosted Wheaties, Crispy Wheaties 'n Raisins, and limited edition Team USA Cheerios and Lucky Charms Olympic Marshmallow.M

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