NEW YORK -- Though Kellogg's announcement last week that it would slash cereal prices pleased many consumers, supermarkets may feel a crunch when it comes to promoting the category.
Retailers and wholesalers told SN they are concerned about the effects of fewer coupons -- Kellogg said it plans to trim its coupon program -- plus the possibility of less frequent advertising at the store level and decreased promotional rates.
The price cuts, which went into effect last week, averaged 19% on 16 items comprising about two-thirds of Kellogg's U.S. cereal business. Kellogg has about a 35% dollar and unit volume share in the ready-to-eat cereal category, according to Information Resources Inc., Chicago.
"They [Kellogg] reduced the everyday low price, so we're all going to have a low price out there," said Terry McKean, category manager with Thrifty Foods, Burlington, Wash. "But they will have less promotional money out there. They're cutting that in half. They will not have as many coupons as they do."
Scan-down promotions offered by Kellogg also will decrease, McKean added. "They were going to give us 70 cents provided we pass that 70 cents on to our consumers. But now it's gone down to 30 cents, so we only have 30 cents to pass on to the consumer," he said. Increased grain and corn prices, too, are likely to
squeeze cereal manufacturers' promotional dollars, he noted.
Retailers and consumers can expect Kellogg's promotional rate to decline, according to Bill Campbell, frozen food and grocery merchandising manager at Associated Food Stores, Salt Lake City. For example, if the company previously pushed a $1-off coupon, that rate now might fall to 50 cents, he explained.
Still, because their customers stand to gain, retailers and wholesalers contacted by SN essentially welcomed a lower price point from Kellogg.
"We have been encouraging that. Kellogg worked very closely with us and our retailers to help assure that this all went smoothly," said Wayne Squires, a buyer for Spartan Stores, Grand Rapids, Mich. "This is going to provide us a better value relationship for the national-brand cereals off the shelf, so consumers are going to have benefits there.
"It actually helps reduce our operational expenses because they won't be so event-focused. They'll be more consistently priced," Squires added.
According to Ruth Kinzey, corporate communications manager at Harris Teeter, Charlotte, N.C., "We believe that customers will appreciate the price reduction, as they have long voiced an opinion that the cost of cereal was too high. Therefore, we anticipate a positive reaction by our shoppers."
At Kellogg's press conference to announce the price cuts, Arnold Langbo, chairman and chief executive officer, would not reveal what the company had planned for its promotional monies but said Kellogg's plans to streamline its coupon program.
"We're looking at coupons in the sense of how can we handle them more efficiently, how can we distribute them more efficiently," Langbo said. "Only 2% of coupons printed are redeemed, so you get a lot of design costs, production costs and distribution costs. We're going to try and focus on that inefficiency." He declined to comment further on coupons or promotions.
Although Kellogg did not specify its future promotional spending plans in the wake of the price cuts, retailers and wholesalers told SN they expect some sort of shift.
"In what we are seeing so far, we believe that marketing dollars will be affected, so the promotion of the cereal category will no doubt change," Harris Teeter's Kinzey said. "However, at this time, we do not have all the details from the manufacturer. So it is difficult to predict exactly how much or in what manner merchandising the category will be affected."
Susan Pierter, a spokeswoman at Hannaford Bros., Scarborough, Maine, said, "We don't know exactly what will happen. It's too early to tell."
Big Y Foods, Springfield, Mass., plans to reduce Kellogg's prices on the shelf beginning June 17, but because of the chain's advertising schedule, mention of the reduced prices may not be made for several weeks, noted Claire D'Amour, vice president of corporate affairs.
"At this point, a quick change in retail takes a little while," she said. "Our ad plans go out several weeks. So in order to change that, it takes a long time. "It has to sort of fit into the whole sales plan. It's hard to say that one action, such as a price decline, overall is going to affect all of our plans drastically or immediately," D'Amour explained. Kellogg's price cuts ranged from 4% to 28%. Among its more popular items, reductions were 18% on Frosted Flakes, 22% on Frosted Mini-Wheats and 27% on Froot Loops. Another popular product, Kellogg's Raisin Bran, had prices cut earlier this year; including the new reduction, its price was slashed 26%.
In the spring, Post and Nabisco cut their cereal prices an average of 20% across the board. Industry observers say Kellogg's price cuts could press General Mills, Quaker Oats and Ralston to enact their own price reductions.