A Case Study of the Ready-to-Eat Cereal Industry

Three companies (Kellog, General Mills, and Philip Morris) dominated the ready-to-eat breakfast industry in 1994. The Big Three were not competing fiercely among themselves, and possible barriers to competition were in the form of unwritten agreements, which limited norms that could be profitable from an individual view but damaging from the broader three perspectives (Corts, 1997). For several decades, the Big Three managed to avoid competing with each other mainly through prices

The factors that aided the Big Three in value capture included technological advancement. While the process of cereal production was simple, the extraction process was complex requiring crucial engineer expertise. This provided the big three with a competitive advantage that was hard for new entrants to duplicate. Another factor is the ownership of distribution channels and centers where supermarkets would mainly pick their products. When introducing a new brand in the supermarket, the Big Three would pay for some shelf space. Thus, their ability to obtain shelf space helped in value capture.

Displaying the grains in the most accessible areas of the store was regarded as crucial. The Big Three had traditionally won the battle for shelf space, mainly through long-term agreements with food stores, and therefore, little room was left for new entrants (Corts, 1997). This combined effort increased their dominance in the market share and the whole industry. At this point, it looked as if the Big Three dominance over the RTE cereal industry would be everlasting.

Initially, the Big Three’s value capture was high and unrivaled due to several factors, such as technological sophistication in production, provision of discount to retailers, and ownership of distribution channels. However, it was not the case with the entry of private labels into the market. On the other hand, the food stores solely depended on the Big Three for value capture, which the Big Three would aid them indirectly through advertisement. With the rise in private labels, food stores’ value capture increased as they could obtain alternatives for their stores and a lower price.

The crisis in the industry started when consumers began buying natural cereals. The big three were not prepared for this consumer demand, allowing competitors to gain part of the market share. The threat of substitute product, natural cereal, increasingly involved competing firms in the RTE cereal industry. Consequently, the sales of private labels’ cereals grew substantially to around 5% in sales and 9% in volume in the 1990s (Corts, 1997).

These private labels also offered higher margins to retailers through their products. This rise was higher by 3% in comparison to branded cereals (Corts, 1997). As a result, retailers were happy to favor them in the space battle. Private labels and branded cereal manufacturers have distinct differences, which has given private labels a decisive advantage in the competition. Private labels’ advertisements were less than branded manufacturers.

The Big Three could have refocused the brand name on a healthier lifestyle. Therefore, the companies would have been able to respond to the demographic shift of an older population. Building this perception would have enabled the company to boost profit margins by charging premiums for their products. Strengthening the brand name in this eat would have enhanced the companies’ plans to introduce more product lines (Corts, 1997). They could have also offered discounts to retailers. The discounting would have afforded them special treatment by these retailers. In turn, the retailers would help them in marketing their goods and also affording them shelf space. Thus, increasing their dominance on the market share and the whole RTE industry.

Reference

Corts, K. S. (1997). The ready-to-eat breakfast cereal industry in 1994 (A). Harvard Business School. Case Study 9-795-191.