Kellogg Expected to Cut Cereal Prices, Following Moves by Rival Philip Morris

Kellogg Co. is expected to announce significant price cuts Monday on some of its major cereal brands, fighting back in a price war begun two months ago by Philip Morris Cos.

The country’s top cereal maker said Chief Executive Arnold Langbo would make an announcement about a “major issue regarding breakfast cereals” at a news conference in New York.

“I think you’re going to have price reductions across a broad range of cereals,” said Sanford C. Bernstein & Co. analyst Steven Galbraith.

The odds of some sort of price cuts are “1 in 1,” he said.

Galbraith said industry executives expect Kellogg to cut prices on cereals that compete directly with Philip Morris’ Post and Nabisco brands as well as private-label products--making Raisin Bran and Rice Krispies among the likeliest targets.

Kellogg’s share of the cereal business has fallen by as much as 4 percentage points since Philip Morris announced average price cuts of 20%, reversing the slide in popularity of its Grape Nuts and other cereals.

“The volume trends have been on the weak side,” said Larry Adelman, an analyst at Dean Witter Reynolds Inc. “There’s been a temporary loss of market share.”

A similar round of cuts at Battle Creek, Mich.-based Kellogg could send its stock down 5% or more, unless the company also announces a stock buyback or other plan to boost shareholder returns, Galbraith said.

Kellogg has shed about 10% of its work force in the last year, and some of those savings could be used to finance the price reductions.

Kellogg’s steps increase the likelihood that General Mills Inc., the maker of Cheerios and Wheaties, as well as Quaker Oats Co. and Ralcorp Holdings Inc. will follow suit.

Earnings and stock prices at all the companies then would be likely to fall.

Before word of the news conference, Kellogg shares on the New York Stock Exchange rose 75 cents to close at $74.875, the highest since before Philip Morris’ move.