Cereal Makers Caught In Catch-22 Reduced Promotional Spending Blamed For Declining Sales At Kellogg And General Mills

Cereal makers may find themselves in a box.

When Kellogg Co. admitted it is concerned about its declining volume in its U.S. cereals business, it underscored Wall Street worries about the $9 billion domestic market.

While announcing earlier this month that earnings grew 2.5 percent in the fourth quarter to $153.3 million, Kellogg said it is “extremely sensitive toward further volume decline” in cereal sales.

The company’s market share by volume slumped to 34.6 percent during the fourth quarter, down from 36.2 percent a year earlier, and continues a multiyear slide, according to supermarket data collected by Information Resources Inc.

“Kellogg’s only hope, in our view, is to replace some of the lost volume with exciting new products,” Goldman Sachs & Co. analyst Nomi Ghez said. But she noted that promising additions last year, including Pop Tarts Crunch and three Healthy Choice cereals, so far have had little impact. Kellogg recently introduced Temptations, a cereal aimed at adults that makes use of the company’s corn-flake-making capacity.

Ghez also is concerned about General Mills Inc.’s market share - at 22.8 percent, down 2 percentage points from a year earlier. Although some of that decline was due to a pesticide problem that halted production last summer, the analyst said the recovery “is much slower than we had expected.”

The slippage by the nation’s two top cereal manufacturers in large part reflects their decision to slash promotional spending - coupons, in-store discounts and the like - and bring a more rational approach to the intensely competitive industry.

But analysts say the cereal makers may be in a bind because consumers have become used to buying cereal at a discount and therefore may be opting for cheaper private-label cereals or alternatives such as breakfast bars. Also, retailers, disappointed at receiving less money from the manufacturers to promote the national brands, may give their house brands an extra promotional push.

Despite its market share decline, General Mills can’t afford to reverse course.

“Lowering promotional spending will only exacerbate the problem,” said David Rabinowitz of Smith Barney Inc.

He tied private labels’ share increase to the price disparity between house and national brands, as well as the increased quality and variety of private-label cereals.

Kellogg reaffirmed its strategy of “reducing inefficient pricepromotion activities” as “the best way to sustain our growth in both volume and profitability over the long term.”

In comparison, Philip Morris Cos. has poured on the marketing dollars for its Post and Nabisco cereals, boosting the company’s market share to 17 percent in 1994’s fourth quarter from 13.8 percent a year earlier.

During the same period, privatelabel cereals gained nearly a point, to 9.9 percent.

“The question is, how long will the leaders, and particularly Kellogg, tolerate the consistent loss in market share?” Goldman’s Ghez asked.

But Steve Galbraith, food analyst at Sanford C. Bernstein & Co., said Post’s use of coupons slowed in the quarter just ended and that the Kraft Foods unit seems to be coming around to the idea that heavy promotions eventually bite back.