IN THE BAG; NO-FRILLS, NO-BOX CEREALS PAY OFF AT QUAKER OATS.

Byline: Noam Neusner Bloomberg News

Quaker Oats Co. Chief Executive Robert Morrison knows what happened to the last man in his job who overreached.

That's one reason he's counting on making money hawking inexpensive knockoffs of major cereal brands, packed in plastic bags and sold as Frosted Flakers, Apple Zaps and Sweet Puffs. Sales of bagged cereals soared 73 percent last year, helping the Chicago-based maker of Cap'n Crunch cereal and Gatorade sports drinks boost total cereal sales by almost a quarter.

Morrison, 55, an ex-Marine and veteran of Philip Morris Cos.'s Kraft Foods Inc. unit, is no fool. He replaced William Smithburg, whose career disintegrated after Quaker bought beverage maker Snapple for $1.7 billion in 1994. Three years later, after selling the unit for $300 million, Smithburg was gone.

``In the food industry, splashy moves are what get you killed,'' said David Kolpak, an analyst at Society Asset Management Inc., which held 408,200 Quaker shares at the end of March.

Morrison is betting that shoppers will favor its bagged cereals because they cost about 75 cents less than boxes, which run $3 or more each. An added lure: Marketing costs are low because many of Quaker's bagged brands are copies of best sellers made by Kellogg Co., General Mills Inc. and Philip Morris Cos.'s Post unit. Quaker says it has faced no legal action over the strategy.

Bagged cereal-bashers such as Sanford C. Bernstein & Co. analyst Steven Galbraith figured that one of Morrison's first moves after taking over last year would be to close the business. Bagged cereals, while selling briskly, have skimpy profit margins.

Morrison is a fan of the bags, however, calling the business the company's second-best opportunity for growth after its sports beverage Gatorade, which contributes about one-third of Quaker's profit. He even vowed to shave his head if 1998 gains in cereal sales match last year's.

So far, he could be on track for a scalping. The company's share of the U.S. cereal market rose about 2 percentage points last year, and sales continue to rise. The company ranks fourth in the U.S. cereal business.

``They're really sticking it to the big guys,'' Kolpak said.

Skeptics abound, though, and many analysts say bagged cereals are hardly worth the effort. Analysts estimate that on 1997 sales of about $160 million, Quaker earned $5 million before taxes - a skimpy profit margin of about 3 percent. By comparison, said Merrill Lynch & Co. analyst Eric Katzman, a box of a full-priced major-brand cereal yields as much as a 20 percent profit, and supermarket-brand boxes earn 7 percent.

``When you're working from a No. 4 position, you look for ways to grow. Quaker's way is discounting,'' said Marvin Roffman, president of Roffman Miller Associates, which owns General Mills shares.

Just as troubling: Quaker's edge in this niche could quickly vanish.

``If the private label guys get into this, Quaker will get killed,'' said Galbraith, who rates Quaker's shares a ``market perform.''

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PHOTO (Color) Sales of Quaker Oats Co. bagged cereals, inexpensive knockoffs of major cereal brands, soared 73 percent last year, boosting total cereal sales by almost a quarter.

Evan Yee/Daily News