Retailers are wondering whether the national cereal brand price wars will make their private-label sales soggy.
Most polled by SN agreed the reductions are bound to affect the cereal category, though there were mixed feelings on how it will hit private label.
Some said sales will remain sweet, but others fear the move could drive consumers who have favored bagged and other private-label cereal to eye products like Froot Loops and Frosted Flakes more closely.
"I'm sure that people will start buying more national brands because they'll perceive them as a value," said Steve Reynolds, director of purchasing at Lem Markets, South Boston, Va. Following on the heels of Post, which last spring cut its cereal prices by 20%, Kellogg announced this month that it is cutting prices on 16 of its cereals, or two-thirds of its U.S. cereal business, by 19%. On the way could be reductions from other manufacturers, particularly General Mills.
Just last week, Ralcorp Holdings, Battle Creek, Mich., which owns Ralston Foods, a leading manufacturer of store-brand cereals, announced it is closing a portion of its Battle Creek plant.
"Pricing decisions by branded cereal manufacturers within the last few months will undoubtedly lead to significant pressures on profitability in the category and would negatively impact our ability to compete unless we act accordingly," Ralcorp Chief Executive Officer Richard A. Pearce said in a press statement. "Our organization will do everything reasonable to remain competitive, which requires the removal of costs from our system."
The Battle Creek plant will continue to produce a wide range of private-label cereal. "Private-label cereals now might not look as attractive as they did before," added Bill Campbell, merchandising manager of frozen foods and grocery at Associated Food Stores, Salt Lake City.
John May, director of buying and category management for Randalls Food Markets, Houston, sees it differently: "I don't think it will impact private-label sales. Kellogg is just responding to what Post did -- and only on selected items," he said. Cereal is the eleventh leading private-label category at supermarkets, generating $523 million for the 52 weeks ended Dec. 25, 1995, according to the Private Label Manufacturer's Association's 1996 statistical yearbook, which is based on information provided by Information Resources Inc., Chicago. For the 52 weeks ended April 21, 1996, cereals generated $7.8 billion at food stores, a 3.7% drop from the same period the previous year, according to IRI. Though store-brand sales increased 9.1% to $514.4 million, the leading national brands saw significant sales decreases. Kellogg, the leading cereal brand, saw its sales slip 4.1 % to $2.84 billion, while General Mills fell 0.3% to $2.07 billion and General Foods (Post) went down 9.4% to $1.006 billion.
In an effort to keep private-label sales on the upswing, some retailers, like Lem Markets, plan to launch stronger promotions.
"Our private-label sales have been strong, and I'd like to keep it that way," said Reynolds of Lem Markets. "We'll promote it so that people realize that it's still a value."
David DiGeronimo, grocery buyer at Victory Supermarkets, Leominster, Mass., said that until now, many consumers stopped buying brand cereals because they were disgusted with high prices. And while the cereal price fight may change some of those attitudes, the price cuts do not go far enough.
At Victory, a 15-ounce box of private-label Fruit Rings costs $2.19, while a 15-ounce box of Kellogg's Froot Loops sells for $3.37.
"Even if they come down $1 a box, private label still will be lower," DiGeronimo said. Though some industry observers said the national-brand price cuts are an apparent effort to regain market share, Brian Sharoff, president of PLMA, New York, said they weren't aimed at private label.
"It was aimed at the No. 2 and No. 3 brands. They're attempting to take market share from the competitors," Sharoff said.
Some retailers are not so sure. One way that private label can ensure it will retain its market share is to reduce prices as well, said Gary Giblen, an analyst at Smith Barney, New York. "Companies that are efficient will reduce prices," he said. But the question remains whether they'll be able to reduce prices and still maintain a profit.
"Private labels can't move very much because they're already low," Campbell of Associated Food said. Still, some retailers are confident their private-label and store-brand products will weather the price-cut storm.
"We will react with our private-label program and come out with a lower price," added Terry McKean, category manager at Thrifty Foods, Burlington, Wash.
Store-Brand Sales Crisp Though national-brand cereal sales at supermarkets slipped significantly during the 52 weeks ended April 21, 1996, store-brand sales remained strong.