CEREAL SIEGE

By Bill Saporito

Is it possible that breakfast-cereal manufacturers are out to eat one another's lunch? That's the impression that Kellogg's gave last week when the company announced price cuts averaging 19% on two-thirds of its product line (not included: best sellers Rice Krispies and Special K). The move came in the wake of sharp gains by the Post Cereal unit of Kraft Foods, owned by Philip Morris. Post lowered prices on its brands 20% on April 15, and quickly stole nearly 4 points of Kellogg's 35.5% share of this $8 billion market. "This is not a price war," says John McMillin, a leading food-industry analyst at Prudential Securities. "Kellogg's was not going to be held hostage to Philip Morris--that's the bottom line."

What the Kellogg's move signals is a shift by the industry to a lower pricing level, one that will be paid for with more efficient marketing--or simply less of it. Say goodbye to BOGOS--buy one get one free. Currently, the industry spends nearly a third of its sales on marketing.

Post's strategic victory was aided by retailers such as Wal-Mart, which swiftly marked down its cereals the day after the April announcement. Consumers began switching brands in droves. Don't wait for another round of cuts. True, General Mills--the No. 2 player, ahead of Post--is expected to align itself with the others. But barring growth, the industry could be forgoing about $1 billion in revenues. Any more would seriously hurt the bottom line. "We are still offering the best values in the cereal aisles," boasts Post Cereal boss Mark Leckie, reacting to the Kellogg's announcement. But as far as price cuts are concerned, he says, "We are done."

--By Bill Saporito. Reported by Jane Van Tassel/New York

With reporting by Jane Van Tassel/New York