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shrink the box and raise the price

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MINNEAPOLIS (June 6) - General Mills Inc. said on Tuesday it would raise cereal prices to match increases by competitors, but investors sent its shares down more than 3 percent, and one analyst downgraded the stock.

General Mills spokesman Tom Forsythe said customers should actually see lower prices per box, but the boxes will be smaller, so the effect is a price increase of a few percent. The new prices go into effect on June 25.

The maker of Wheaties and Lucky Charms has been looking for a way to boost profits on its cereals. It sold as much cereal during its most recent quarter as it did in the same period a year ago, but at lower prices because of promotions. Profits have been squeezed by higher prices for fuel and ingredients such as oats.

"Input costs are definitely a factor" in the price increase, Forsythe said. "Grain and energy costs have increased. Most of our competitors in the cereal category have already raised prices, some months ago."

General Mills competitor Kellogg  Co. said in April that it had raised prices by 5 percent based on weight.

Forsythe said General Mills cereals often appeared more expensive on the shelf because of their larger box sizes, and the switch to smaller boxes will make them appear more competitive, even with the increased price per ounce.

General Mills is also eliminating some cereal sizes, although Forsythe declined to say how many. That will help reduce costs and should make its cereals easier to put on store shelves, he said.

Citing the quiet period before General Mills reports results on June 21, Forsythe declined to say what effect the company expects to see on its profits.

Bear Stearns  analyst Terry Bivens wrote in a research note on Tuesday that General Mills appears to be trying to boost volume with the lower shelf prices. He said the company is gambling by making the change across all its cereals at once rather than experimenting first to see if it works. He downgraded the stock to a neutral rating.

"Though we still admire many aspects of the company, the risks in its cereal plan are too acute, by our measure, to maintain a confidently bullish rating on a stock that already has performed so well year-to-date," he wrote.

General Mills shares have risen steadily from about $51 a year ago to over $61 recently. But on Tuesday they dropped $2.07, or 3.4 percent, to $59.40.

General Mills' last attempt at an across-the-board price increase went badly. In early 2005 it effectively raised prices by reducing discounts - and watched sales of some cereals drop as much as 5 percent.

One question is whether retailers will pass along shelf-price reductions to customers, or keep the difference for themselves. That's a risk, but it wasn't a problem that Kellogg ran into, said Jon Fisher, a portfolio manager at Fifth Third Bancorp  who follows food companies.

He said he believes General Mills waited this long to raise prices because it was hoping to grab market share from Kellogg. But it didn't work out that way. Kellogg even claimed in April that it had gained market share.

"It was becoming evident as the spring wore on that it wasn't having that impact," Fisher said.

Other food companies have been raising prices successfully he said, and retailers have been going along.

"Food companies, consumer product companies, they have pricing power right now," he said.
BY JOSHUA FREED -AP
Entry #1,173

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