Rte cereal

RTE Cereal Industry Table of “Barriers to Entry”

Sept 18, 2017 Kyu Ho Lee

BADM 449

Entry Barrier

Level

Evidence

Page

Economies of Scale

High

-“Because of economies resulting from feeding a single packaging line from multiple production lines, an RTE cereal plant was estimated to require a capacity of 75 million pounds per year to achieve minimum efficient scale”

-“major firms continually introduced new products, either through creation of a new brand or by the extension of an existing one…Brand extensions were generally considered more likely to succeed than new brands…economies of scale in advertising, and were technologically simpler to develop…”

-Pg. 3

-Pg. 5-6

Experience

Curve

Advantages

High

-“Since the production process was relatively similar for all cereals and the main source of scale economies was in bagging, a single plant could produce many brands of cereal”

-Pg. 3

Intended

Excess

Capacity

Moderate

-“General Mills announced it planned to cut $175 million out of its trade promotions and couponing budget, and simultaneously to reduce prices on its biggest brands…by an average of 11 percent.”

-Pg. 11

Reputation

High

-“Big Three had restrained competition among themselves by achieving effective unwritten agreements to limit in-pack premiums”

-Pg. 2

Product Differentiation

High

-“most advertising intensive of all industries, with an advertising/sales ratio as high as %18.5…”

-Pg. 5

Capital Requirements

High

-“a plant of this capacity that combined production and packaging together in one plant employed about 12t employees and required a capital investment in excess of $100 million”

-Pg. 3

High Switching Costs of Buyers

Low

-“neither coupons nor other forms of trade promotions were believed to stimulate total cereal demand very dramatically. Rather, these competitive tactics led primarily to stockpiling and brand-switching by the most fickle consumers”

-Pg. 5

Access

To

Distribution Channels

High

-“As the number of RTE cereal brands expanded, prime shelf space became even more important. Securing shelf space for a new brand required payment to grocers…While large cereal firms were not exempt from this policy, they had more flexibility than new entrants in shuffling their allocation of space among brands...”

-Pg. 4

Favorable Access to Raw Materials and to Markets

Moderate

-“FTC argued that the leading RTE cereal manufacturers had jointly monopolized the RTE cereal market…”

-“incumbent firms may have filled all profitable niches in the cereal market…”

-Pg. 2

-Pg. 3

Proprietary Technology

High

-“some processes-particularly the extrusion processes used in many children’s cereals-were quite complex and required substantial engineering expertise and production experience to master”

-“RTE cereal industry as a whole spent about one percent of gross sales on R&D”

-“breakfast cereal R&D did generate proprietary new product developments”

-Pg. 3

-Pg. 3

-Pg. 4

Exit Barriers

High

-“RTE breakfast cereals accounted for over 80% of Kellogg’s…sales”

-“cereals’ declining profitability…also limited the amount of cash that General Mills…to help out with other enterprises such as its restaurants”

-no entrants would mean no buyers for the assets

-Pg. 6

-Pg. 7

-Pg. 3