Ready-To-Eat Breakfast Cereal Industry (hbs 795191)

Ready-to-Eat Breakfast Cereal Industry (HBS 795191)

Sjoerd Jansen – 2017-81400 – Corporate Strategy - 251.424.002 – 09/19/2017

1) Why has the RTE cereal been such a profitable business? What changes have led to the industry crisis of 1994?

In my opinion, the most apparent reason that the RTE Cereal industry was so profitable for Kellog’s, General Mills and Phillip Morris, is having the first-mover advantage in combination with the high entry barriers. Especially the brothers Kellogs, who invented the corn flake, had a first mover advantage because they were the first to build brand awareness. With regards to the high entry barriers, the article states that these companies were  “encouraging supermarkets and other retailers to adopt a shelf space plan” which made sure that these companies had the most prominent shelf space in the supermarkets. This would obviously make it harder for new entrants to gain market share. Another entry barrier was the extremely high investments that needed to be done to be able to make profit in this industry. The articles states that an RTE cereal plant was estimated to require a capacity of 75 millon pounds per year to achieve minimum efficient scale”. This seems like an extremely high production capacity for new entrant to ensure operational efficiency. So, with regards to the entry barriers, the difficulty to get shelf space in stores and the high production that was needed to ensure efficiency made them high.

What also boasted the profitability of the business, were the vitamin fortification in the 1940’s, the presweetening which gained popularity in the 1950’s and the increase of consumers interest in granola and natural cereals in the 1970’s and 1980’s. I believe these trends brought along big opportunities for The Big Three, even though these trends were not initiated by The Big Three. In my opinion, this was mere luck for the RTE Cereal industry.

When looked at the crisis in 1994, it can be concluded that there are around three instigators. First, the article mentions the “price-promotion spiral” which led to an increase of 15.6% of the cereal products (which is extremely high when you compare it with the 5.9% increase in the overall food prices). This in combination with new entrants offering lower priced corn flakes ensues a decreasing market share for the incumbent companies. Second, the incumbent companies offered loads of new types of cornflakes, which made the market really fragmented. As the article states, “high rates of new product introduction lead to high rates of product failure”. Thirdly (and finally), there was a “Private Label Threat”. In the beginning of the 1990’s, their sales grew with 50% to $500 million. They did not differentiate and advertised their products as much as the Big Three companies did, which enabled them to produce low priced cornflakes. The price was so much lower, that consumers started to pick it up.

2) Imagine that your group wants to enter the RTE Cereal industry in 1994. What are the investment items you should consider? How much should these items cost in total?

I would try to develop high-quality cereals for a low price, without investing much in further R&D and in advertisements. The most important is to overcome two problems: ensuring the cereals to stay crispy in the packaging as also in the milk. I would choose a wide segment, and make good quality, however basic cereals for a low price. Since the market became really fractured, I think the consumers will like a high-quality no-nonsense brand right now, especially with the high growth of consumer interest in natural and biological products and ingredients. However, the product needs a first buyer to be able to lean on mouth-to-mouth advertisement, so I would invest at least $1.000.000 in buying a proper shelf-space. With regards to other investments, the industry is too much unknown (even after this article) to make sensible calculations so I’d rather state that than type random numbers here to vain intelligence.