Big cereal companies
•What are the barriers to entry in the RTE (ready to eat) cereal industry? •Market concentration and big players extremely powerful and profitable. •Restrained competition by the big three by unwritten agreements to limit in pack premiums; tread dealing (one brand at a time for each company); and vitamin – fortification •Economics of scale in production and advertising
•Slots in the supermarket and negotiation by volume and discounts
Big cereal companies Essay Example
•Three big cereal companies: Kellogg, General Mills and Philip Morris •When: 1994 •What: for the first time decrease of sales. Before this avoided destructive head to head competition. •Used to be a very closed market and even considered monopolistic. •Big margins, easy to negotiate and volume for retailers among other things made it difficult for new companies to enter the market. •1% of gross sales (80 millions) used for R&D.
•Distribution to centers. Buy space at retailers (could go up to 1 million) when introducing a new brand. •Expansion from 96 – 2000 20% by entering superstore centers (Walmart with discounts) •Advertising and use of coupons… cereals seen as a luxury item with the high prices according to consumers. •New products developed (expansion of brands or new creations). Also co-brand deals •Kellogg: 35% of market share, leader. It has cereals, waffles (eggo), toaster pastries (pop-tarts) and granola bars. •General Mills had 24.3% of market share (food company). Cereal division was its largest division (30% of revenues) followed by restaurants, packaged food goods like frozen see food. •Philip Morris: 60 billion consumer packaged goods company (half from food and half from beer). Acquired Nabisco •Quaker Oats: leader with 65% of the hot cereal industry. •Ralston: pet food, batteries manufacturing (everyday and energizer), soy protein, operator of ski resorts, polymer products, etc. Produced 50% of the private label cereals.
Private Label Thread •Grew 50% from 91-96 (9.2% of all cereal sales) •Low price (40% less than the big 3) •Offered better margins for the retailers •90’s change, they used to suffer from poor quality and limited production before. Costs where cheaper because they focused on simpler cereals no R&D, packages also cheap. •Malt-O-Meal’s competition of private label
•Is the recent decrease in profitability a temporary phenomenon or a permanent change in industry profitability? •It is a permanent change thanks to the market penetration and growth the companies are having. Also it is important to mention that people, according to the text, view cereal not as a luxury item but as something basic. They rather pay less than buy for a more elaborated cereal. •How should Kellogg compete with the white-label firms?
•I believe Kellogg should diversify their products and make a premium line and a more basic with lower prices but with Kellogg quality.