Ready To Eat Breakfast Cereal Industry

Restrained competition amongst themselves through “unwritten agreements” to limit the in-pack premiums (free toys, gifts, e tc) -Refrain from trade dealing-offering discounts to retailers for special treatment or special promotions -Refrained from widespread fortification of their brands because it was believed to not be in the long run interests of the industry (vitamin fortification)

FTC also argued the big three took specific actions to make new entry ventures unprofitable
-prevented entry into the RTE cereal industry by encouraging super markets and other retailers to adopt a shelf space plan that ensured the big threes products received the most valued center aisle position

Caught off guard with the introduction of natural cereal brands

Industry environment in the 1990’s

Processes utilized in creation of many children’s cereals took substantial engineering expertise and production experience to master.

-Standard plant was estimated to req. a capacity of 75 million pounds per year to achieve minimum efficient scale -employed 125 people
-req. capital in excess of 100 million
-a singly plant could produce many brands of cereal because the main source
of scale economies was in bagging -Spent about 1% of gross sales on R&D (slightly higher than the food industry average)

2 PROBLEMS that have persisted over the 100 years of making cereal

1. It was difficult to keep cereal crispy in milk, and in cereals like Raisin Bran, the flakes tended to become soggy in the box because they absorbed the moisture of the fruit
2. NOT easy to combine things with varying water activity characteristics
a. A typical solution to this problem was to coat the fruit with a thin layer of fat to trap the moisture thus preventing the flakes from getting soggy in the box

Even tried to alter the shape of the cereal to prevent mild absorption and preserved the crispiness


Prime shelf space and its importance!
-Slotting Allowance: securing shelf space for a new brand required pmt to grocers -larger cereal firms had more flexibility than new entrants in shuffling their allocation of space among brands(sometimes replacing a failed brand with a new introduction)

Introduction of supercenters-Large 125,000 sq. foot stores that combined a supermarket, a general discount retailer, and specialty retailers under one roof

They really increased non-supermarket sales of food from 5% in 1993 to 20% by 2000

Supercenters helped shelf space! Significantly less entrenches than in supermarkets and thus allowing start-up value oriented brands to obtain a market presence AND…..DID NOT require slotting allowances

INTERESTING FACT- Big three accounted for 75.6% of sales in food stores, they only had a 41.3% mkt share in mass merchandisers

Advertising, Promotions and Pricing
Advertising/ sales ratio fell from 1960s. Especially intense though around a new product introduction

RTE cereal industry historically had rounds of price increases usually initiated by Kellogg and then followed by other manufacturers of branded cereals

Known as the process of “price up and spend back”

In addition to being amongst most advertising intensive industry, the RTE cereal industry was the top issuer of coupons -Coupon use grew a lot, by 1994 the average value of redeemed coupons had climbed to 87 cents

In addition to coupons, other forms of trade promotions were become prevalent such as:

-per case discounts to retailers and cash payments for special in store promotions and cooperative advertising, -Buy One Get One promotions-one of the most costly
-Might gain 2-3% market share with aggressive price promotion for value sensitive customers -Neither coupons nor forms of trade promotions were believed to stimulate the total cereal demand dramatically -mostly led to stock piling and brand switching by customers

-price promotion spiral drove RTE cereal prices up 15.6%! From 1990-1993 -development of new brand took 2-4 years on average and expenditure of 5-10 MM -Brand extensions perceived to be more likely to succeed than new brands and thought to offer economies of scale in advertising and were technologically simpler to develop and produce because the basic process was already in use

-Rapid innovation and introduction of new cereal brands led to increased product failure

Co-branded cereal in 1994 was very popular
-Several companies also attempted to extend the reach of RTE cereal into snack food

Kellogg was the clear leader with 35.2% mkt share in 1993

-Had great diverse assortment of products (toaster pastries with pop tarts, frozens waffles with eggos, and granola bars