Consumers Cheer as Cereal Companies Scuffle in the Aisles

Cereal producers are embroiled in a brutal price war that snaps, crackles, and pops with cheery news for the American consumer.

In the past two months, a battle for the national cereal bowl has driven down the price for a box of some leading brands by more than 20 percent.

"It's about time," says Tom Gilcrest while plying the cereal aisle at a Chicago supermarket. "They had to either cut prices or start putting the kiddy cereal in the gourmet section," he says. Since 1983, the average price for cereal had soared by 70 percent.

The price slashing should continue for several weeks. Two major cerealmakers, General Mills Inc. and Quaker Oats Company, will probably soon announce deep cuts in step with their two top rivals, Kellogg Company and Post.

Still, this is a war with limited corporate casualties.

"I don't think we are seeing an all-out go for the jugular price war. This is a well thought-out strategy," says Eric Sorenson, managing director of the center for retail management at Northwestern University in Evanston, Ill.

A harsh mix of forces - including consumer resentment and inroads by cheap producers - has shaken up a cozy oligopoly of cerealmakers and triggered the price plunge. A handful of companies dominating the cereal industry are recognizing that, after years of steady mark-ups, they must reverse course.

"This is probably the most challenging time cereal producers have faced in a long while," says Michael Darling, associate professor of marketing at New York University's Stern Business School. Analysts disagree over whether the price war foreshadows a lasting boon for consumers and an enduring change in the way producers price and market cereal.

The hands-down winners are consumers and cereal producers that resort to bold and shrewd pricing. The losers are shareholders and workers at laggard or inefficient cerealmakers, industry analysts say.

Consumers should be especially vigilant of price shifts and hoard coupons that could take a huge bite out of a cereal bill when shelf prices bottom out, they say.

Big cerealmakers have cut prices to overcome what some analysts say is unprecedented adversity. Sales in the $8 billion cereal industry fell 3.7 percent last year as consumers turned increasingly to muffins, bagels, and other breakfast fare. Also, makers of comparatively cheap store brands and private-label cereals have expanded market share to 7 percent.

Cerealmakers are being burned on both ends of production: Foul weather for farming and a surge in worldwide demand have boosted grain prices to record levels this spring. "It is a tough time now, especially with grain prices so high," Mr. Sorenson says.

THE challenges compelled Post, the No. 3 cereal producer, to break from the pack in April and chop prices by an average of 20 percent. The market share of Post, a Phillip Morris subsidiary, has since risen by 5 percent.

Kellogg, the No. 1 maker commanding 36 percent of the market, saw its share erode by 3.6 percent during the month after the Post mark down. Early last week, it announced 19 percent price reductions on most of its brands.

The lower prices reveal a greater emphasis on value pricing and a trend toward less spending on costly promotion, Sorenson says.

"The reason we're seeing all the price reductions is that companies got their prices out of whack by training consumers to buy on promotion," according to Sorenson. "What lurks behind the price wars and decisions to cut prices is a decision also to cut back on promotions," he says.

But Mr. Darling, a former marketer at Kellogg, says that after slumping further, prices will eventually edge up to current levels as Kellogg regains its longstanding role as price leader. The industry is unlikely to alter its balance of pricing and promotion, he adds.

While cereal costs ebb, the price of cereal's companion - milk - will probably jump to the highest level in many years. The price bottlers pay for milk will rise 4 percent on July 1, says George Hansen, administrative supervisor at the Central Milk Producers Cooperative in Schaumburg, Ill. The shelf price for milk nationwide is already unusually high, he says.