KANSAS CITY, Mo. — General Mills Inc. plans to spend about $65 million for the national introductions of Basic 4 and Triples--breakfast cereals that it hopes will generate tasty profits.
The promotional cost, estimated at $35 million for Triples and $30 million for Basic 4 over at least a year, is in line with the national rollout costs for cereals.
Introducing a cereal costs $20 million to $30 million, said a spokesman for rival Kellogg Co. in Battle Creek, Mich.
The expense of national rollouts and the proliferation of brands already on supermarket shelves, from 90 to more than 200 depending on the store, caused cereal introductions to slow in the past year, said William Maguire, an analyst with Merrill Lynch Research in New York.
"The industry has come to realize the high cost of new-product introduction and realized that when you go to the market place . . . you've got to introduce a product that has some potential," said Kellogg's Joe Stewart, senior vice president of corporate affairs.
Add to rollout costs the budgets for promoting existing brands--figures not disclosed by the cereal companies for competitive reasons--and marketing costs for breakfast cereals are tremendous.
But the payoffs are great. U.S. retail cereal sales total anywhere from $5.5 billion to $7 billion a year, according to industry sources and stock analysts.
Theoretically, if a cereal achieves even a 1% share of such a large market, "you have a very successful cereal," said Craig Shulstad, a spokesman for General Mills, based in Minneapolis.
"If you're looking at 1%, that translates into sales of $70 million in the first year," he said. "That $70 million is a good return on an investment of $35 million."
Shulstad said cereal is purchased by 95 of every 100 households. At any time, a household has more than one brand, he said.
Cereal consumption grew at about 3% a year from 1985 to 1989. In per-capita terms, the growth in consumption was even stronger, said John Bierbusse, an analyst with A. G. Edwards & Sons Inc. in St. Louis.
But consumption slowed in 1990, Bierbusse said, partly because cereal price increases in the previous five years outpaced the consumer price index. Another factor, he said, was a loss in volume by industry leader Kellogg.
"Their brand-name products have faced competition from General Mills, most notably, in selling products that have either better nutritional positioning or are more elaborate and have better price value," he said. "At the other end of the spectrum, their more mundane branded products, things like Corn Flakes and Raisin Bran, have suffered some market share erosion to private-label products who compete on the basis of price."
When measured in terms of tonnage sold, Bierbusse said, Kellogg has a 38% market share, followed by General Mills with 24%; General Foods Corp., 11%; Quaker Oats Co., 7%; Ralston Purina Co., 6%; Nabisco Brands Inc., 4.5%; private labels, 6%, and all others, 2.5%.
Bierbusse said "it is a fact that the industry leader has not been able to introduce a successful new-product for the last several years."
Kellogg's Stewart said the company is active in new product introductions.
He pointed to Oat Bake, "introduced at the height of the oat craze," Common Sense Oat Bran and Ken Mei Rice Bran, introduced recently.
Stewart said the key factor for success in the industry is the quality of a company's cereals, "the ability to provide customers with that value," rather than the quantity of brands available.
The characteristics of a successful cereal have changed little since Kellogg introduced its Corn Flakes in 1906, he said.
"It has to taste right. It has to offer value to the customer, and it has to be in line with the perceived consumer need on health, fitness--whatever that consumer is looking for," he said.
He said Kellogg is "extremely optimistic" about the cereal market's future, despite limited growth this year. Growth in the near future may be limited, he said, adding that health considerations position cereal to do well over the long term.
"When you consider the health ramifications and the fact our society is moving from a treatment society to a disease-prevention society, then these grain-based products will play an increasingly meaningful role in a healthy diet," he said.