Post to Slash Cereal Prices by About 20%
Post Cereal, the maker of Raisin Bran and Grape Nuts, said Monday that it is slashing prices on its cereals by an average of 20%, setting the stage for a price war among the nation’s cereal giants.
Post, a unit of cigarette manufacturer Philip Morris Co., is using the price cut to strike at its larger rivals, Kellogg Co. and General Mills Inc., which together account for 63% of domestic cereal sales. Post has 16% of the nation’s cereal market.
Analysts said the price cut is an indication of mounting consumer resistance to cereal prices, which by one report have risen 90% since 1983. According to a Post survey, 59% of consumers are unhappy with the cost of national cereal brands, the highest level of dissatisfaction ever recorded in the annual survey.
In dropping prices, Post hopes to keep its customers from switching to cheaper store brand cereals, which have been stealing sales from the pricey big brands. In 1995, sales of store brand cereals grew by 10.8% while total cereal sales fell 3.3%, according to Information Resources, a market-share tracking firm.
“The consumer is telling us they like variety and the quality but they want a better value,” said Tim Callahan, marketing vice president for Post Cereals.
But analysts said consumers who regularly use coupons might not notice that much of a change. They said that in order to offset the price cuts, Post is likely to use fewer coupons to entice shoppers.
“To consumers who don’t use coupons, this is positive,” said John C. McMillin, a food industry analyst with Prudential Securities in New York. “For people who do, we have to wait and see.”
Analysts said the price cut demonstrates Philip Morris’ intention to become a leader in the cereal business since acquiring the Nabisco line of cereals last year.
Taking the lead on price cuts is by now a familiar strategy at Philip Morris. The company cut prices on Kraft cheese and Oscar Mayer meats to regain market share. Three years ago this month, Philip Morris rocked the stock market when it slashed prices on its flagship cigarette, Marlboro, in response to inroads from generics.
In contrast to that “Marlboro Friday,” Philip Morris’ shares rose Monday in response to the cereal price cuts, closing at $89.375 up 37.5 cents in trading on the New York Stock Exchange.
Post said the price cuts were effective immediately and would probably show up in supermarkets in several weeks. They said the cuts could shave up to $1 off the price of a box of cereal.
The actual size of the cuts ranges from a low of 5.7% on 100% Bran Flakes to 27.5% on Post Premium Raisin Bran. Callahan said the most costly cereals are taking the biggest cuts.
The cut brings Post’s suggested retail price for a 17.2-ounce box of Spoon Size Shredded Wheat down to $2.99 from $3.88; while 20 ounces of Premium Raisin Bran will cost $2.99 instead of $4.13; and 16 ounces of Honey Bunches of Oats will also go for $2.99, down from $3.85.
Besides lowering prices, Post is changing the way it uses coupons. It said it will offer coupons less frequently, and that they will be good on any Post or Nabisco cereal. Currently, all coupons are brand-specific.
Analysts said the move is a clever way of forcing consumers to familiarize themselves with the entire Post and Nabisco cereal lines. But they said the move is risky in that it is giving consumers more power to decide which brands survive in the marketplace.
It was unclear how Post’s competitors intend to respond. Analysts expect Kellogg and General Mills to cut prices on cereals that compete directly with Post and Nabisco brands. They said the industry leaders might make more aggressive use of coupons to pass price cuts to consumers. About 60% of all cereal is purchased with a coupon.
Kellogg declined comment on Monday, except to say it makes pricing decisions on a product-by-product basis. General Mills said it has no intention of reducing prices, noting that it trimmed its prices two years ago.
Stock prices of both companies fell in trading on the New York Stock Exchange Monday. Shares of Kellogg closed at $71.375, down $1.25 and General Mills closed at $55.375, down 25 cents.
The move comes at a time when grain prices are soaring. Analysts said Post is better able to weather those increases than its rivals because Philip Morris is a diversified company not dependent on the cereal business. Cereal accounts for about 2% of Philip Morris’ business, compared with 60% at General Mills. McMillin said the cuts could reduce Post’s revenue by $260 million this year and slash its profit by $50 million to $80 million.
