The whole Ready-to-Eat (RTE) breakfast cereal industry is a very profitable industry in general with the Big Three: Kellogg, General Mills, and Philip Morris dominating more than seventy percent market share. By using 5-Force Analysis, we can have a deeper insight of this Industry:
•Entry Barrier: High
The Big Three has spent large amount of money on advertising to establish brand recognition and to promote sales. By paying grocers “slotting allowance”, the Big Three gain shelf space advantage over private label brands. However with the prosperity of drug stores, convenience store, discounted retailer such as Wal-Mart that do not charge “slotting allowance”, private label brands gained equal opportunities of brand demonstration, which results to 3.6% growth up to 9.2% market share in three years. The capital required is very high to establish production line, to advertise and to pay wages. Another reason why the entry barrier is high is the technology. The R&D accounts for one percent of gross sales, higher than food industry. The Big Three has competitive advantage of new product development and existing product improvement.
The main substitute could be homemade breakfast.
•Buyer Power: Medium High
Buyers are supermarkets, drug stores, convenience stores and discounted retailers. Supermarkets charge “slotting allowance” from the Big Three for better shelf space. Because customers are very price sensitive and have low switching cost, for those retailers who do not charge “slotting allowance”, they prefer to sell those “value-oriented” brands, which may not include the Big Three. •Supplier Power: Low
Suppliers are raw ingredient suppliers, equipment. Those substitutes could be easily found so suppliers have low power.
•Rivalry: Medium Low
The Big Three having unwritten agreements to limit in-pack premium, coupled with the existence of “co-branded” cereals shows that the relationship between the Big Three is more of cooperation instead of fierce competition. However with the growing of private label brands, the competition for market share is getting bigger. Suggestions:
Statistically from 1991-1993, the Big Three has decreasing COGS and big increase of SGA, which did not lead to the growth of sales and operating income. That suggests the failure of advertising and other overhead. The case has already mentioned that promoting coupon to offset the high price is expensive and profitless and should be abandoned. It is very important for the Big Three to know what customers want and to advertise wisely. Considering the fact that the Big Three has technology advantages and use more expensive ingredients than private label brands, this could be a good point to advertise to differentiate their product from private label brands and to establish a better brand image. Also the Big Three is too diversified that it is very costly to produce some brands or products that do not have a big market share. Also those unpopular products within one brand lower the image of the whole brand. So they should stop producing those unpopular ones.