Two straight years of wilting sales have presented U.S. cereal makers with a grim picture. Two of the industry’s heaviest hitters, Kellogg’s and General Mills, had drastically lowered prices and cut marketing and promotion budgets, only to find that their U.S. market share was going nowhere.
At the end of April, after Kellogg announced a 10 percent drop in its U.S. sales. Kellogg chairman and ceo Arnold Langbo blamed it squarely on cuts in promotion, explaining: “Our reductions were too deep, and we adjusted our program too late in the quarter.”
Kellogg moved quickly to make a correction. In announcing that its second-quarter profits had dipped by 17 percent, the Battle Creek, MI company also trumpeted that it would increase spending in nearly every sector of promotion.
Kellogg, which had done more than its fair share over past decades to make cereal one of the most promotion-intensive categories, relearned that Americans like a little value-added with their Corn Flakes. “We stepped up our investment in promotions and all forms of marketing in the second quarter, and we’ve seen improvement in our U.S. business,” states Kellogg spokesman Richard Lovell. He adds that, for the first time in five years, Kellogg saw growth in market share – up 1.4 points to 33 percent – within the month of July.
Once again, a walk down the supermarket is like a dance across the front lines of a promotional firefight. The scene in early August:
Kellogg brands including Raisin Bran, Frosted Flakes, and Apple Jacks were throwing a Breakfast Party offering five grand prizes of breakfast with an NBA player and a Kellogg character; 100 First Prizes, consisting of a free limo ride to school; and 5,000 Second Prizes, consisting of special Kellogg Breakfast Care packages, containing special goodies.
General Mills’s Cinnamon Toast Crunch brand was giving away free Spy Specks, dark shades that allow kids to stare straight ahead and yet see what’s gaining on them from behind. Cheerios boxes featured the John Benson Cheerios Racing Team.
Post Cereals, with its modest 17.6 percent share, had plenty of colorful puzzles and games on the boxes of its major brands but no coupons good for theme parks, NASCAR collectibles or other offers emanating from the competition.
New game for the ’90s The 1980s had in general been a good time for cereals. According to Andrew Lazar of Lehman Brothers, the cereal makers enjoyed “tremendous pricing leverage” which the industry heavyweights could use to cover their costs and drive up their earnings to outperform competitors. In those days, “Branded manufacturers could justify any big price jump they wanted to. There was high inflation, times were good, so they raised prices,” says Jack Ryder, president of Wilton, CT-based Cannondale Assoc., a supermarket industry research firm.
But the slow economy of the ’90s produced more value-conscious consumers who recoiled with sticker-shock in the cereal aisle. Even though analysts like Lazar point out that cereals come out to a good nutrition value on a price-per- servings basis, the public began turning to private labels and discount brands. Bag cereals from regional player Malt-O-Meal began to take hold nationally, and Quaker took a cue to increase its volume with its own no-frills, no-value-added bagged products Competition reared its head, too, in the form of bagels and cereals bars, an overcrowded field rife with price-cutters.
Over four years, ending in 1997, Kellogg saw its domestic market share decline from 35.4 percent to 32 percent in 1997, chiefly due to discounting by competitors The No. 2 ready-to-eat cereal marketer, General Mills, found itself in the same scenario. Its 1993 share of 27.1 percent slipped to 24.4 percent by ’97.
According to analyst David Nelson of Credit Suisse First Boston, Post was the only cereal maker to gain ground, going from a modest market share of 15 percent in 1993 to 16.7 percent by 1996. Meanwhile, a share point is worth less these days. Category-wide sales were $7.2 billion last year – a 10 percent slide from $8 billion in 1994.
Post touched off the latest round of discounting in 1996, when it tried to jumpstart the category – and enhance its position in it – by slashing prices 20 percent across its entire line. But Post and competitors that followed with cuts of their own drastically misread the character of their own category. In the 1980s, cereal makers introduced very high prices, but they also “spent a ton of it back against the consumer” in the form of coupons, FSIs, and other offers,” says Ryder, “It’s a marketing-intensive category that responds well to aggressive consumer marketing efforts.”
But after they cut prices, an amazing thing happened: nothing. The category didn’t budge upwards an inch. There were no additional buyers. Consumers bought no more cereal than they had before.
The companies quickly cut back on their marketing and promotional efforts to make up the difference in lost revenues Lazar says that Nabisco, for example,” had undersupported its brands” for months, and the rest had too. Where cereal companies traditionally spent 6.5 percent of their annual revenues on advertising, companies like Kellogg and Nabisco had cut promotional expenditures to 2.5 percent. The results, most observers agree, have been a marketing disaster.
