GENERAL MILLS BREAKS CEREAL PRICING SPIRAL

RUPERT CHISHOLM

MINNEAPOLIS -- The upward spiral of pricing and promotional activity that has marked the ready-to-eat cereal category in recent years was broken last week by General Mills here. General Mills said last week it would cut coupon and price promotion spending for cereals by 30% -- or $175 million annually -- and reduce prices for its leading brands by an average of 11%.

General Mills' new high-impact pricing strategy marked the clearest sign in a series of recent indications that the cereal category had overpriced itself. Industry leader Kellogg Co., Battle Creek, Mich., said in early February it was reducing promotional spending. And General Mills itself earlier took less-significant price reductions or increased package sizes. Those changes were put into effect during the past five months and affected more than half its brands. As for last week's move, General

Mills said that starting on May 2, it would lower prices on 40% of its brands, including most sizes of Cheerios, Wheaties, Whole Grain Total, Golden Grahams, Lucky Charms and Trix. Reductions will amount to 30 to 70 cents per box.

The company anticipated taking a fourth-quarter charge of 5 to 10 cents a share to compensate retailers for purchases made at previous price levels.

Industry observers predicted that the reverberations from the General Mills reductions would cause most packaged goods manufacturers to re-evaluate their pricing and promotional policies.

"If Philip Morris [price reduction] was a warning shot, this is a wake-up call," said Todd Waters, chief executive officer of Waters-Molitor, a Minneapolis-based promotional marketing firm. "Now that General Mills has done this in one of the most lucrative areas in the supermarket, the aftershocks will be felt across any number of categories."

Although General Mills said its customers had reacted favorably, some observers said reductions could impact trade relations.

"Some of the $175 million is probably going to have to come out of the retailers' hide," said Steve Galbraith, a securities analyst at Sanford C. Bernstein. "And they aren't going to be really excited about relinquishing this money."

General Mills said its price cuts would provide consumer savings more efficiently than the coupon and pricing programs that the cereal industry has traditionally favored.

"This approach will enable us to get the value directly and consistently to the consumer," said Steve Sanger, General Mills president. "Price promotions have become so expensive that they were just too inefficient for everyone involved. If we could regularly deliver consumers a savings of 50 cents by spending 50 cents on a coupon, we'd do it, but that's not the best way to go."

Sanger said last week's price reductions were not intended to improve General Mills' market share and that, to the contrary, the move could cost the company some $110 million in sales during the coming year.

"Our aim is to actively improve the profitability of our market share and benefit our shareholders," Sanger said. "We know we're going to lose some volume without all of the coupons, but we'll make up for some of those sales on a day-to-day basis."

Also, said Sanger, the price cuts were made strictly to improve General Mills' performance and shouldn't be seen as an effort to fall in line behind the price- and promotion-reduction strategies pursued by marketers such as Philip Morris or Procter & Gamble. Sanger also said the move to cut prices and reduce promotions wasn't driven by a desire to follow the Efficient Consumer Response initiative but, at the same time, he said it is advantageous because it dovetails with ECR.

As for General Mills' competition, none are expected to precisely echo General Mills' changes anytime soon. Indeed, Kellogg announced late last week that it does not plan to change the pricing of its ready-to-eat cereal products.

Several analysts predicted the reductions could actually spur renewed promotional activity.

"[The price cuts] must put pressure on Kellogg to step up its promotional spending in the U.S. or risk further share erosion," said Les Pugh, a securities analyst at Salomon Bros., in a recent industry report.