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Are cereal prices too high?
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May 5, 1999: 2:32 p.m. ET
Some industry watchers fear that consumers may be getting soaked
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NEW YORK (CNNfn) - That morning snap, crackle and pop has gotten a little more expensive, sparking concern among some politicians and consumer advocates that the high breakfast cereal prices of the early '90s may be crunching their way back to grocery stores.
Quaker Oats Co. (OAT) this week became the latest cereal maker to jump on the higher-price bandwagon. The Chicago-based food company hiked the price tag on about half of its cereal line, including Cap'n Crunch and Life, by about 3 percent, or 8 cents per box.
Last month, General Mills Inc. (GIS), the Minneapolis-based maker of Cheerios, Total and Lucky Charms, raised its cold cereal prices by 2.5 percent, while Battle Creek, Mich.-based Kellogg Co. (K), whose brands include the popular Rice Krispies and Frosted Flakes, announced a 2.7 percent price increase in December.
Cereal makers say they need to charge more to cover increased costs for advertising and promotion and new product development, as their industry is becoming increasingly competitive. And analysts say the cold cereal market is in some trouble, as eat-on-the-go Americans opt for more portable kinds of breakfasts, such as snack bars and bagels that don't require a bowl and a spoon.
Consumer watchdogs have eyed cereal prices since the early 1990s, when prices soared, topping $4 a box. Several members of Congress took up the complaints, with some recommending that cereal makers be investigated for possible antitrust violations. In the mid-1990s, the leading companies became involved in a fierce price war, and prices on many major brands began to fall.
Increases are worrisome
But cereal is still expensive and the latest round of price increases is worrisome, said Scott Kovarovics, chief of staff for U.S. Rep. Sam Gejdenson, D-Conn., whose office, together with that of New York Sen. Charles Schumer, has been tracking cereal prices since 1995.
"We are seeing a slow increase in prices again, which should give consumers pause," Kovarovics said.
Cereal makers are sensitive to accusations that prices are too high.
"Even with today's price increase, the prices today on a box of cereal are 9 percent lower than they were in 1995," said Karen Savinski, a spokeswoman for Quaker Oats. In 1995, a consumer paid $3.68 a box for Cap'n Crunch, while that same box costs about $3.36 today, she said.
That may be true, Kovarovics counters, but he fears that those savings are slowly being eroded by incremental price rises.
"What we see is a little bit here a little bit there," he said. "Then, that 20 cent decrease never exists."
Kovarovics said that while prices on all products go up, cereal prices have been found to vastly surpass the price of production. In a 1995 study, Gejdenson and Schumer found that only 45 percent of the price of a box of cereal was for the cost of the ingredients, packaging and other production factors, while 55 percent went to advertising and profit. Only chewing tobacco, cigarettes and greeting cards have a higher percentage of price going to profits and marketing, he said.
Industry analysts said that the latest round of price increases reflects a desire by cereal makers to inject cash into their operations to develop new products.
"They are all scrambling," said William Maguire, an analyst at Wasserstein Perella Securities. "The category is not growing right now."
Perella added that despite the complaints of some congressmen, cereal prices are in fact moderate. "No consumers are getting gouged, in my view," he said.
But the price increase strategy is not necessary wise, said another analyst, Chris Jakubik of Warburg Dillon Read LLC. He said that consumers are becoming less loyal to specific brands and are turning to generic store brands and cheaper bagged cereal offerings.
Also, since consumers may not take well to price increases, the higher prices in turn may lead to the companies issuing more coupons and price promotions in order to remain competitive, which will cut into the bottom line, Jakubik said.
"I don't think it's providing the companies much scope to raise their profitability levels," he said. Instead of raising prices, he said, "what's really going to grow the category is some real innovation."
-- by staff writer Martha Slud
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