Oligopoly Paper: Breakfast Cereal Manufacturing - Top 4 Firms: Kellogg, General Mills, Pepsico (quaker), and Post Foods

Oligopoly Paper: Breakfast Cereal Manufacturing: 31123

Top 4 Firms: Kellogg, General Mills, PepsiCo (Quaker), and Post Foods

Questions:

1. Write a report on the background and history of the industry you have selected.

         The breakfast cereal industry was created more than a hundred years ago by eccentric health reformers. The odd shaped bits of flavored grain has become a staple part of the American diet, eaten by more than 80 millions Americans everyday. There are four major companies that dominate in this industry including General Mills, Kellogg, PepsiCo and Post Foods. US Cereal Production industry takes raw materials like corn, wheat, flour, and sugar from different sources and turns these ingredients into ready-to-eat cereals, hot cereals, and cereal bars.

        The breakfast cereal industry specifically began in the last years of the nineteenth century during the vegetarian movement. James Caleb Jackson invented Granula, the first breakfast cereal, in the United States in 1863. Jackson was the operatory of Jackson Sanatorium in Warsaw, New York and happened to be a strict vegetarian. However, Granula never became popular because it was too inconvenient, as the cereal needed to be soaked overnight in order to be tender enough to eat. John Harvey Kellogg an operator of Battle Creek Sanitarium had a large influence on health and fitness in his time. His sanitarium in Battle Creek, Michigan, was a recovery destination for Americans for many decades. Kellogg’s beliefs followed the idea of exercise and vegetarianism, which let him to create a cereal made up of ground-up wheat, oats, and cornmeal for his patients suffering from bowel problems in 1877 (Dougherty). Kellogg originally called his product Granula, but changed it to Granola after a lawsuit. However, Kellogg’s most famous contribution to the industry was an accident. After leaving a batch of wheat soaking overnight and then rolling it out, Kellogg created wheat flakes. John Kellogg’s brother, Will Keith, later invented the corn flakes from a similar method. In 1906, Will went on to buy his brothers share of their business, and founded the Kellogg Company. Due to their innovative marking and advertising, Kellogg’s sold one million cases within three years.

        General Mills entered the industry in 1924 with Wheaties, targeting a younger generations by adding sugar (Dougherty). Soon after in the 1930’s, the first puffed cereal, Kix, was introduced into the market. The industry started to target children by adding sugar to their once-healthy breakfast food. Mascots became increasingly popular first with the Rice Krispies elves, and later on Tony the Tiger and the Trix Rabbit appeared.

        Most breakfast cereals are marketed for all ages, some promote health benefits, while other promote sugar and fun for children. The industry is highly profitable with 40-45% gross profit margins, 90% penetration in some other markers and steady growth throughout its history. There is no anticipation of this market disappearing anytime soon, they have shaped a huge profitable industry that created a staple food item in almost everyone’s diet.

1. Determine if your industry is old or new.

        The breakfast cereal industry was created a little over one hundred years ago towards the end of the nineteenth century, therefore making it an old industry. However, due to recent advancements and variation the industry has definitely developed significantly over recent years. An old market has been revived through convenience and good advertising. The top four firms directed their targeting towards busy professionals who neither have time nor desire to prepare a hot breakfast, and children who want a warm alternative to their surgery cereals. An industry that developed in the late nineteenth century has continued to be relevant through sales all over the world (Sugarman, 1985).

1. Have there been significant technological changes in your industry?              

        “Ready-to-eat” cereal happens to be a prime contender for the title of most manipulated food product. It’s also the likeliest to make outlandish health claims (Kummer). Cereal was originally created and advertised as a health food. Its creation and rise have been products of ever-devout American beliefs in the power of technology and marketing, and of food to improve health. When it comes to significant technological advances, there have not been many in recent years due to the adaptability of the current manufacturing process. According Clextral, “To meet market demand and manufacture new products, the food production lines are easily changed and adapted using simple add-ons, making it possible to manufacture bicolor or filled cereals, as well as flakes.” Despite the adaptability of this industry’s technology, the technological environment of this industry poses a barrier to entry. The major players have spent years developing new products through research and development. This wide array of products makes it difficult to innovate a new brand of cereal. Technology such as keeping cereal crispy in milk also poses a barrier to new entrants (Roy, 1997).

1. Describe your industry and its product(s).  US Census publishes extensive reports on various industries, which include this information.

        According to the US Census the breakfast cereal manufacturing industry, “comprises establishments primarily engaged in manufacturing breakfast cereal foods.”  Operators in this industry acquire raw materials such as corn, wheat, flour, sugar, malt extract and rice that are processed into ready-to-eat and hot cereals. They also purchase raw materials, such as plastic and paperboard containers, from other manufacturers for packaging purposes. The finished breakfast cereals are subsequently sold to grocery wholesalers, retailers and food service providers. Energy, cereal, granola and protein bars are not included in this industry (IBISWorld). The main products that are produced within the industry include ready-to-eat corn breakfast foods, ready-to-eat wheat breakfast foods, other ready-to-eat grain breakfast foods, and hot cereals. The products within each firm are very similar, however throughout each firm there is a lot of variation. For example, each firm has a hot cereal product, as well as a surgery cereal option with a mascot marketed towards children, along with a healthy option for adults. The industry is very diverse and has something for everyone.

1. Describe your industry’s current CR4, CR8 and interpret its current HHI index in the context of collective market power firms have.

        Based on the chart above demonstrating the breakfast cereal industry’s concentration ration for their top 4 firms, and their top 8 firms and the Herfindahl-Hirschman Index for the 50 largest companies, it is clear that this industry is an oligopoly.  With only 37 firms in this industry and the top four dominating close to 80% of the total value, it is clear that market power lies within these top four companies, which include General Mills, Kellogg’s, Post Foods and Quaker, which is owned by PepsiCo. Consider the Herfindahl-Hirschman Index is greater than 1800, it is clear that this industry is highly concentrated. The top 8 firms make up almost all the industry’s total value.