Ready to Eat Cereal
Ready To Eat Cereal
1) The Big Three firms, Kellogg, General Mills, and Philip Morris, formed practically an oligopoly in the RTE cereal market. Their price and cost levels moved in lockstep, following signals sent mostly by the biggest player, Kellogg, while their tactics could be used against outside competition, as suggested in the scenario below. Although RTE cereal is a basic food item and production technology stabilized for about half century, the industry had effective barriers to entry. The competition between incumbents was friendly while most of the inputs came from a perfectly competitive market, agriculture. Major customers, the food stores, were coopted in perpetuating barriers to entry in the form of shelf space “slotting”. The competition included traditional breakfast items, and, lately, toaster pastries and granola bars. The RTE cereal has been a profitable business mainly because of friendly competition between the Big Three, barriers to entry, and defense against outside competition. Big Three’s cooperation allowed them to keep margins high by avoiding trade dealing, lower in-pack premium, and avoid vitamin fortification. Barriers to entry related to distribution and shelf space could increase a newcomer’s cost structure by about 10% each. Also, the Big Three practically covered all niches of the market with a proliferation of brands. An entrant producing RTE cereals like the Big Three could have similar cost structure and projected EBIT, around 15%-20%. This would be erased by expenses due to barriers to entry which amount to 20%, making the entrants unprofitable. The Big Three were able to counter even those entrants who could produce at lower cost or avoid barriers, A temporary price cut could situate the retail price of a Big Three’s product below production cost on an entrant. The negative effect on incumbents would be minimal given they had tens of brands with margins 5% to 15% to even out losses.
A number of factors contributed to the
1) The Big Three firms, Kellogg, General Mills, and Philip Morris, formed practically an oligopoly in the RTE cereal market. Their price and cost levels moved in lockstep, following signals sent mostly by the biggest player, Kellogg, while their tactics could be used against outside competition, as suggested in the scenario below. Although RTE cereal is a basic food item and production technology stabilized for about half century, the industry had effective barriers to entry. The competition between incumbents was friendly while most of the inputs came from a perfectly competitive market, agriculture. Major customers, the food stores, were coopted in perpetuating barriers to entry in the form of shelf space “slotting”. The competition included traditional breakfast items, and, lately, toaster pastries and granola bars. The RTE cereal has been a profitable business mainly because of friendly competition between the Big Three, barriers to entry, and defense against outside competition. Big Three’s cooperation allowed them to keep margins high by avoiding trade dealing, lower in-pack premium, and avoid vitamin fortification. Barriers to entry related to distribution and shelf space could increase a newcomer’s cost structure by about 10% each. Also, the Big Three practically covered all niches of the market with a proliferation of brands. An entrant producing RTE cereals like the Big Three could have similar cost structure and projected EBIT, around 15%-20%. This would be erased by expenses due to barriers to entry which amount to 20%, making the entrants unprofitable. The Big Three were able to counter even those entrants who could produce at lower cost or avoid barriers, A temporary price cut could situate the retail price of a Big Three’s product below production cost on an entrant. The negative effect on incumbents would be minimal given they had tens of brands with margins 5% to 15% to even out losses.
A number of factors contributed to the