Cereal producers counterattack

It could be billed as Tony the Tiger, Sugar Bear, and the Trix rabbit vs. Uncle Sam. The handlers of these and other denizens of the breakfast cereal world have for years been on the defensive against government efforts to reduce the amount of time they can advertise on children's television programs and to lower the sugar content in their products. Dealing with the government's most serious attack of all -- an effort to break up the big three cereal firms with anti-trust suits -- Kellogg, General Mills, and General Foods have launched an all-out counterattack on the federal regulators.

The Federal Trade Commission (FTC) is seeking to force the top three manufacturers -- who together control 80 percent of the total ready-to-eat cereal market -- to sell a number of plants to would-be competitors, as well as to give away their brand names. The result, the FTC hopes, would be to eventually split Kellogg into five or so companies, as well as break up General Mills and General Foods.

But the manufacturers are on the offensive:

* The cereal producers are charging that the FTC entered into an "unlawful employment contract" (in effect, collusion) with the first administrative law judge who presided over the initial phases of the eight-year-old case from 1972 until his retirement in 1978.

The effect of this alleged collusion, they argue, is to prejudice the case, and hence, require either a retrial or dismissal.

Both the FTC and companies have presented material on the allegation, and the companies are pressing for a decision on the issue of the law judge before letting the government go ahead with the antimonopoly case itself.

* On April 17 a House committee will hold hearings on proposed legislation that would ensure that administrative law judges "try" regulatory cases fairly. Kellogg will be the lead-off witness.

* Finally, later this spring the American Federation of Grain Millers -- the main union in the cereal industry -- will testify before the administrative law judge hearing the FTC case. The union is expected to argue that breaking up the cereal firms will have an adverse impact on employment within the industry.

At the same time, the companies are clearly hoping that congressional efforts to strip the FTC of many of its enforcement powers will help to blunt the thrust of the agency's pursuit of the cereal industry.

Still, most legal analysts here anticipate that the cereal case could continue for several more years. In fact, according to a key attorney for the commission, the case itself may not be resolved until as late as 1986 or so.

It began back in 1972.

The crux of the FTC case hinges around what agency officials concede is a new concept of "monopoly."

1. Commission attorneys argue that the three manufacturers constitute a "shared monopoly" that as a whole adds up to restraint of trade.

2. The "shared monopoly" grows out of the fact that the firms engage in product (or brand) "proliferation." Hence, the FTC argues, by distributing more and more products, the three firms are taking up most grocery shelf space to the exclusion of competitors.

3. By controlling shelf space and eliminating competition commission staffers argue, cereal prices are forced upward to artificially high levels.

The FTC position, if successful, could have widespread implications for US industry. Three firms dominate the aircraft production. Boeing alone sells 65 to 70 percent of all commercial planes. Three firms dominate the US auto industry. Several firms each dominate aluminum and steel.

Critics of the FTC, such as Yale Brozen of the graduate School of Business at the University of Chicago, maintain that the FTC concept of "shared monopoly" is in effect turning traditional anti-trust law "on its head."

By faulting a firm for its "product proliferation," these critics argue, the FTC is in effect attacking a firm for its very success -- its ability to market a wide range of consumer goods that gain marketplace popularity.

Kellogg, with a hammerlock on 42 percent of the cereal market, has four of the top five best-selling cereals, including the first place brand -- Kellogg's Corn Flakes.

General Mills is estimated to have about 19 to 20 percent of the market, and General Foods about 16 percent. Both firms have deliberately sought diversification, unlike Kellogg, which is still essentially a cereal producer.

Could divestiture lead to cheaper prices? Some economists say the opposite would occur, that the efficiency of size and distribution for a giant like Kellogg leads to cheaper prices in the long run.

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