Discounters, drug chains wake up to cereal - Food Merchandising

Discount Store News, Nov 4, 1996

Price slashing in cereal may yet fortify sales. But the cuts have not halted new product activity in the $8 billion category. In fact, the lower prices have made it easier for non-food retailers to offer cereal.

Post, Kellogg's, General Mills and Quaker all clipped cereal prices by as much as 20% over the past few months, with hopes of reducing consumer annoyance over climbing prices.

Drug and discount chains such as Hills and CVS seized the opportunity to offer cereal because, as CVS chairman Tom Ryan said, "prices are no longer insulting."

Phil Lempert, an industry expert added: "Reduced pricing make larger-size boxes that discounters tend to sell more affordable."

Research from Information Resources Inc. shows that price cuts have not had a big impact on sales. For the 12-week period ended Aug. 11, 1996, dollar sales of cereal in supermarkets were down 6.2%. Kellogg's share declined 14.2% to 33.9%, and Post's share was off 1.3% to 13.2%. General Mills' share increased 1.2% to 27.6%.

Some experts think that the price cuts in cereal are costing manufacturers too much money, eventually forcing them to bump up prices. One problem, sources said, is that cereal consumption just isn't going to rise. It has been growing by 2% to 3% annually throughout most of the 1990s, but went flat in the last two years.

What's not known, however, is how much the price cutting may have boosted discount and drugstore business as the two channels delve deeper into the category. The theory is that people shopping drug or discount stores may no longer find prices too high to pick up cereal on a non-food shopping trip, especially when that purchase is measured against their busy schedules.

After toying with more portable food items such as breakfast bars, discounters and drug chains are eyeing the cereal category. And the nation's cereal manufacturers are touting their lines of cold cereals as the perfect addition to drug and discount store food sections.

"If retailers are stocking convenience foods, then including cereal makes sense," said a spokeswoman for Kellogg Co., Battle Creek, Mich.

Several drug chains have forged ahead with big cereal programs. Rite Aid, for example, has added an entire mini food department to its new prototype.

Spokesman Craig Muckle said the idea is "to offer any item a customer might need for any meal." The department offers mainstay cereals like Cheerios and Frosted Mini Wheats.

Eckerd Drug also is in the process of boosting its food set to include cereal. Eckerd installed 400 new Food Marts--mini food departments--into its stores last year, bringing the total to 850. Another 475 will be added by the end of 1996.

In the Midwest, Walgreen Co. was one of the first chain drugstores to stock all of Kellogg's top cereals, including Corn Flakes, Frosted Flakes, Raisin Bran and Rice Krispies.

Discounters have been a bit slower to add cereal, suppliers said, despite success with cereal bars. "They still work the food sections on an in and out basis," noted Frank Blod, a principal at the New England Consulting Group, Westport, Conn., who specializes in retailing. "The challenge facing the cereal manufacturers is to convince drug and discounters that cereal needs to be stocked on a year-round basis."

Kmart has long offered cereal products in its food departments and has kept the inventory in its newly designed Pantry area.

Lempert also sees potential for drug and discounters with private label offerings. "Both of these trade classes have successful private label that is stretching into food and cereal makes sense," he said.

In the midst of the price cutting of breakfast cereals, new brands have been launched. General Mills acquired Ralcorp's snack mix business and the Chex cereal brand and kicked off plants for French Toast Crunch and two baked cereals--Betty Crocker Cinnamon Streudel and Dutch Apple. The Betty Crocker cereals are being supported with the largest consumer marketing campaign in General Mills' history--$50 million.

These product could fit snugly into another avenue cereal marketers are looking at to increase sales--its value as a finger snack.

While cereal accounts for a tiny segment of snacks, its consumption as a finger food has grown over the last 10 years, according to NPD Group, Port Washington, N.Y. And the snack market holds potential: Americans consume an average of 200 snacks annually, compared to 300 or breakfasts, NPD reported.

Said Lempert, "If the category becomes a grab and go snack, non-food accounts could prosper."