Promotions May Be Why Cereal Prices Have Risen

Several of the largest food companies are jacking up the price of cereal to cover what analysts say are increases in promotional spending.

Kellogg’s triggered the round of price hikes Thursday by boosting prices on ready-to-eat cereal an average of 3.5%. Archrivals General Foods and General Mills have quickly followed with price hikes of 3.5% and 4% respectively. The increases will add about 10 cents to the price of a box of cereal, analysts said.

The food companies said the price hike--the second in less than a year--was needed to cover overall costs. John McMillin, a food industry analyst with Prudential Securities in New York, said only promotional costs are rising as cereal makers shower consumers with cents-off coupons in a cutthroat battle for market share.

“Their labor costs are not going up. Their production costs are not going up. This is more ammunition for 50- and 75-cent-off coupons and Tony the Tiger ads,” McMillin said.

David Litwak, senior editor at Supermarket Business, a trade publication, said a proliferation of brands means cereal makers must spend heavily to build market share. Five years ago, the top 27 brands commanded two-thirds of cereal sales. Today, 40 brands are responsible for two-thirds of cereal sales.

Litwak said the increases announced by the cereal makers exceeded price hikes announced so far on most other dry grocery products.

“This strikes me as inflationary, totally contradictory with the real world,” said Charles Ritchie of Business Trends, a Jericho, N.Y., market research firm. He noted that the Labor Department reported last month that overall food prices rose 1% in April.

Prudential Securities’ McMillin predicted that the price increases would stick, even though Quaker Oats and other food companies did not immediately join in. “The question is how much of it will be dealt back in the form of discounts and coupons,” he said.