Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, March 19, 1995                   TAG: 9503180042
SECTION: BUSINESS                    PAGE: F-1 BUSINESS   EDITION: METRO 
SOURCE: JOHN LEVIN
DATELINE:                                 LENGTH: Medium

IS THIS A FEDERAL CASE? OR THE WORK OF FLAKES?

Specifically, two Democrats - Charles Schumer of New York and Sam Gejdenson of Connecticut, this month asked the Justice Department to reopen an antitrust investigation of the U.S. breakfast cereal industry. In 1982, the Federal Trade Commission found no evidence of anti-competitive practices. But Schumer claimed to be stunned to discover a box of raisin bran retailing at $4.49 and questioned if major cereal makers were conspiring to keep prices high.

Maybe the congressman doesn't do the family shopping often enough to realize the price of cold cereal has risen steadily in recent years. It is the result of fierce coupon wars among the manufacturers and Americans' demand for food novelty and variety.

But the underlying question is whether there is enough competition among the makers and sellers of many types of consumer goods. It can be argued that the long flat economy has stifled risk-taking among many U.S. companies and diminished consumers' choices.

Consider that at a Roanoke Valley supermarket there are nearly three dozen varieties of cereal of the shelf, but they're all the product of just a half-dozen makers. And, except for bargain brands at one end and upscale gourmet varieties at the other end, there is not wide difference in prices.

If Schumer were to buy his raisin bran in Roanoke, he'd find brands made by the four leading makers - General Mills Inc., Kellogg Co., the Post division of Philip Morris Cos. and Quaker Oats Co. - all selling for between 16.5 cents and 20.8 cents an ounce. Direct comparison is difficult because of vast differences in box sizes and the variations of grains and additions of nuts and fruit.

But does that call for a federal investigation of the puffs, pops and flakes we eat every morning? Are the cereal makers in collusion and are they any more suspect than auto manufacturers, airlines or any other group attempting to capture a share of the market with remarkably similar goods and services?

Not according to Donald Hatfield, an assistant professor in Virginia Tech's Pamplin College of Business who is the author of two studies on global competition.

The test, he says, is whether there's a concentration of producers earning profits much higher than other industries, to the degree that potential competitors are kept out of the business. Ultimately, such a concentration is bad for the marketplace because it discourages innovation and keep prices fair.

Certainly, there's some evidence of problems for cereal eaters. The big-four makers control 85 percent of the $8.33 billion (sales for the year ended Oct. 9, 1994) and together the cereal makers earned a 38 percent return on investment. That latter figure comes from a FTC study of industries from 1971 to 1989, when the average return of all U.S. industries was between 10 and 16 percent.

That's offset, Hatfield contends, by a near-constant flow of new products. An average of 111 new cereals have been introduced each year over the past seven years, according to statistics reported by the Food Marketing Institute, a Washington, D.C., trade association of supermarket operators.

The grocer, who generally resists letting his shelves become test markets, demands manufacturers to prove some reasonable chance of success of a new product. Replacing an old product with a new one involves considerable cost, said Edie Clark, spokewoman for the institute.

But unlike the auto industry, where energy issues gave Japanese makers an opportunity to compete in America, there are not such obvious ways for a newcomer to challenge the established cereal mills. Meeting new health consciousness, for example, was as easy as renaming of sugar flakes to frosted flakes, for example.

Ultimately, Hatfield said, it will be consumers who decide if there's not enough competition in an industry. If prices are too high, we find substitutes. And if products don't keep up with changing tastes, we switch buying habits.

"I don't see a need for new government regulation," he said. "I don't see them ripping off consumers."

And for breakfast, just serve him coffee.