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Honey, I Cut the Price; Cereal Bowl Shake-Up

IT used to be so easy for cerealmakers to get Americans to invite them to breakfast. In the late 1980s prices were rising about 7 to 10 percent a year on the grainy products and people kept coming back for more.

But in the last few years the industry's leading manufacturers have faced a flat or declining market and stiff competition from lower-priced store brands. As a result, they have had to change the way they do business in the domestic $8 billion ready-to-eat cereal area.

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The most recent indication came this week when the No. 3 maker, the Post division of Kraft Foods, lowered the suggested retail price of all 22 of its Post and Nabisco brands in the United States. The average cut of 20 percent is the largest price reduction the industry has seen in recent years. Some observers see the bold move as a sign that the cereal giants more fully realize the new - and lower-priced - environment they face in the '90s.

"[The] action ... is evidence that Post now appreciates the extent of the change in the cereal industry," says David Rabinowitz, an analyst at Smith Barney, a New York investment house.

Kraft, a subsidiary of Philip Morris Companies Inc., says it took its queue from surveys showing that consumers are dissatisfied with the value they're getting in the cereal aisle.

"We believe by taking this action we will reinvigorate the ready-to-eat cereal category and help the retailer start growing this business again," says Mark Leckie, general manager of Post, in White Plains, N.Y.

Mr. Rabinowitz says that market leader Kellogg Company has also caught on to some extent by holding its prices steady recently, and in some cases lowering them. No. 2 General Mills Inc. has also lowered prices in the last two years, but with little impact on the industry because of the way the cuts were implemented, observers note. But Rabinowitz says the Kraft action "could very well serve to stimulate what has been slow category demand."

Sales for all ready-to-eat cereals in the US fell 3.3 percent in the 52 weeks ending Feb. 25, according to Information Resources Inc. in Chicago. Sales by the major manufacturers declined 2 to 12 percent in that period; the only rise was in private label sales - generally store brands - which gained 10.8 percent.

Consumers are flocking to these private-label brands instead of their more pricey brethren, observers say. Rabinowitz says that what he calls the lower-priced category - primarily store brands - is now about 15 percent of the unit sales of the cereal business, a number that has tripled in the past five years. Little wonder the folks at the top are taking note.

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Post, for example, says that prior to its announced cuts there was a 70 percent gap between its prices and those of private labels. With the cuts, that gap now narrows to 30 percent.

Elsewhere, the Quaker Oats Company, also a top player, last year responded with a new low-cost brand of bagged cereals that sell at 40 percent below comparable name-brand products, says spokesman Ron Bottrell.

Also influencing the cereal industry in the '90s is promotion. Cerealmakers, and others, like Procter & Gamble, "would like to get out of the business of couponing ... and simply put more things at a more realistic price," says David Debertin, a professor of agricultural economics at the University of Kentucky in Lexington. He notes that eventually consumers may get fewer coupons, but more uniform cereal prices.

For now, some industry watchers say the impact of Post's price reduction will be moderate, given that the firm does not have a controlling position in the market. The key, they say, will be if Kellogg and General Mills follow suit.

"Everybody's going to be watching to see if Post gains market share on this move," Mr. Debertin says. He notes that the cereal business is an oligopoly - an industry dominated by a handful of big players - where all the competitors watch each other closely.

Still, the other companies will probably be affected by Post's action even if its market share stays flat, Rabinowitz contends. Even if retailers choose not to pass along the list-price savings to consumers - which he and others think is unlikely - retailers will still be getting Post products at 20 percent less, and that may prompt stores to put pressure on the other companies.

Says Rabinowitz: "This really ups the ante."

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