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Subject: Executive Update
Date: Wed, 18 Nov 92 12:51:16 EST
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11/18/92


TITLE Executive Update Breakfast Is No Peaceful Time For Cereal
Leaders

Kellogg, Gen'l Mills Hope To Reduce Promotions; Post May Not Let
Them Marilyn Much In New York

If the nation's top two cereal marketers were hoping for a truce
in their long-running promotional battle, they'd better think
again.  Philip Morris Cos. may be about to ratchet up the "snap,
crackle and pop" another decibel or two.  With its proposed $450
million acquisition of RJR Nabisco Inc.'s Shredded Wheat lines,
Philip Morris Marketing

seems bent on bolstering its lagging Post cereal unit, and
analysts say a promotional push in the $6.5 billion ready-to-eat
cereal market can't be far off.  Publicly, No. 1 Kellogg Co. and
No. 2 General Mills Inc. say they are hoping to throttle back ad-
vertising, coupons and incentives given to grocers. Whether they
can do so is another matter. Up to now, a key concern has been
private-label brands.  "The recession and the ability of
private-label brands to increase their market share has forced us
to rely more on couponing and other forms of price promotions in
this slow-moving economy," said Arthur R. Schulze, vice chairman
of $7.8 billion-in-sales General Mills in Minneapolis.  Private-
label brands - many of which are produced and packaged by Ralston
Purina Co. and sold at deep discounts - have increased their U.S.
market share in the last 12 months to 4.9%, or $348.5 million,
from 4.6%, or $311.9 million, calculates A.C. Nielsen Co.  That's
a mere drop in the bucket to Kellogg, maker of Rice Krispies and
Corn Flakes, or General Mills, with such brands as Cheerios and
Wheaties.  But the competition has chipped away enough of the two
leaders' turf to make both nervous.  "When growth begins to slow
in the cereal business, the only way to grow is to gain share,
and one way to do that is through discounting, trade allowances
and more spending on merchandising," said John Curtis, an analyst
with Securities Corp. of Iowa in Cedar Rapids. "The big players
are duking it out to hold onto their share."

Shift At General Mills

Traditionally, General Mills has competed primarily on the basis
of product and image by extending lines and launching new pro-
ducts. It has improved its Kix corn-puffed cereal at least twice
in the last decade. And in every year for the past five, its ce-
real unit volume has increased about 6%, outpacing industry
growth of 3% to 4%.  But General Mills' tack has changed in re-
cent months.  "At certain points, we must meet our competitors'
promotional activities," said Schulze.  General Mills was the in-
stigator in the latest round of heavy promotions, says William F.
McGuire, an analyst with Merrill Lynch & Co. It was responsible
for pushing up marketing spending throughout last winter and ear-
ly last spring.  Kellogg responded with record advertising and
marketing spending of its own.  Kellogg's selling, general and
administrative expenses climbed to 34.6% of sales in the first
nine months of 1992, from 32.9% in the same 1991 period and 33.5%
in all of 1991, says Bonnie Wittenburg, an analyst with Dain Bos-
worth Inc. in Minneapolis.  The ratio has climbed so high that
Kellogg Chairman and Chief Executive Arnold G. Langbo publicly
called for a truce at a meeting with analysts earlier this month.
"We're hoping our SG&A expense ratio does not increase any furth-
er," said a Kellogg spokesman.

Schulze admits General Mills' outlays have increased as well.
"Our marketing spending as a percentage of sales has gone up
slightly," he said. "But based on our information, our spending
has been less than our competition. We began to pull back on our
spending last spring."


Hopes Peak Is Near

Like Langbo, Schulze hopes the escalation in promotions has
peaked.  "This is unlikely to be a permanent situation," he said.
"The private-label market has begun to stabilize and its share
increase appears to have leveled off.  "So it's not unreasonable
to expect that promotional activity will return to more normal
levels," he said.  General Mills, however, has increased its SG&A
in the current quarter to support its major fall promotion, which
includes special savings on about a dozen Betty Crocker and ce-
real brands.  "This is a companywide promotion that we have done
for the last eight years," said Schulze, stressing it does not a
signal the cereal war is escalating.  For its part, Kellogg
management thinks the "envelope has been pushed to the limit,
that the couponing blitz will flatten and then abate," said
Merrill's McGuire.  The wild card, of course, is Philip Morris.
The Nabisco brands now being sought by Philip Morris were origi-
nally to be sold to General Mills in a similar $450 million tran-
saction.  General Mills could have given the lagging $230
million-in-sales Nabisco lines a boost, but the acquisition was
called off abruptly early this month over regulatory concerns.
Philip Morris now plans to merge the unit into its Post cereal
division, a move that will instantly boost its market share to a
more formidable 14.5%.  And unlike RJR Nabisco, a highly lever-
aged concern that has to watch promotional spending carefully,
Philip Morris is cash-rich and can be expected to seek additional
share for Post at the expense of its rivals.

Post's New Role

Post has seen its share of the market decline from 15% a decade
ago, largely because of gains by General Mills, says Schulze.
General Mills also has given the Battle Creek, Mich.-based leader
Kellogg a good fight.  Kellogg's U.S. market share slipped
slightly in the last 12 months to 36.7% from 37%, Nielsen esti-
mates. But with a 52% share of the faster-growing international
arena, Kellogg is still way ahead overall.  The expanded role of
Post has added a new element of uncertainty. As McGuire put it,
"Who flinches first in this game of chicken, we cannot tell."

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