RTE Breakfast Cereal Industry in 1994

The “Big Three” cereal manufacturers have jointly monopolized the market and have reaped high profits from their monopoly pricing combined with the tacit co-ordination they share regarding price hikes. The “Big Three” have backed up their monopoly strategy with their strong relationships with each other and with regional and national grocers. This relationship allowed them to control or buy shelf space and ideal positioning of their product on the grocers shelves. Moreover, the major cereal manufacturers also owned national distribution system and flooded the market with a wide variety of cereals.

Another key factor is the coupon redemption process driving consumer demand. The industry spent more than one billion per year on coupon redemption and advertising, enticing customers into purchasing their products. This marketing practice prohibits any new independent players that don’t have deep financial pockets from entering the market. Taking into account the initial capital cost’s to build and maintain the factory, advertising costs, distributions requirements, grocer’s relationships for shelf space, product proliferation and minimum production requirements for efficiencies purposes, the barriers for entry for a new player are pretty high.

Success of Private labels is due to their better cost structure and price incentives:

With the emergence of mass-merchandisers like Walmart in the 1990’s, the smaller players and private labels manufacturers, found a new avenue for placement of their cereal brands appealing to the value-conscious customer who felt that the “Big Three” were exorbitantly expensive. The “Big Three” were also caught off-guard when demand for natural cereals surged and the smaller players capitalized on this opportunity. One of the branded players, Ralston, also began producing private label cereals probably in order to use excess capacity in production effectively. The private labels offered better margins to the retailers and every day low pricing for the customer who was tired of cutting coupons and switching brands based on promotions.

The value driven private labels had a slimmer cost structure than the “Big Three” with quality pegged a little lower than the branded ones. The economic cost structure was achieved through lower manufacturing costs as a result of a less labor-intensive process with fewer expensive additions. Some even reduced the packaging costs by packing the cereal in just plastic bags without the box. The distribution costs were also limited to 10% through tie-ups with wholesalers and third-party distributors.

“Big Three” should produce private label cereals to counter-act private label threat:

Considering the slow overall growth of the segment and the rapid erosion of market share to private labels, the “Big Three” should strongly consider the possibility of manufacturing private labels for sale in mass-merchandise outlets. Each of the Big Three companies of the RTE breakfast cereal industry have the financial resources to produce not only branded cereals but to also private label cereals. They already have a strong presence in the RTE breakfast cereal market. Entry into the private labels will help in catering to the value-conscious consumers that demand a level near that of a branded product, but not that the price of the branded product. The private labels could be named differently or sold to grocery chains and can be marketed under their trade name. This will also help the “Big Three” to send a strong signal to the small producers, which seem to be gaining in strength (For Eg: Malt-O-Meal with its plant expansion and growing presence) and attack their market territory. This will also prevent them from “trading up” to manufacture their own branded cereals.