Pricing Showdown in the Cereal Market

Posted by 18 February, 2008
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The cereal category experienced interesting price competition in the late 1980s and early 1990s. During this time, the cereal industry as a whole aggressively raised prices on items as much as 5 to 6 percent every eight months. In order to disguise the higher prices, cereal makers attempted to offset them with a host of coupons, trade promotions, and other deals (such as two-for-the-price-of-one and buy-one-get-one-free or “bogo” offers) – a strategy dubbed “price-up, deal back.”

On April 4, 1994 (“Cheerios Monday”), General Mills, the number two player in the $8.7 billion cereal market with a 29 percent share, announced that it would lower prices between 30 cents and 70 cents a box (or 11 percent on average) on its eight most popular ready-to-eat cereals (Cheerios, Honey Nut Cheerios, Multi Grain Cheerios, Wheaties, Whole Grain Total, Golden Grahams, Lucky Charms, and Trix). General Mills also announced that it was cutting coupon and other promotional expenditures by $175 million.

General Mills was motivated by a number of factors. With prices as much as 25 percent lower, private label cereals had begun to make some significant inroads on sales, increasing their share of the market to 5.2 percent. Because of pervasive sales promotions, more than 60 percent of all cereal purchases were being made with some kind of coupon or discount. As Steve Sanger, president of General Mills, stated:

“The practice of pricing up and discounting back has become more and more and more inefficient for manufacturers and retailers and burdensome for consumers. There’s tremendous cost associated with printing, distributing, handling, and redeeming coupons. Because of this inefficiency, the 50 cents that the consumer saves by clipping a coupon can cost manufacturers as much as 75 cents. It just doesn’t make sense.”

Kellogg, the market leader with a 36 percent share, followed quickly with an announcement that it would stop offering the buy-one-get-one-free offers and attempted to hold firm on price increases by cutting costs. Recognizing a competitive opportunity, marketers of the number three and four cereal suppliers, Post and Quaker Oats, initially decided to continue to offer $1-plus coupons. Eventually, however, Post enacted a 20 percent across-the-board price cut and began to issue a new, all-purpose coupon that would apply to all sizes of all its cereals. Kellogg soon thereafter reduced prices an average of 19 percent on nearly two-thirds of its line.

The cycle of price cuts perpetuated by the bitter price war was bad for the bottom line. Kellogg, as the leader, suffered significantly as a result of the price wars. Kellogg’s profit margin shrunk, sales declined, and its market share plummeted. In 1998, Kellogg raised cereal prices an average of 2.7 percent, its first increase since 1994. This move signaled the end of the cereal price wars, but it did not solve Kellogg’s problems. In 1999, General Mills grabbed the domestic market share lead from Kellogg’s.

[1] Richard Gibson, “General Mills to Slash Prices of Some Cereals,” Wall Street Journal, April 5, 1994, p. A-4; John McManus, “Sanity’s at Stake in Steve Sanger’s Cereal Showdown,” Brandweek, April 25, 1994, p.16; Betsy Spethman, “Kellogg Counters Big G Price Cuts: ‘Bogo’ a No Go June 1;” Brandweek, April 25, 1994, p.3, Julie Liesse and Kate Fitzgerald, “General Mills Price Cuts Fail to Stem Couponing,” Advertising Age, August 1, 1994, p.26. “Kellogg Raises the Prices of Some Cereals.” Orange County Register, December 15, 1998; Betsy Spethmann. “Breakfast in Battle Creek.” Promo, May 30, 2000

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