The Ready-To-Eat Breakfast Cereal Industry In 1994

The Ready-to-Eat Breakfast Cereal Industry in 1994

Why have private labels been able to enter this industry successfully? How do the cost structures of private label and branded cereal manufacturers differ?

The private labels have been able to enter the ready-to-eat cereal industry successfully for the following reasons:

High prices set by major manufacturers (incumbents)

Retailers' willingness to promote better because of better margins

Coupon promotions by major manufacturers eroding brand loyalty

Failed brand extensions by major manufacturers

Increased technological competence raising product quality

Proliferation of mass merchandisers that did not need slotting fees

High prices set by branded cereal manufacturers (incumbents)

The incumbents engaged in increasing the prices and then spending more on advertisements and promotions to steal consumers from their competitors, eventually leading to a zero-sum game. The consumers resented the tactics of the firms to charge high price for such a basic food item and started looking for alternatives. Private labels positioned themselves as alternative to expensive cereals.

Retailers' willingness to promote better because of better margins

Because of their low-cost structure, private labels could afford to give 3% margin more than branded cereals to retailers. Higher margins led to heavy promotions of private labels by retailer.

Coupon promotions by major manufacturers eroding brand loyalty

Branded manufacturers heavily promoted their products through frequent sale promotions and coupons, conditioning the consumers to pay less. Such tactics eroded brand loyalty as consumers were given incentives to switch brands eroding brand loyalty. When there were no coupons, consumers looked for cheaper alternatives, which were satisfied by private labels.

Failed brand extensions by brand