Lukewarm. That's how best to describe the initial retail reception of the news that General Mills is reducing prices and cutting promotional spending on its most popular cold cereals.
Grocers contacted by SN agreed that lower prices will be well received by consumers. But some said they are concerned that General Mills' decision to cut promotions such as couponing could weaken their ability to lure some shoppers into the cereal aisle -- and even into the store. General Mills, however, said its customers have welcomed the news.
On April 4, the nation's second-largest cereal producer said it will reduce its spending on cereal couponing and price promotion by 30%, or $175 million, annually. Steve Sanger, president of General Mills, said the move will allow the Minneapolis-based company to lower prices on its largest brands by an average of 11%.
The price reductions, which were to take effect May 2, were moved up to April 11 because of what General Mills termed enthusiastic support from its wholesale and retail customers. The price changes apply to most sizes of Cheerios, Wheaties, Whole Grain Total, Golden Grahams, Lucky Charms and Trix, products that represent about 40% of the company's cereal volume.
Will lower prices mean increased volume? Opinions were mixed.
"I would say so," said Ken Martin, a buyer for Publix Super Markets, Lakeland, Fla. "Lower retail would normally dictate that. From what I've seen, the coupon redemption rate has been on a decline. I'm sure they're looking to spend their money more effectively."
"All this means is they're changing their method of going to market," said Julien Lacourse, vice president of grocery operations for Demoulas Super Markets, Tewksbury, Mass. "I think they're trying to force Kellogg's to come down and get away from these high prices and coupon activity. General Mills made a good move here."
Others said the price decreases will have no effect, or perhaps a negative effect on sales of General Mills cereals.
"From our experience, the customers look forward to and are responsive to promotions, more so than they are to the everyday-low-price concept," said John Shepherd, corporate spokesman for Safeway, Oakland, Calif. He said retailers will have to wait and see what happens, "but in the meantime there could be a renewed focus on other areas of the category where the promotions continue."
"I don't think it will make that much of a difference overall," said R. Davis Herriman, vice president of operations for Giant Food, Landover, Md. "It will lower prices somewhat; but the cereal business is not as price-elastic as other parts of the business. Therefore, price increases or decreases, until they reach a certain level, don't really carry the meaning to them that they might for other products.
"If you went down on the price of Bounty towels by 11%, that would be significant. There's such a confusing array of cereal out there that people have a hard time perceiving what the true price is," Herriman said. "It may work for General Mills, because it may drop them through some psychological pricing thresholds. An item that might be selling for $3.49 might drop down to $2.99; so that might have an effect," he added.
"I don't know how much it's going to add to their share," said Wayne Barton, director of category management for Price Chopper Supermarkets, Schenectady, N.Y. "I don't think it's going to be significant. I looked through the price decline. We carry dozens of items from General Mills and only nine of them are specifically included in the information I have."
Still, grocers contacted by SN said they are concerned about how consumers may react to seeing fewer coupons and promotions.
"I think lowering their promotional deals is going to hurt them," said an executive of a California division of one of the country's largest supermarket retailers. He said many consumers have grown accustomed to using coupons for cereals. "[General Mills'] sales have been good with us because of the coupon activity we've had with them."
"Our customers respond strongly to buy-one-get-one-frees," Price Chopper's Barton said. "So we may see some softening in the category because of doing fewer BOGOs.
"Because of what I think is a new diminished loyalty to the brands, I don't know if they'll be able to get rid of their dependence on coupons quickly," he added.
Lacourse said he expects other cereal manufacturers to follow suit. "I think in the next six to nine months a lot of people are going to try to lower their everyday price, to give consumers a better price 52 weeks of the year, so the ones who don't take advantage of the coupons still get the value," he said. "I think couponing is still going to stay; it's just going to be minimized."
The trend is already there, according to Barton, who pointed to other areas of the store. "If you think back to Marlboro coming down five bucks a carton and you add that to the big laundry detergent and diaper manufacturers, specifically P&G, who brought their prices down, I think this is not a signal of a new trend, it's part of a trend."
Giant's Herriman said he was actually happy to hear about fewer coupons. "We love that. Coupons are a hassle, especially when you're in a market that doubles. We don't think it's the best way to spend your money, and the consumer doesn't receive the proper value. We applaud anyone who's going to reduce FSIs."
Several retailers suggested increased competition from private-label brands may have had something to do with General Mills' decision to lower its prices.
"Private label has gained tremendous momentum," Lacourse said. "One area for years where it's had a hard time has been cereal. But with the advent of a good manufacturer like Ralston Purina getting into private label, that has changed. They've done a good job and so has Quaker and a few others at the private-label end. The spread [in price] was getting a bit too large now, and I think they're going to start squeezing that back down."
