Breakfast cereal lovers: Sharpen your coupon clippers!
A new wave of coupon and promotional wars is coming soon as cereal manufacturers escalate their battle for domination of American breakfast tables, analysts predict.
The heightened wars will be triggered by marketing behemoth Philip Morris, which is poised to expand its share of the ready-to-eat cold cereal market through its proposed $450-million acquisition of RJR Nabisco's Shredded Wheat lines, which includes Spoon-Size Shredded Wheat and Shreddies. The deal, proposed in November, is expected to win regulatory approval in a few months.
Philip Morris, which already has the Post brand cereals, hopes to reverse a market share slide by Shredded Wheat that saw the line's share of the market fall 2.8% last year--even as overall cereal consumption continued to grow.
"The Nabisco product has already had a very strong niche. I don't think that's ever gone away, it's just not been promoted lately," said Michael Mauboussin, industry analyst for First Boston.
Because breakfast cereal sales are closely tied to promotional campaigns, analysts expect Philip Morris to win back Shredded Wheat eaters by offering coupons and other promotions. Analysts also predict that the company will develop some new product lines.
"We (are going to) pump some life into these brands," said Philip Morris' spokesman, Barry Holt. "These Nabisco brands are poised and have room to grow."
By adding Shredded Wheat to the Post brands and winning back strayed Shredded Wheat consumers, Philip Morris hopes to grab market share from industry leader Kellogg. The move will boost combined Post/Nabisco annual sales to $1.1 billion, or a 15% share of the $7.3-billion market. Kellogg (maker of Corn Flakes, Rice Crispies, Nutri-Grain, Crispix, and other brands) leads the industry with a 37% share, followed by General Mills (including Cheerios, Wheaties, Total, Trix and Cocoa Puffs) at 30%.
But Philip Morris' bid to gain market share won't go without a fight.
In the past, promotional campaigns have been met by comparable moves from other market leaders. General Mills spokesman Barry Wegener said his company would wait until Philip Morris' acquisition is completed before revealing its response. Kellogg is also expected to counterattack.
"We react to what the market forces are, and we will just have to wait and see what happens," Wegener said.
A similar deal for General Mills to buy the Nabisco line fell through in November, when it appeared likely that state and federal regulators would require a lengthy review of the acquisition, which both companies said would hurt their competitiveness.
"Obviously we think that it's a very good cereal," Wegener said. "We don't have a Shredded Wheat type product, so it would have complemented our products nicely."
Philip Morris is expected to promote Shredded Wheat to appeal to the health conscious, fitting a long-term trend of identifying cereal as a health food.
"The low-fat, low-sodium, higher-grain products will continue to be popular," Mauboussin said. One reason for that popularity is the demographic profile of cereal consumers. Analyst Stephen M. Carnes of Piper Jaffray said the highest percentage of cereal eaters are those under 20 or over 50 years of age, and he expects continued growth in the overall market.
Mauboussin agrees. "In the next 10 years you have the baby-boom echo and average age moving up," he said. "Cereal continues to be very healthy, easy to prepare and it tastes good. That's three really strong attributes."
While the winner in a coupon war is the consumer, who gets lower prices, the losers in this shakeout may be private label breakfast cereals. Sold as store brands, sales of private label cereals grew dramatically in the late 1980s and early 1990s. But earlier this year, the cereal market giants moved to win back customers by offering deep discounts on their products through coupons.
"The growth of private label products has been stunted due to the competitive activity of Kellogg," Mauboussin said. "In a number of markets in the U.S., with promotions, you have been able to buy Kellogg's product for less than the private label brand."