Barriers to Entry - Rte Cereal

689 Words Oct 3rd, 2013 3 Pages
RTE Cereal Industry Barriers to Entry
Giovanni Massari

1) Economies of Scale: with regards to Economies of Scale, we have Product-Specific ones with regard to the fact that there is a minimum efficient scale of production in the industry, without which firms wouldn’t survive in the environment; requirements, in this case, are 75 million pounds of cereals per year to be efficient.
Other scale economies can be Multi-Product ES (“Economies of Scope”); indeed, different types of cereals can be produced in a very similar way, not requiring different production facilities, but leveraging the existing ones. The same can also be applied to packaging/bagging, which is the main source of Economies of Scale, because the Big Three use the same
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4) Product Differentiation: in order to communicate differentiation of their products to consumers, Big Three spent massively on advertising (advertising/sales ratio: 18.5%). In this regard, also brand extensions have to be considered, because in this way they’re reaching different markets (e.g., healthy-food lovers, with the introduction of fruit in cereals). In order to further differentiate from new entrants, the incumbents used to provide customers “In-Pack Premia” (only one at a time, in order not to be negatively affected one by the other).

5) Capital Requirements: in order to enter the industry, there were huge capital expenses to be sustained by firms, such as a minimum of $ 100 million for capital investments, and at least 125 employees to run a plant that could produce both packaging and cereals themselves. In this framework, advertising expenses may be added too, since they’re a great part of the expenditures a RTE Cereal firm has to face, and they also represent a great Barrier To Entry, being an amount close to 1/5 of the sales generated by the company.

6) Access To Distribution Channels: Big Three have ease of access to distribution channels, for instance through their “Shelf-Space Plans”. These were intended to give their products the most valued positions in supermarkets, offering also a simple resolution to shelf space struggle (space was allocated in proportion to historical sales