R-T-E Cereal Breakfast Industry Name: Andres Gil Competitive Analysis and Strategy The ready to eat (RTE) cereal industry has grown steadily, with a compounded annual volume rate of three percent between 1950 and 1993. It success during the 20th century had been driven by the surge of consumer’s interest in healthy and dietary food. After World War II there was an increase demand for vitamin fortification products.
During the 50’s, pre-sweetening gained popularity among Americans and in the 70’s and through the 80’s consumer’s preferences turned to granola and natural cereals. Ready-to-eat breakfast cereals have become the best option for a healthy and nutritional breakfast mainly due to the market’s perception that adults who consume breakfast, especially incorporated vitamins cereals, will have a better overall diet quality than those who skip breakfast.
At the same time, the RTE cereal industry has experienced high concentration by the three largest producers (Kellogg, General Mills, and General Foods) who had restrain competition and new entrants through in-pack premiums, offering free souvenirs in their packages, trade dealings, discounts offered to retailers in exchange of better shelf placements, and aggressive marketing techniques.
Private labels have been able to successfully enter the ready-to-eat cereal industry due to changes in consumer’s perception regarding the premium paid for RTE cereal products and also due to changes in external market forces which allowed private labels to offer similar products at a much lower price. As one consumer surveyed explains “cereal prices are an obscenity – to take a genuinely basic food and make a luxury item out of it is an outrage, and not far from sinful. The big three have been heavily promoting their products through coupons, conditioning the consumers to pay less only by presenting coupons at the register. However, such tactic eroded brand loyalty as consumers were forced to look for alternatives when they did not have coupons with them. Private labels positioned themselves as an alternative to expensive cereals. Technological advances and the proliferation of mass merchandisers who did not charge slotting fees (fees charged to companies for better product shelf placement) elped private placements to offer a similar quality product for a lower price. Private labels message to consumers focused not on product differentiation, but on product pricing. Given that private labels had lower manufacturing cost than the big three producers, they were also able to offer greater margins to retailers in exchange of better shelf placement within their stores. Private labels Procurement costs included very little for advertising expenses as their main focus was not product differentiation but price.
Instead, they focused on customer awareness of their prices in comparison with branded cereals. Also, private labels focused on less labor intensive products and inexpensive raw materials, including the introduction of clear plastic bags for packaging rather than boxes, this method saved private placements up to 25% of packaging cost. Branded cereals’ products were characterized by their use of relative expensive ingredients, such as fruits and nuts, in the creation of their cereals.
Their processes were also characterized for been complex and labor intensive. Contrary to private labels companies, advertising was the highest expense in their operations process, especially during the product introduction to the market stage. Increase product prices were sometimes necessary to cover for high promotion and advertising cost. RTE cereal industry Threat of new entrants: The average effort required to enter this industry with a new product is two to four years and five to ten million dollars of research and development expenses.
However, new entrants need to look at whether there are substantial costs to access bank loans and credit. If borrowing is cheap, then the likelihood of more new entrants entering the industry is higher. Also, high prices to consumers and low profit margins to retailers from branded companies have increased the number of new entrants in the industry. The more new entrants that enter the market, the more saturated and fragmented it becomes for everyone. Brand name recognition plays a role in the RTE cereal industry.
A company with a strong brand name such as Kellogg can sometimes retain a customer even if its prices are higher than competitors. Power of suppliers: There are many suppliers in this industry due to the simplicity of the materials, basic food ingredients, needed to manufacture these products. Subsequently, supplier’s cost remains relatively low compared to other industries. Power of buyers: Given the number of products available, the bargaining power of customers in this industry is very high.
The two main drivers for customer’s preferences are quality and price, there is no service involved. Threat of substitutes: This category is very high in the RTE cereal industry. RTE cereals compete with every single breakfast buyer option that is out in the market. For instance, a person might choose to eat an egg sandwich or fruits or pancakes rather than cereals. Through high advertising costs, RTE cereal companies create brand awareness among consumers by presenting their products as the healthier breakfast option and therefore remain competitive. Competitive rivalry:
This industry had been heavily concentrated by the big three companies during the last 90 years; however highly fragmented industries; such as this one, can quickly turn around to be more competitive earning lower returns because the cost of competition is high. This proves to be disastrous during tough economic times. SWOT analysis between | |Branded RTE cereal |Private Label cereals | | | | | |Strengths |1) Access to capital. 1) Advanced technology. 2) Less | | |2) Name and brand recognition. |labor intensive production processes. | | |3) Quality products |3) Inexpensive costs (raw materials, packaging) due to | | | |the commodity ingredients used in making simple, standard| | | |private label products. |Weaknesses |1) Higher costs, especially advert. 2) Lack |1) Low or non existing brand recognition | | |of product technology during the manufacturing |2) Lower excess capital to invest into the company for | | |process. |future product and processes enhancements. | | |3) Lack of technology capabilities. | | | |4) Complex manufacturing processes. | |Opportunities |1) Opportunity to achieve efficiencies by |1) Increase customer’s awareness on their low price | | |reorganizing their operational structure. |products. | | |2) Invest capital into technology advancements |2) Merges between private labels to achieve synergies and| | | |therefore be able to provide even lower prices and sell | | | |higher volumes. |Threats |1) Raising competition from private labels. |1) To be purchased or acquired by any of the big three. | | |2) Increasing cost of labor and raw materials. |2) Changes in customer perception towards the quality of | | |3) Economic recessions or downturn. |their products. |