Analysts Say Cereal Price Cuts Not Enough

Price cuts by the nation’s top three cereal makers alone may not be enough to give a big boost to the sluggish ready-to-eat cereal industry, analysts said Thursday.

Although the latest round of price cuts may entice consumers for a while, it may take further reductions or discount promotions to return annual sales growth to the historic 3% level. Currently, U.S. cereal sales in all outlets--including grocery stores, mass merchandisers and warehouse clubs--stand at $9 billion a year and are growing about 2% a year.

“We don’t think the ready-to-eat [cereal] saga is over with,” said SBC Warburg Securities analyst Chris Jakubik. “We anticipate the need for further price reductions and/or promotion spending. We would expect one or the other to continue.”

However, Post Cereal, which in April cut its prices by 20% across the board, said it expects the reductions by the top three players to reinvigorate category sales.

“I think it only improved the probability that the category growth will resume with more and more prices going down,” said Mark Leckie, president of Post Cereal, which is part of Philip Morris Cos. Post is the third-largest cereal company in terms of market share.

On Wednesday, General Mills Inc., the No. 2 player, became the last of the top three to take action, cutting the price of several brands by an average of 11%. It also cut the cost per serving of other brands by 11% by increasing package size. These actions affect about 42% of its cereal business.

Earlier this month, Kellogg Co., the market leader, cut prices by 19% on two-thirds of its U.S. business.

But some price cuts will be accompanied by a reduction in promotions that typically have attracted consumers.

“I don’t think [the price cuts] will support category growth, in part because promotions are going to be dramatically reduced, and this is a promotion-driven category,” Oppenheimer & Co. analyst John O’Neil said.

Post, however, said it does not expect a reduction in the number of boxes of its cereals that are purchased with coupons, despite its new, simplified coupon program.

Under the program, Post offers consumers a single coupon that can be used for any of its Post or Nabisco cereals.

In recent newspaper ads across the country, Post touted the price reductions on its Post and Nabisco brands and offered a discount coupon of $1.50 for the purchase of two boxes of cereal.