The Rte Cereal Industry in 1994
The RTE Cereal Industry in 1994
Case Analysis
Competitive Strategy
Presented by:
Raghav Keshav
Why has RTE cereal been such a profitable business?
The RTE cereal market is a classic oligopoly with the four dominant players controlling
85% of the market. The return on sales earned by the incumbents in this market (18%) is significantly higher compared to rest of the food industry (5%). Efficient markets typically entice new entrants when the returns are attractive. These returns are gradually eroded with increased price competition as a result of the entry. The RTE market has defied this market theory.
There are two main reasons for this. One, any market that yields a high rate of return but has no new entrants must have significant barriers to entry. The RTE cereal market has significant entry barriers. Two, barriers to entry does not necessarily mean high profits for all incumbents in an oligopoly. However, in the RTE cereal, it has. This is attributable to the fact that players in the oligopoly have demonstrated profit maximizing behavior and have successfully avoided market share maximization motivated price wars.
Barriers to entry are discussed below.
Brand Proliferation Strategy: Incumbents have successfully launched a “brand proliferation” strategy using which every foreseeable market niche is already serviced with a specific brand. Collectively, there are about 200 + brands offered by the three leading suppliers. This approach deters new entrants because no market niches are left out for new providers to exploit. Also, the given market share of any one brand is low in a market which has such a large number of brands. This also makes it difficult for new entrants, as the expected market share from a new launch (and hence revenue/profit) is very low. This would typically not cover the costs associated with initial capital investment required for the manufacturing facilities.
Advertising & Promotional Spend: Spending on advertising
Case Analysis
Competitive Strategy
Presented by:
Raghav Keshav
Why has RTE cereal been such a profitable business?
The RTE cereal market is a classic oligopoly with the four dominant players controlling
85% of the market. The return on sales earned by the incumbents in this market (18%) is significantly higher compared to rest of the food industry (5%). Efficient markets typically entice new entrants when the returns are attractive. These returns are gradually eroded with increased price competition as a result of the entry. The RTE market has defied this market theory.
There are two main reasons for this. One, any market that yields a high rate of return but has no new entrants must have significant barriers to entry. The RTE cereal market has significant entry barriers. Two, barriers to entry does not necessarily mean high profits for all incumbents in an oligopoly. However, in the RTE cereal, it has. This is attributable to the fact that players in the oligopoly have demonstrated profit maximizing behavior and have successfully avoided market share maximization motivated price wars.
Barriers to entry are discussed below.
Brand Proliferation Strategy: Incumbents have successfully launched a “brand proliferation” strategy using which every foreseeable market niche is already serviced with a specific brand. Collectively, there are about 200 + brands offered by the three leading suppliers. This approach deters new entrants because no market niches are left out for new providers to exploit. Also, the given market share of any one brand is low in a market which has such a large number of brands. This also makes it difficult for new entrants, as the expected market share from a new launch (and hence revenue/profit) is very low. This would typically not cover the costs associated with initial capital investment required for the manufacturing facilities.
Advertising & Promotional Spend: Spending on advertising