HURDLES IN THE AISLES 1994-12-26 (1)

Grahams, Lucky Charms and Trix.

t that the price cuts would take effect May 2, but then quickly rolled that back to April 11, saying it was nudged into it sooner by wholesalers, retailers and consumers.

"The practice of pricing up and discounting back has become more and more inefficient for manufacturers and retailers, and burdensome for consumers," said Steve Sanger, president of General Mills. "It just doesn't make sense."

But whether it makes sense or not, consumers and retailers also had grown used to the flow of couponing and deep discount promotions that had been steering the ready-to-eat cereal category for a long time.

As General Mills' determination to run against the current sank in, it caused ripples on Wall Street and the retail community.

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

General Mills officials cautioned that they were only lopping off the more drastic and "inefficient" types of promotions, such as high-value coupons and buy-one-get-one free offers, and would not leave supermarkets high and dry.

Still, the initial reaction from many retailers was lukewarm, if not cold.

"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.

"I don't think it will make that much of a difference overall," said M. Davis Herriman, vice president of operations for Giant Food, Landover, Md. "There is such a confusing array of cereal out there that people have a hard time perceiving what the true price is."

Meanwhile, some chains wasted no time trying to make the best of the situation. Kroger Co., Cincinnati, for example, ran a full-page ad April 13 promoting Big G's price breaks.

And nationally, retail prices for some General Mills cereals did actually drop in the months after the pronouncement, according to scanning data evaluations.

Other observers saw General Mills' plan as another indication that packaged goods manufacturers were going to be increasingly re-evaluating their pricing and promotion policies.

"If Philip Morris [and its Marlboro cigarette price reduction in 1993] 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 in any number of categories."

Waters may have something there, considering packaged food is an industry that drops about 300 billion coupons a year, and sees just 7 billion redeemed.

However, while cereal BOGOs became a noticeably less prominent factor in freestanding insert cereal coupons throughout the rest of 1994, by year's end none of the other major branded players -- Kellogg; Kraft General Foods USA (Post), White Plains, N.Y., or Quaker Oats Co., Chicago -- made a more overt move to follow General Mills' strategy. Kraft and Quaker continued to drop $1-plus coupons, in fact.

General Mills made headlines again this month, when it said it would undergo a big restructuring, and spin off its restaurant operations from its $5.5 billion total prepared-food business, of which cereal is the biggest cash generator. At that time, the company released second-quarter earnings, with some indications of how the price/promotion gambit was working. Consumer food sales declined 3% from the previous quarter, reflecting a 2% decline in domestic volume and the lower average cereal prices. However, the company also said that profitability gains by its Big G operation helped earnings improve.

As the year was winding down, the overall ready-to-eat cereal market was still looking pretty crisp. For the 52 weeks ended Nov. 6, dollar sales were $8.3 billion, up 5.7% from the year before, while unit sales were bobbing at about 1% higher, said Information Resources Inc., Chicago.

Cola Wars Escalate

he cola wars raged on this year, proving once again that the soft drink category is among the most dramatic theaters of conflict in the packaged food world.

Indeed, some of the skirmishes had a distinct flavor of melodrama this year.

While big national brands continued to slug it out against each other in the stores and in ads, with low-price promotions week in and week out, the biggest news was the struggle between name brands and store brands.

In supermarkets around the country, store-brand colas gained ground, literally, in the contest for the consumer's attention, with many chains, including some of the biggest in the country, devoting more display space and ad space to them.

One of the biggest catalysts was Cott Corp., the Toronto-based company that convinced chains to turn up the volume on store-brand soft drinks.

Cott spent the year presenting a convincing case to retailers hungry for some new direction: "superior" quality formulas, rendered economically into smartly packaged and marketed store-brand products. It sold the program as an effective way to combat mass merchants and rise above the dulling buzz created by the Coke/Pepsi promotion treadmill.

A lot of retailers bought it. They boosted their programs, introducing new premium colas coupled with more active marketing strategies.

One result was that store-brand soft drinks were a lot more prominent this year than they have ever been in supermarkets. The brands were still there, of course, but the battle lines had changed in favor of private label.

There was another change, too.

"Retailers are now controlling their store space much more effectively, and realizing the value of it, and charging an appropriate fee for exposing the consumer to products," explained Mark Husson, an analyst with J.P. Morgan Securities, New York, and an outspoken advocate of the new store-brand strategies. "Retailers are now making the money that they should have been making all along."

"Having a strong private label was a tool we never had before in creating leverage with the big national brands," one buyer at a leading West Coast chain told SN. "It certainly wakes up Coke and Pepsi."

The frustration level for Coke and Pepsi was high. At InterBev '94, the beverage industry's big biennial convention in Atlanta, Coke vented.

During a theatrical keynote speech to a packed house, Douglas Ivester, Coke's president and chief executive officer, called store branders "parasites" bent on sucking the life out of the category.

"The parasites of the soft drink world," Ivester said, "have never helped build the business, never created new product or packages and have given nothing back to the community."

He also classified many of his competitors as "sheep." It's better, Ivester said, to be a wolf: noble, independent, fiercely defensive of your marketing turf and willing to lead the industry in new directions.

He challenged all industry players to decide, "Will I act like a sheep, parasite or a wolf?" Amid a booming soundtrack of howls, he made it clear how Coke would answer that question.

Executives at Pepsi and other branded companies did not prefer being characterized as sheep. Pepsi, for one, had proved itself an innovator most recently with freshness dating for Diet Pepsi and with the success of the Cube package. But it agreed with many of Ivester's other comments.

Some retailers felt slighted by Ivester's comments as well, although his accusing finger was primarily being pointed at Cott.

Still, it was a defining moment for a struggle that will play out further, and perhaps even more dramatically, next year, when the current crop of premium store-brand programs will have been under the microscope for an extended period and their effects, for good or ill, will be more apparent.

Overall, the carbonated beverage category stayed fairly healthy this year. Total sales hit $10.2 billion for the 52 weeks ended Nov. 6, 1994, a 5.7% increase from the year before. Volume, in 192-ounce equivalents, was up 6.6%.