Valassis Communications ceo Alan Schultz claims there’s a direct correlation between cereal companies’ sagging sales and their cutback in FSI spending. “The average cereal brand was moving 23 percent to 45 percent of volume on coupons,” says Schultz, whose Livonia, MI, company is one of the two big FSI publishers. “When they cut back FSI expenditures on the theory that they would get a tremendous edge in market share, they lost a lot of that volume.”
Analyst David Nelson of Credit Suisse First Boston is in agreement with Schultz. “All brands,” he says, “have been spending less on the promotional front, and their sales have suffered as a result.”
Schultz notes that FSIs were traditionally the industry’s biggest promotional tool, and that when Kellogg and the rest made deep cuts in FSI spending, they savaged one of their most effective wys to market.
According to Shultz, FSI’s began to return to favor with branded marketers in the fourth quarter of last year because “manufacturers were starting to see they were losing volume.We’re seeing a growth in FSIs in the cereal category.”
But trade analysts question whether 50-cent coupons in the Sunday paper will be enough to lift cereal brands out of the doldrums. “Promotional spending puts a Band-Aid on the problem,” notes John McMillin of Prudential Securities.
Kellogg has long promoted using a broad mix of devices including in-store coupons, premiums, cross-brand offers, sweepstakes, and contests. But, according to Kellogg director of promotion and licensing Bill Nielson, the mix has changed over time. Speaking at the Promotion Marketing Association’s Star Power conference in Los Angeles last May, he noted that Kellogg no longer does in-pack premiums and almost no mail-in offers because “Consumers aren’t driven by that type of promotion any more.” He says that today’s promos are all “themed around the trade. The trade is consolidated and grocery stores have their own marketing departments that set the rules.”
Ryder and Lazar both see cereal companies’ renewed promotion offensive as a potential flashpoint in the category. By upping their promotional budgets simultaneously, note these analysts, the cereal powers ensure that competition between them will become even tighter. Lazar wonders whether more promotional spending will be able to deal effectively with the price discounting issues that the industry faces from the supermarket and discounted brands that have already lost them so much of their market share.
Kellogg has already announced plans to selectively cut prices of some U.S. brands, while General Mills is being careful to not tip its hand. (Prudential analyst McMillin already has made the comment that he doesn’t see how there could be selected price cuts at Kellogggiven the fact their 1998 earnings could be down by 15 percent, in spite of the second-quarter spurt.)
Nelson notes that Kellogg has the cash surplus to fuel major consumer promotion, and he notes that the company is increasing marketing expenditures this year “to earlier, pre-price cut levels.” But whether that will help stem the loss of market share remains to be seen, he says.
But to Ryder, aggressive cereal marketing is the answer, especially for Kellogg. With “its cash cows getting clobbered,” and with the General Mills/Nestle partnership “draining profit” from Kellogg’s share overseas, he believes the company should “price the product back up, beat the bag brands, and develop the market money to hit them really hard.”
Milk spills in traffic
Innovation is also an issue, holds Ryder. Fifteen years ago sitting down to a bowl of cereal at breakfast was considered convenient. But since then time has become a premium, and nowadays it’s a bagel or a granola bar in the car. To survive, marketers must make cereal more convenient. “Kellogg (and General Mills) must somehow be able to put a bowl of Wheaties in a granola bar,” Ryder says.
Kellogg is employing FSIs to promote its new Breakfast Mates, an individual-sized box of Frosted Flakes or Fruit Loops with a container of milk and a spoon in one package, to be found in the refrigerated section of the grocery store.
But in the meantime, Kellogg’s and General Mills’ spending still emphasizes trade promotion rather than consumer promotion, and while Kellogg and General Mills flatly decline to comment on any future plans, an equity analyst for Warburg, Dillon Read LLC Chris Jakubik, says that he believes that trend will be to stick with trade promos.
He argues that the only segment in the category experiencing any growth are the bag cereals and discounted brands, and they are growing because of lower list prices or lower price offerings. For Jakubik, companies like Kellogg’s and General Mills are probably less likely to purchase more FSIs, and more likely to lower their list prices and ensure that the cost savings are passed back to consumer (something which didn’t occur in the Post-initiated cuts of two years ago when many retailers pocketed the savings. ) He acknowledges, however, that at this point, “it’s difficult tell which way [cereal companies] will go.”
Ryder would like to see the U.S. cereal leader, Kellogg, make the grade and retain its old glory. But he warns: “They need to do something. They’ve had all these great brands for 60 years, and they’re sitting there watching it all go away.”