Kellogg Loses Some Snap, Crackle, Pop

TONY the Tiger is doing some extra roaring these days. The rivalry in the cereal section of grocery stores is more intense than ever, with food companies scrambling among themselves for shelf space for their ready-to-eat breakfast products. Cereal firms have been introducing a number of new products in the past few years to take advantage of the interest in ``health'' foods; and private labels are now seriously challenging the established positions of some the best-known brand names in the $7 billion-a-year industry.

For consumers, choices in cereals are often confusing in terms of labeling claims about nutrition. But two facts are plain: first, retail prices have been rising, following recent price hikes by the manufacturers. Second, there are just lots of cereal products on the shelves. General Mills is putting two new ``adult'' cereals on the market in January. Cereal makers insist that the future is promising. ``Only about one in three Americans eats breakfast,'' notes John McMillin, an analyst with Prudential-Bache Securities, Inc. That's the kind of news that puts a lot of snap, crackle - and zip - in the promotion plans of the cereal makers.

The major trends:

Per capita cereal consumption has been leveling off in the US. But that follows a five-year pattern of growth.

Within the business a modest realignment has been occurring. Kellogg, long dominant in the industry, has been losing market share. Kellogg now controls about 38 percent of the market, down from 42 percent in 1988.

General Mills, with 28 percent, has been the main beneficiary of Kellogg's loss, largely because of its successful promotion of oat-based cereals such as Cheerios.

Private label brands such as those offered by major grocery chains under their own store names have been winning customers. Private label products now represent about 6.2 percent of market share in terms of tonnage, compared to about 3.6 percent in 1987. The main maker of private label cereal products is Ralston Purina.

All is not lost for Kellogg. Far from it. The company, which is to cereals what General Motors is to cars, or McDonalds is to fast-foods, is doing an end run on domestic producers by boosting sales abroad. Kellogg's overseas market share ranges from a mere 23 percent of the market in Argentina, to 85 percent in Mexico, 95 percent in Brazil, and 99 percent in Venezuela, according to Pru-Bache. Kellogg now sells half its total tonnage abroad.

In a recent report for Oppenheimer & Company, Inc., food analyst O. Lee Tawes concludes that the momentum - in terms of corporate earnings - is clearly with General Mills. The company has two strong restaurant divisions, Red Lobster and the Olive Garden, in addition to Betty Crocker baking products. But equally important, General Mills continues to post gains in terms of packaged cereal sales.

William Leach, a food analyst with Donaldson, Lufkin & Jenrette Securities Corporation, also recommends Generals Mills. He finds Quaker Oats and Kellogg ``moderately attractive.''

Quaker Oats and Ralston Purina have highly diversified product lines, in addition to cereals, which remains the mainstay for Kellogg. Ralston Purina is a pet food producer. In the case of Quaker Oats, ready-to-eat cereals comprise about 15 percent of the company's total earnings, according to Pru-Bache. Gatorade, a thirst-quenching drink, accounts for over one-fifth of Quaker's earnings. The company also has other food lines, such as Aunt Jemima mixes and frozen products, and Celeste pasta products.

Is mighty Kellogg about to be dethroned in the cereal business? Some investors have been shying away from the stock because of its tough competition. But John McMillin of Pru-Bache believes that Kellogg will continue to show strong growth abroad. Mr. McMillin believes that Kellogg will garner 58 percent of its revenues and 51 percent of its profits from overseas operations in 1995, compared to only 29 percent of revenues and 20 percent of profits in 1985. So if you see Tony the Tiger in a sombrero, don't be surprised.