Ready to Eat Cereal
The Ready to Eat Breakfast Cereal Industry in 1994
Market demand for cereal was elastic
1. Why has RTE cereal been such a profitable business? What changes have led to the current industry crisis?
Profitability-
a. RTE has been very profitable – posting ROA’s in the 15-30% range.
b. Restrained competition thru effective unwritten agreements for the big three to work together on restricting – trade dealing, in-pack premiums, and vitamin fortification, these were viewed as powerful tools for increasing a firms market share - the big three feared that if one firm employed such tactics for short run advantage, could wreck the overall industry profitability.
c. Each owned national distribution systems
d. Strong relationships with grocers-- Shelf space - Big 3 worked with supermarkets and other retailers to ensure the Big 3’s products received the most valued center aisle positions.
e. Lack of new entrants because of the product lines (proliferation) of the Big 3.
f. Lack of new entrants because a cereal plant required a capital investment of 100mil.
Industry Crisis-
a. The demand for natural cereals surged and caught the Big 3 by surprise. Entry by small firms and large food manufacturers- however 5 years later the Big 3 had introduced their own natural cereal and recaptured market share.
b. Brand fragmentation – increasing rates of new products
c. Advertising expenditures of $800 mil and $610 mil for costs associated with coupons
d. Price up and spend back practice
e. Price-promotion spiral drove RTE cereal up 15.6% from 1990 to 1993
2. Why have private labels been able to enter this industry successfully? How do the cost structures of private label and branded cereal manufacturers differ?
Private Labels Entry-
a. Low price, private label cereals averaged $1.90 vs. Big 3 average of $3.20, 40% less
b. Private labels did little advertising but when they did it was at raising awareness of the price advantage.
c. Advertising expenditures
Market demand for cereal was elastic
1. Why has RTE cereal been such a profitable business? What changes have led to the current industry crisis?
Profitability-
a. RTE has been very profitable – posting ROA’s in the 15-30% range.
b. Restrained competition thru effective unwritten agreements for the big three to work together on restricting – trade dealing, in-pack premiums, and vitamin fortification, these were viewed as powerful tools for increasing a firms market share - the big three feared that if one firm employed such tactics for short run advantage, could wreck the overall industry profitability.
c. Each owned national distribution systems
d. Strong relationships with grocers-- Shelf space - Big 3 worked with supermarkets and other retailers to ensure the Big 3’s products received the most valued center aisle positions.
e. Lack of new entrants because of the product lines (proliferation) of the Big 3.
f. Lack of new entrants because a cereal plant required a capital investment of 100mil.
Industry Crisis-
a. The demand for natural cereals surged and caught the Big 3 by surprise. Entry by small firms and large food manufacturers- however 5 years later the Big 3 had introduced their own natural cereal and recaptured market share.
b. Brand fragmentation – increasing rates of new products
c. Advertising expenditures of $800 mil and $610 mil for costs associated with coupons
d. Price up and spend back practice
e. Price-promotion spiral drove RTE cereal up 15.6% from 1990 to 1993
2. Why have private labels been able to enter this industry successfully? How do the cost structures of private label and branded cereal manufacturers differ?
Private Labels Entry-
a. Low price, private label cereals averaged $1.90 vs. Big 3 average of $3.20, 40% less
b. Private labels did little advertising but when they did it was at raising awareness of the price advantage.
c. Advertising expenditures