W. K. Kellogg Company (a)

Abstract

On April 4, 1994, General Mills, the number-two cereal manufacturer in the United States, announced a per-box price reduction between $0.30 and $0.70 on eight brands that accounted for 40% of its cereal volume. The case focuses on Kellogg's possible responses to the General Mills price cut, providing opportunities to discuss various strategies for responding to private-label and store-brand competition. Specific responses discussed in the case include price cuts, couponing, other promotional vehicles, and advertising. Of particular interest is Kellogg's use of advertising to shift consumer attention from the per-box price of cereal to the per-bowl price of cereal. Also see the B case (UVA-M-0472).

Excerpt

UVA-M-0465

W. K. KELLOGG COMPANY (A)

On April 4, 1994, General Mills, the number-two cereal manufacturer in the United States, announced a per-box price reduction of $ 0.30 to $ 0.70 on eight brands that accounted for 40% of its cereal volume. General Mills planned to fund the price cuts, which were scheduled for May 2, with a $ 175 million reduction in “inefficient” promotional spending such as high-value coupons, half-price deals, and BOGOs (Buy-One-Get-One free offers). When retailers and consumers responded favorably to the announcement (a General Mills spokesperson reported receiving almost 500 phone calls from consumers), the company implemented the price cuts on April 11.

General Mills' April 4 announcement followed an earlier price reduction on other brands, as well as a 25% increase in the fruit-and-nut content of five cereals unaccompanied by any price increase. As a result of General Mills' actions, industry leader W. K. Kellogg faced an important decision: should Kellogg follow General Mills and reduce prices on its own cold cereals?

The Cold Cereal Market

In 1993, Americans consumed an estimated 2.96 billion pounds of cold cereal worth an estimated $ 8.9 billion at retail prices. Sales for the 52 weeks ending on May 22, 1993, indicated that 10 cereals accounted for 33% of cold-cereal volume in 1993 (Exhibit 1). Exhibit 2 reports dollar shares and measured advertising expenditures, while Exhibit 3 contains market-size information, as well as market shares for leading domestic manufacturers.

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Keywords: advertising strategy, brand management, pricing, promotion