Lawmakers Call Cereal Prices Unfair : Consumers: Breakfast food makers accused of overcharging, despite price decreases.


Some big-name breakfast cereal makers have gone against the grain by lowering their everyday prices and reducing their dependence on the cents-off coupons and retail promotions that have long been industry cornerstones. But even with these efforts, are cereal companies still overcharging?

Two House Democrats think so, announcing that they have asked the Justice Department to conduct an antitrust investigation of the cold breakfast cereal industry.

Reps. Charles Schumer of New York and Sam Gejdenson of Connecticut released a report Tuesday showing that the top four cereal makers--Kellogg, General Mills, Post and Quaker--control nearly 85% of the market. With more than 200 cereal varieties, the companies have quashed competition and thereby allowed prices to rise virtually unchecked, they said.


According to the report, the price of breakfast cereal has increased by 90%--twice the rate of all food--since 1983. Cereal, the congressmen said, has the highest profit margin of any food product at 17%, with prices rising at twice the rate of inflation even though production costs have decreased.

“You know you have a problem when a minimum-wage worker has to work an hour to buy a box of cereal,” Gejdenson said in a written statement. “It’s hard enough for parents to feed their kids healthy food at an affordable price. I am outraged that cereal companies are padding their profit margins on the breakfast tables of America.”

According to the report, 55% of the retail price of a box of cereal, or twice the average of other foods, goes to marketing and profits. Out of 456 industries surveyed, only chewing tobacco, cigarettes and greeting cards devoted a higher percentage of their prices to marketing, profits and capital depreciation.

But Jeff Nedelman, spokesman for the industry trade group Grocery Manufacturers of America, disputed the lawmakers’ figures.

He said in a statement that when cents-off coupons are factored in, prices rose between 1% and 2% annually between 1989 and 1993--lower than inflation.

The four major cereal companies have faced these charges before, Nedelman added. Former President Ronald Reagan stopped a Federal Trade Commission investigation in 1981.


Just last month, U.S. District Judge Kimba Wood ruled that anti-competitive, coordinated efforts by big cereal firms would be difficult and were unlikely.

Ironically, the congressmen’s anger comes at a time when some cereal companies, in order to boost market share or trim costs, have reduced pricey promotional strategies and become more efficient in their marketing efforts.

Last May, General Mills reduced the prices of most of its top-selling brands by 11%, deciding it was cheaper to give consumers lower prices directly than through coupons and in-store promotions.

The company expects to reduce promotional costs by $175 million, streamlining marketing operations that had become increasingly convoluted, said Ellen Baras, an analyst with Duff & Phelps Investment Research. General Mills did not return phone calls seeking comment.

Industry leader Kellogg soon followed General Mills’ move by cutting coupon use. But instead of reducing product prices, Kellogg has taken the money saved and invested it in advertising.

These efforts indicate that cereal makers are beginning to realize that while cents-off coupons work well with consumers, the printing, distribution and collection of them is extremely costly and time-consuming, Nedelman of Grocery Manufacturers said.


“Billions of the coupons printed are simply thrown away at an enormous cost to manufacturers, which is then reflected on the shelves,” Nedelman said.

But Gejdenson said reductions in coupon use--at a time when labor as well as grain costs have gone down--increases companies’ profitability while doing nothing to ease consumer woes at the cash register.

“Buying cereal these days is like buying a Dodge Minivan but being charged for a Mercedes,” Gejdenson said. A box of Kellogg’s Raisin Bran that sells for $4.49 costs only $1.63 to produce, he said.

Quaker Oats Inc. has its own approach. Taking its cue from the growing appeal of cheaper store brands, the No. 4 cereal company recently introduced a new line of bagged cereals with virtually no advertising or promotional support.

By minimizing its packaging and promotional costs, the company will be able to sell its new Quaker-brand bags for 40% to 50% less than many national boxed brands.