The Rte Cereal Industry in 1994

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The RTE Cereal Industry in 1994
Case Analysis
Competitive Strategy
Presented by:
Raghav Keshav
Why has RTE cereal been such a profitable business?
The RTE cereal market is a classic oligopoly with the four dominant players controlling
85% of the market. The return on sales earned by the incumbents in this market (18%) is significantly higher compared to rest of the food industry (5%). Efficient markets typically entice new entrants when the returns are attractive. These returns are gradually eroded with increased price competition as a result of the entry. The RTE market has defied this market theory.
There are two main reasons for this. One, any market that yields a high rate of return but has no new entrants must have
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Reduce price gap with private label: The name brands have been losing market share to the private labels. The private labels have been competing on price and have been successful in gaining the price sensitive customers’ business. General Mills (GM) hopes to gain back some of the market share that has been lost to the private labels by cutting price. Increase profits!: The net effect of reducing price and minimizing trade promotions is an increase in profit, even before the desired effect of increased market share via reduced price is achieved. GM wants to send a signal to the market and hopes that the competitors follow suit. Analysis to quantify the benefit is provided. The following analysis makes a simplifying assumption that the $175 million saved by way of cuts in trade promotion are not spent in other forms of advertising. Also assumed is that the relative market share of the members in the oligopoly is unchanged.
Lost profit because of reduced cost (11% price drop for 40% of sales) is shown below. (40% of Revenues * 0.11)/Pounds sold
= (0.4*2473.70*0.11)/684.8
=$0.16/lb
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