CEREAL SHOWDOWN

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For years, cereal makers have been pounding home the message that their product is a really good deal, just pennies per serving. But consumers are not buying it anymore-- literally.

That's why Post Cereal, part of the Philip Morris consumer-goods empire, last week slashed the wholesale price of its 22 cereal brands an average of 20%. The price cuts, the most sweeping in decades, are designed to puff up Post's soggy sales. The No. 3 manufacturer had been losing ground to Kellogg and General Mills, the industry leaders in the $7.5 billion cold-cereal business, as well as to store brands. If--and it's a big if--grocers pass along the full savings, the price of a 20-oz. box of Post Premium Raisin Bran would fall from $4.13 to $2.99; overall, the reductions would average about $1 a box.

The cuts are an admission that the industry's pricing has been sending shoppers down other aisles. "The rise in cereal prices has been absolutely outrageous," says Patricia Cromie, a lawyer and mother of two in Allendale, New Jersey. "I can spend $4 and change for just one box and have it gone in less than a week." Since World War II, no food category has had more price increases than cereal, which easily outdistanced the rate of inflation for groceries (see chart). But consumers began balking in 1994, angered by relentless price hikes. Last year sales of cereal began to drop.

With more than 200 cereal products fighting it out on the shelves--it can get ugly when Cap'n Crunch takes on Count Chocula at the A&P--lower prices would seem to be a natural result. Yet competition hasn't worked that way with cereals, though it has in other categories. (Prices of Coke and Pepsi are cheaper in real terms than they were a decade ago.) That is because the cereal manufacturers have been using consumers to finance what has become a very expensive marketing war. So as prices inflate, the companies use the additional money--about $1 a box--to advertise and promote their products.

Post is using its new price drops to try a more rational approach to marketing. Typically, the manufacturers raise prices aggressively and then "deal back"--that is, offer coupons while at the same time paying grocers incentives to promote the product. This method is enormously wasteful. Consumers, annoyed by or indifferent to coupons, redeem only a fraction of those distributed; the handling costs are high; and, worst of all, it's not a particularly effective way to build a brand. Smart shoppers often "cherry pick" a category, buying only the brand that's on sale, so the manufacturer gains no loyalty.

Post will now issue a single coupon good for any of its products. The company hopes to save some $200 million in marketing and promotion costs, which will go a long way toward recouping the $60 million in operating profit it will forgo as the result of the $260 million in price cuts.

Consumer organizations hailed Post's moves as "Grape Nuts Monday"--an echo of "Marlboro Friday," when Philip Morris cut the cost of Marlboros in 1993 and ignited an industry-wide break in cigarette prices. "Brand-name cereals have been outrageously priced for as long as anyone can remember,'' says Michael Jacobson, executive director of the Center for Science in the Public Interest. "Cutting the price will make it easier for more Americans to eat a healthier breakfast."