Analisis Of The Cereal Industry

Structure

Economic Analysis

The cereal industry is an oligopoly with four large companies and a few very small niche companies. The small niche companies hold very little market shares, approximately 13.6% in 1995, with the big four holding the other 86.4%. The big four manufacturers are Kellogg, General Mills, Post, and Quaker Oats. Price competition is almost nonexistent between these companies and no company has any clear dominance over any of the others. Due to the oligopolistic nature of the industry they earn large profit margins, a net profit average of 6.7% in 1993.T Great barriers to entry and the inelastic nature of cereal allow this oligopoly to exist and numerous government attempts to end it have failed. With the exception of Kellogg, the other big three are diversified with other food products and are first beginning to divest some of them in the past ten years. This diversity allows the companies in the industry to have "deeper pockets" and gives them to ability to use aggressive strategies in order gain or maintain market shares. However, Kellogg has also proven their strength which is held by remaining focused. Since the cereal industry is an $8 billion industry, every tactic that can gain even a 1% increase in market share is a substantial amount of money for the company that gains it.

Rivalry

As discussed previously, the cereal is a highly consolidated market. In 1970, four companies dominated an extraordinary 90% of the ready to eat cereal market. While the dominance of the big four has dropped some in recent years, the market is still highly consolidated. While there are only a few major players, these companies have individual brands which compete for very small shares of the market. Kellogg's Frosted Flakes leads all individual cereals with a 4.2% market share. This is followed by General Mills Cherrios at 3.7%, Kellogg's Corn Flakes 2.9%, and Kellogg' s Raison Bran at 2.8%. There is high competition backed be enormous advertising budgets that make rivalry very intense.

Buyer Power

The bargaining power of the buyers can have a significant impact on any industry if the consumers can determine prices or quality. Consumers do not have a profound impact on the cereal industry for a variety of reasons. First of all, there are only a few major players in the industry. Due to this fact, a company is not dependant on what a few customers want to see changed. Similarly, consumers do not purchase large quantities of cereal at one time. Cereal shopping is generally done weekly with purchases normally including only a few boxes. Buyers can switch companies to purchase from, however, the companies are still in control due to the small number of companies to select from. A potential threat to the cereal industry is the power of the grocery stores. Cereal manufacturers need to occupy shelf space in order to sell their product. The grocery stores ultimately have the ability to decide who gets shelf space. However, the cereal industry is an eight billio n dollar business. In order for the grocery stores to make money, they need to shelve breakfast products. With so few companies to choose from, their power is limited.

Supplier Power

Another potential threat to the cereal industry is the power of suppliers. Suppliers find that they are able to find the most power in a variety of scenarios. First, suppliers find power when there are few substitutes to their product. For most cereals, the main ingredients include sugar, food grains, flour, and other dehydrated food products. All of these ingredients are present in a variety of foods and are unable to control buyers of their products. A second form of power derives from suppliers ability to get along without the buyer. All of these products are bought for a variety of reasons, but due to the large size of the cereal industry it is a lucrative buyer for these products. Another lack of supplier power derives from the potential of suppliers to integrate. In this example, a sugar or grain supplier may attempt to move into the cereal industry. However, the trend developed in this paper is that this is very difficult to due. On the same note, the suppliers do have some power as it is unlikely that the cereal companies are going to enter the extremely large grain and sugar industries. Another potential power comes from the sugar industry as the United States imports the product. Other inputs into the sale of cereal come from advertising and packaging. Packaging is an industry in which the companies are able to change between suppliers. Conversely, the advertising agencies have a solid grip on the industry. Advertising is the largest source of marketing for the cereal companies. This allows them to have better control and set pricing for the ads.

Substitutes

As the prices of cereal continued to rise throughout the 1970's and 1980's many consumers began to look for substitutes. Products such as Pop Tarts and breakfast bars began to enter the market and consumers now had more to choose from. Another deciding factor in the creation substitutes came from consumers looking for a healthier diet and more rounded breakfast. Hot cereals entered the market.

Potential Competitors

The lack of potential competitors is what gives the present cereal companies so much power. With the lack of supplier power it is easy for an entrepreneurial company to innovate and create a brand of cereal. However, there are a variety of barriers to entry in the industry which make it near impossible to enter this potentially profitable market. The billion dollar cereal companies can take advantage of absolute cost advantages and economies of scale. A major portion of this stems from the advertising section of the industry. In 1993 more than 1.3 million advertisements for cereal aired on American television at a cost of 762 million dollars per day. This advertising budget was second only to the auto manufacturers. Companies such as Post are able to draw from the seven billion dollar Phillip Morris parent company. While a new company can probably develop a new cereal, it is very difficult to compete with these large advertising budgets. Another major barrier to entry comes from brand recognition. Consumers have grown up with the names of Kellogg, Post, and General Mills. The different cereals under these companies also pose significant name recognition. Cartoon characters such as Tony The Tiger, the Trix rabbit, Lucky (of Lucky Charms), Count Chocula, Snap Crackle and Pop, and Toucan Sam name just a few. Children are quick to recognize and relate to these characters. Potential competitors find it nearly impossible to compete with such characters that have ingrained their presence in the minds of consumers.

Technological Environment

The technological environment also poses a barrier to entry. The major

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