The reason for the high profitability of the rte cereal business

GM wants to send a signal to the market and hopes that the competitors follow suit. This signals the beginning of price competition in a market that has refrained from profit erosion via price undercutting. Reduce emphasis on trade promotions: The industry has historically demonstrated a pattern in which Kellogg raises prices and the rest of the industry follows suit.

Also, reduction in trade promotions helped offset some of the lot profit because of reduced prices. Market forces in efficient markets force this behavior.

A viable product substitute has emerged in the market. Was General Mills move the right one? Discount retailers prefer carrying private label because their margins are higher on private label compared to name brands.

Also, coupons based trade promotions reduce switching cost and are destructive to brand loyalty building activities. This would lead to increased profits for each player as shown below approximate.

This trend will favor private label brands in the future. This makes it difficult for new entrants to break into the market, as it is impossible for them to get prime shelf space.

The intent is to foster brand loyalty by differentiating similar cereals supplied by competitors. Analysis to quantify the benefit is provided. Highly price sensitive customers that would bother to compare the price reduction benefit vs.

Incumbents have relationships with the retailers and get the most desirable shelf space to maximize chances of high sales. Emergence of Wal Mart and other discount retailers: What are the risks associated with this action?

It is unclear if the price reduction percentage was sufficient to stop market share loss to the private labels. Based on the historical track record of this industry and on the low effort, high benefit nature of option 1, I expect the competitors to follow suit.

This is certainly a barrier to entry but not a very strong one as many large companies would have access to this capital private or from lending institutions and would be willing to make the investment, given the high profitability potential. The price cut might help gain back some customers who were on the fence, however, this increase will turn out to be relatively minor.

GM and other competitors in the market will be forced to go down the path GM chose sooner or later. Name Brand Private Label Comments: This would typically not cover the costs associated with initial capital investment required for the manufacturing facilities.

General Mills GM hopes to gain back some of the market share that has been lost to the private labels by cutting price. The customers were signaling that the high prices in effect thus far would not be sustainable in the future.

The barriers to entry helped maintain the oligopoly. Competitors have 2 options. This has reduced switching cost for customers.

Switching cost and trade promotions: Competitors have made heavy use of coupons based trade promotions. 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.

The price cut, however, might help gain market share from the other brand name cereal makers. However, a key factor contributing to high profitability is the implicit collusion amongst members of the oligopoly. Private label manufacturers are producing a much higher quality product compared to before.

Reduce price gap with private label: Discount retailers have done really well and expanded into the groceries area. This has eroded brand loyalty and has promoted price sensitive shopping behavior. The name brands have been losing market share to the private labels.

Why has RTE cereal been such a profitable business? Essay

A cost structure comparison per pound between the name brand cereals and the private label providers is presented in the following table. This translates to increase in market share of 1.

GM had to cut prices to stop market share loss and had to become more efficient in the current environment. Option 1 — Follow Suit:The Ready-to-Eat Breakfast Cereal Industry The RTE breakfast cereal industry has long been a highly profitable and very stable oligopoly%(7).

Profitability of the RTE Cereal Industry: The profit margins and return on assets for the firms in the cereal industry were much higher than normal. There are several reasons for such high profits.

First, it seems that the firms in the industry did not compete on price; rather they competed by following a strategy of product differentiation through 5/5(2).

Harvard Business School Rev. February 14, The Ready-to-Eat Breakfast Cereal Industry in (A) All is not well in the land of Tony the Tiger.1 In earlythe ready-to-eat (RTE) breakfast cereal industry had reached a.

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 - Why has RTE cereal been such a profitable business?

introduction. Sep 11,  · Cereal, that bedrock of the American breakfast, has lost some of its snap, crackle and pop. For the last decade, the cereal business has been declining, as consumers reach for granola bars, yogurt.

Rte Cereal Industry The Ready-to-Eat (RTE) Breakfast Cereal Industry in The Big Three (Kellogg, General Mills, and Phillip Morris) had been enjoying the stable Ready-to-Eat breakfast cereal industry with above average profitability since its start in until the recent surge of the private label sales and slowing demand.

The reason for the high profitability of the rte cereal business
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