The barriers to entry helped maintain the oligopoly. This has eroded brand loyalty and has promoted price sensitive shopping behavior. The intent is to foster brand loyalty by differentiating similar cereals supplied by competitors.
Also, the given market share of any one brand is low in a market which has such a large number of brands. Competitors in the RTE cereal market spend heavily on advertising and trade promotions and have justified the price increases based on the additional advertising expense companies have incurred.
The industry has historically Why has rte cereal been such a profitable business a pattern in which Kellogg raises prices and the rest of the industry follows suit.
It is unclear if the price reduction percentage was sufficient to stop market share loss to the private labels. The name brands have been losing market share to the private labels. Competitors will decide between the two options based on their assessment of how price sensitive the market is.
Also, reduction in trade promotions helped offset some of the lot profit because of reduced prices. The coupon based promotion model was incredible expensive and had to be limited in the future.
Description and analysis of each option is provided below. This approach deters new entrants because no market niches are left out for new providers to exploit. Better sooner than later. This signals the beginning of price competition in a market that has refrained from profit erosion via price undercutting.
Switching cost and trade promotions: Improved product quality amongst private label: Highly price sensitive customers that would bother to compare the price reduction benefit vs.
Analysis to quantify the benefit is provided. Private label manufacturers are producing a much higher quality product compared to before. The customers were signaling that the high prices in effect thus far would not be sustainable in the future.
This would typically not cover the costs associated with initial capital investment required for the manufacturing facilities. GM and other competitors in the market will be forced to go down the path GM chose sooner or later.
Emergence of Wal Mart and other discount retailers: This makes it difficult for new entrants to break into the market, as it is impossible for them to get prime shelf space.
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.
This would lead to increased profits for each player as shown below approximate. Reduce emphasis on trade promotions: This has opened up a new retail channel without the traditional shelf space allocations constraints.
Trade promotions are expensive as they involve administrative expense, coupon printing expense, etc. The price cut might help gain back some customers who were on the fence, however, this increase will turn out to be relatively minor. Competitors have 2 options.
Incumbents are spending million annually on advertising and promotions. The emergence of an increasingly value sensitive sentiment amongst customers coupled with the evolution of an alternative retail channel that knocks down some of the traditional barriers to entry and carries a low price product alternative has led to the crisis.
The industry trend seems to be value consciousness. Also, coupons based trade promotions reduce switching cost and are destructive to brand loyalty building activities. A cost structure comparison per pound between the name brand cereals and the private label providers is presented in the following table.
What are the risks associated with this action? Shelf space is typically allocated based on historical sales volume. 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 translates to increase in market share of 1.The Ready-to-Eat Breakfast Cereal Industry The RTE breakfast cereal industry has long been a highly profitable and very stable oligopoly. Inindustry leaders sense that the industry is at a crucial turning point, as private label brands have begun to make significant inroads against the branded cereals and competition among the branded manufacturers has 57%(7).
The RTE cereal industry has been so profitable because they were able to restrain competition among themselves by achieving adequate unwritten agreements. They limited in-pack premiums such as free toys or gifts included in the package to one brand at the time and to refrain from trade dealing or special promotions.
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%)%(29).
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. The return on sales earned by the incumbents in this market (18%) is significantly higher compared to rest of the food.
Study 5 The Ready-to-Eat Breakfast Cereal Industry in flashcards from april g. on StudyBlue. Why has RTE cereal been such a profitable business? High entry barriers.
econ. of scale (min. eff. = 75m lbs/yr/plant) recover lost business; reduce internal cost of coupons; take share back from private labels (not big 3 competitors). The RTE cereal market has significant entry barriers.
in the RTE cereal. the given market share of any one brand is low in a market which has such a large number of brands. The return on sales earned by the incumbents in this market (18%) is significantly higher compared to rest of the food industry (5%).5/5(1).Download