Ready to Eat Cereal Case Study

The value chain, Appendix B, in the RTE cereal industry consists of branded manufactures and private labels that receive their raw materials from suppliers and then distribute their product to food stores, drug stores, and mass merchandisers where the end consumer can eventually purchase the cereal product. Private labels rely on wholesalers and third-party distributors to get their product on the store shelves where the end consumer can purchase these items.
In the RTE cereal industry, there were three large manufacturers, General Mills, Kellogg and Philip Morris that had a strong presence in the market. They were extremely profitable with pricing power and dominated the whole market with great market share; all this made it unattractive for potential new companies entering the RTE cereal industry. According to Appendix 2, Kellogg was one of the Big Three companies in the RTE cereal industry with an average market share of 40.25 from 1950 to 1993 in the whole industry. The industry was concentrated and the market structure for the industry was an oligopoly.
The production of RTE cereal requires dough as the raw materials. Due to the fact that dough is a very common material, the power of the suppliers is low. Buyer’s switching costs were low because customers can freely choose different brands and products. Companies, in order to increase their customer’s brand loyalty to certain products, are offering coupons and promotions, which subsequently increase the buyers’ switching cost and weaken buyer’s bargaining power. There is high competition existing among RTE cereal companies; the Big Three companies had strong position and market share in the industry and are continuously introducing new brands and products causing increased competition in the industry.
The high entry barrier in the RTE cereal industry was another factor that contributed to its high profitability and made the industry even more concentrated over time. The cost to manufacture RTE cereal was