Ready to Eat Cereal

2026 Words9 Pages
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”.
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This left a segment open for new entrants to come with no competition from incumbents. Private labels also did not do product proliferation and were focused on limited popular brands at low costs. This helped them save costs in R&D of new products and also save costs by not experimenting new products. They did not compete with the Big 3 on all possible niches. Also, from the table below, we see that the total costs of the private label are 40% less than the Big 3 brands, which helped them to target the price sensitive customers. They are several strategies that the private labels applied which resulted in reduced cost structure. First of all, they did not use coupons, which had accounted for 23% of the total costs for Big 3 brands. The private label also offered higher margins to retailers (15%) in comparison to Big 3(12%) in order to get premium shelf space and signage. The private labels reduced packaging costs by supplying cereals in clear plastic bags. They also used less labor intensive manufacturing process and fewer expensive fruits and nuts. | Big 3 | Private Label Cost Structure | Comments/Assumptions | Raw Materials | 0.42 | 0.36 | Fewer expensive nuts so assuming costs less by15% | Packaging | 0.19 | 0.14 | 25% less (no boxes) | Labor and indirect mfg | 0.52 | 0.44 | 10-20% lower: less labor intensive and fewer expensive fruits and nuts. Let 's take avg 15% | Distribution | 0.14 | 0.16 | 10% margin on
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