Ready-To-Eat Breakfast Cereal Analysis

Ready-to-Eat Breakfast Cereal Analysis

Part 1

1.) Barriers to Entry

The barriers to entry within the ready to eat cereal market are high. More specifically, the barriers to entering the branded market are higher than those of the private label market. The following barriers contribute to the difficult nature of entry into this industry:

* The competition has been in business since 1894, which has given competitors a head start in creating superior products. This is a key barrier for an industry in which production advantages are created over time. "While the fundamentals of the process technology were relatively simple and well-understood by all firms, some processes... were quite complex and required substantial engineering expertise and production experience to master."

* Competitors have established relationships with retailers which allow them to have a greater deal of flexibility when negotiating product price, placement and promotions.

* In order to compete as a large competitor of branded cereals, a new entrant would be facing large capital expenditures and long lead times related to R&D and facility construction.

* The largest companies in the RTE cereal industry focus on creating an industry structure that creates a mutual benefit for a small number of participants, essentially colluding to form an oligopoly and control the market.

* Product proliferation has allowed large competitors to capture all apparent niche markets within the industry, which leaves few market opportunities for new entrants.

* Shelf space in retailers is allocated based on historical performance. With no prior performance numbers, new entrants face major obstacles in obtaining shelf space.

* First year costs are extremely high and are outlined in the "Costs of Entry" Exhibit (A).

* Companies who are currently in the industry have had the opportunity to study the consumer and learn their preferences; new entrants would need to create new research data to help drive marketing decisions.

Costs of Entry

The cost of entry for a branded cereal manufacturer who wants to achieve minimum efficient scale is approximately $595,300,000. The cost of entry for a private label company that reaches minimum efficient scale is $220,300,000. Please see the "Cost of Entry" Exhibit (A) for all calculations and assumptions.

2.) Cost Structures and Margins

Branded cereals have higher cost structures compared to private label cereals, particularly related to distribution and marketing costs. Private label cereal companies pay a negligible amount for distribution and marketing. However, the branded cereal company has a higher margin because they are selling the cereal for $2.82 (versus $1.45) in the value chain. Branded cereal companies are making a $.40 margin, while the Grocer will have $.38 margins (11.9% of the retail price). Private label cereal companies only make a margin of $.07 and the Grocer makes $.29. However, the Grocer makes a higher margin percentage with private label at 15%. See the "Value Chain" Exhibit (B).

3.) Profit Impact

On a per pound basis the impact of General Mills price cuts will generate a new margin of $0.75 per pound (a $0.35 increase). Overall the company will see an increase in profitability of $283.92 million in 1994 (see "GM Cost Structure" Exhibit C). Assuming competitors do not adjust their business model or price structure, it can be projected that revenues and profit margins will experience a 4% increase.

Ready-to-Eat Breakfast Cereal Industry

General Mills (GM) strategy of simultaneously decreasing promotional spending while lowering wholesale pricing, is an attempt to address two primary concerns; the inefficiency of coupons and increased competition from private label manufacturers. By cutting investment in coupons the company is able to save $175,000,000 and eliminate a marketing tool that is only generating a 2% usage rate. While that 2% represents over 25% of total cereal purchases, one can speculate that utilizing that savings to offset the 11% price decrease, will ultimately allow the product to be positioned at a lower retail price point; assuming retailers retain their standard profit margin percentages and pass the savings on to the consumer. GM is pursuing the idea that a lower in-store price tag will trump the hassle associated with consumers having to use coupons. This strategy trains the consumer to shop based on their taste preference rather than their coupon collection. Meanwhile the strategy will allow the 75% of cereal purchases that do not use coupons, to be exposed to a lower

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