Is there life after buy-one-get-one-free? Supermarket executives think so, at least for the cold cereal business. The dust is still settling from last month's announcement by General Mills, the category's No. 2 producer, that it would slash $175 million from annual promotional spending in a bid to slow down the spiral of discount promotions dominating the big ready-to-eat cereal market.
However, grocers contacted by SN are already predicting sales will remain crisp in the category, in spite of reductions in the number of coupons and other discounting that Big G's move will engender.
Retailers said they anticipate that the Minneapolis-based
manufacturer's accompanying price cuts, averaging 11% on its best selling products, will keep shoppers heading down the cereal aisle.
Beyond that, the greater impacts on cereal selling depend on what the other major manufacturers do, or don't do, in response. So far, they have adopted a wait-and-see attitude to General Mills' strategy, saying instead they have no plans to reduce prices or cut back on spending. (See related story.) Some retailers, however, told SN they think it is likely other players will be compelled to follow General Mills' lead.
The price cuts, originally scheduled to go into effect May 2, were moved up to April 11, one week after the announcements were made. General Mills said it hurried things because of what it termed enthusiastic support from its wholesale and retail customers.
Some supermarket chains wasted no time promoting the lower prices. Kroger, for example, ran a full-page ad in the April 13 edition of the Cincinnati Enquirer promoting the price breaks. General Mills said it will get the word out on the price cuts through a variety of media, as well as flags on its packages.
Cereal buyers expect a positive response overall to the new strategy because it offers most consumers better prices on a day-in, day-out basis. Some say the strategy could lead to a decreased reliance on cereal couponing categorywide.
"Albertson's believes the General Mills price reduction/promotional cutback program will benefit the consumer, retailer and wholesaler," said a spokesman for the Boise, Idaho-based chain. "Right now, coupons drive the sales in the cereal category. But as regular prices are lowered and promotional spending decreases, coupons will probably become less important. Other cereal manufacturers will most likely follow General Mills' lead or, in the alternative, become more aggressive with their couponing."
"I think in the cereal category what's happened is that the everyday price has gotten so out of hand for the customers," said Paul Duckworth, grocery buyer at Thrifty Food Stores, Burlington, Wash. "The category is just totally driven by promotions, in-ad coupons and scan-downs and so forth. According to their [General Mills'] letter, they've made the statement this is not an EDLP strategy on their part, but that they felt they needed to keep the retail down where the customer can more afford to buy their product day-in and day-out.
"I suspect, and what I've heard rumors about, is that the cereal companies are probably going to back off on the aggressiveness they've taken in terms of promotion," Duckworth said.
"An example would be these frequent buy-one-get-one-free coupons. It's my understanding we're still going to see in-ad coupons, which we use quite a bit in our ads because the value is so great to the consumer. But I'm not a fan of [freestanding insert] coupons, even more so in this market. "In Washington they've been identified as having a redemption level of less than 3%. Yet you can put these event ads together and get combined savings of up to $20 sometimes. I mean that it's worth people's time to cut those types of coupons out, as opposed to the FSI coupons."
The lower retail prices should create a big image boost for General Mills, retailers surmised.
"I think the consumer is going to feel that General Mills is out there to market to them, and that every day now they can pick up a box of cereal at a good value," said Marc Eveleth, grocery buyer at Shaw's Supermarkets, East Bridgewater, Mass. "We're still analyzing it, but I'm certain it will increase sales for General Mills."
Dave Dettore, grocery buyer at Riverside Markets, DuBois, Pa., said it's too early to determine for sure what effect the moves by General Mills will have on the rest of the category.
"It will have a bigger effect if the one other big player and the smaller players follow suit, as opposed to if everybody else continues to do what they've been doing as far as buy-one-get-ones and the retails [remain] high because of that.
"All indications now look like they're not going to," Dettore continued. "In fact, they might even increase spending."
"I think cereal and a lot of the others are pushing more for lower prices instead of coupons," said a merchandiser for a Southern chain. "We like it for our division ad because we don't like to run coupons in our division ad. We like to run a clean, in-store flier."
Jimmy Simmons, a buyer at Harvest Foods, Little Rock, Ark., said General Mills needed to lower its prices. "I think they're just now getting competitive," he said. "They've been just a little bit higher than Kellogg's for the past few years."
The Southern merchandiser who requested anonymity said there was some initial confusion about the price cuts. "We've had a few customers call our pricing manager, thinking all the General Mills cereals were going to come down. Of course, it was only a selected number they put the cost reduction on."
Craig Schulstad, a spokesman for General Mills, said consumers called his company as well. Most calls were positive, he said, but some callers were under the impression the company was eliminating all coupons. He said consumers and retailers will soon see that's not the case.
"There's going to continue to be very strong trade support for our cereals and we will also continue to have significant numbers of coupons," he said. "The difference is that we're getting rid of stuff that really wasn't helping anybody, was only adding to the cost of doing business. So I think the trade will continue to see a lot of opportunity to promote our cereal products.
"We identified $175 million in cutbacks," he continued. "That's only an estimate of 30% of what we were doing. I can't be emphatic enough; our purpose here is not to eliminate this kind of activity, per se, but to eliminate that which was not helping consumers, the manufacturer or the trade.
"We're going to continue to do what we can to identify and isolate inefficient activity. We don't have any specific plans beyond what's been announced. We had actually done some of this already. In December we had price declines on selected packages. So this is something we've kind of been thinking about for some time."
The changes by General Mills could bring about changes in consumer shopping habits. While coupons have been a driving factor in the cereal category, consumers may now shift their focus.
"Over time, consumers may change their habits and use fewer coupons as the prices come down and the value of coupons as a percentage of the price decreases," said the Albertson's spokesman.
Riverside's Dettore said, however, that there are enough coupon users out there that General Mills will have to be careful not to alienate them.
Retailers also discussed what role their growing private-label programs may have played in persuading General Mills' to go for lower everyday prices.
"The private labels were stealing market share from the brands," Dettore said. "The gap was getting too large in shelf retail between the private labels and the brands. General Mills felt it was out of hand and had to close that gap.
"The brands are concerned about private label and they're trying to close the gap by reducing spending and lowering their prices. According to the brands, they've lost share to private label. That's the biggest trend I've seen and that leads right into what General Mills has announced," Dettore said.
"It's possible private label could have had an impact, considering it has made quite a dent in the cereal category," said Shaw's Eveleth. "And private label is still going to be much more competitive than the brands. Private label is definitely a value -- and our private label, I would say, would match up to any branded cereal out there today."
"The price spread between private label and national brands has been widening and consumers are realizing this," the Albertson's spokesman said. "Customers are assured of a more stable price and consistent value with private-label cereals."
The Southern retailer saw it differently, however, based on his own experience.
"Maybe nationally that's the case," he said. "It's not so much with us because we have been doing so much with all three of the nationals on ad coupons. We haven't been pushing private label as much in the past year as we had been."
Burt Flickinger III, a management consultant with A.T. Kearney, New York, said General Mills' moves will strengthen its position against private labels as well as other evolving competition.
"It will reinforce General Mills' position as the growing silver medalist, or No. 2 player in the category, in its long march to overtake Kellogg, which Big G cereal probably will do before the turn of the century," Flickinger said. "It will obviously help Big G in its battle, not only against private label, but exclusive brands like President's Choice and the product coming north from Mexico that's manufactured and distributed by a company named Maizoro."
