Case study: branded labels vs. private
labels in the RTE breakfast cereal
industry
Rowena Baah
Alin Vasile Horj
Elena Shilova
Harvard Summer School 2011
Group #2
Breakfast Cereals Manufacturing Video
https://www.youtube.com/watch?v=-DtpYcxnS4M&feature=related
Harvard Summer School 2011
Group #2
Introduction
1894 Kellogg Company, invention of wheat cereal flakes
1904 Quaker Oats Company, puffed rice and puffed wheat cereals
1928 General Mills, diversified consumers foods company
1994 Philip Morris acquired two small lines of RTE cereals: Nabisco and General Foods
Source: businessinsider.com
Date: 22-03-2011
3
Before 1993
Facts:

1950 to 1993, compound average annual volume growth rate
of 3%

Factors: WWII, interest in granola and natural cereals in the
1970s and 80s.
By 1993
-Kellogg, Quaker, and Philip Morris cereal lines: 59% of the RTE
sales by volume
-the U.S. market consumed 2.82 billion pounds of cereals ($8bn)

Date: 22-03-2011
4
RTE breakfast cereal industry
Date: 22-03-2011
5
The Big Three: Kellogg, General Mills, and Philip Morris
Industry Environment in the 1990s
Tools for increasing markets share temporarily at the expense of its
competitors:
Technology:
 similar production process for all cereals, many brands of cereals
(additional expertise)
 scale economies.
 R&D to generate proprietary new product developments (1% of gross
sales)
Distribution
 national distribution system
 supermarkets to allocate shelf space in proportion to historical sales
volume
 Efficient Customer Response Initiative (ECR)
Date: 22-03-2011
6
The Big Three: Kellogg, General Mills, and Philip Morris
Industry Environment in the 1990s (I)
Advertising, Promotions, and Pricing
 Among the most advertising intensive of all industries
(advertising/sales ratio of 18.5% in 1960s and 10,2% by 1993).
 «price up and spend back»
 Coupons, buy one get one free
New product introductions:
 new brands or extension of the existing ones
 co-branded cereals
 snack-oriented cereals
Date: 22-03-2011
7
The Big Three: Kellogg, General Mills, and Philip Morris
Industry Environment in the 1990s (II)
Competition



Kellogg 36,3%
General Mills 24,3%
Philip Morris 15,0%
Date: 22-03-2011
8
The Five Forces Framework
1. Threats of Entry (1-5)
2. Bargaining power of buyers (1-5)
3. Bargaining power of suppliers (1-5)
4. Substitutes (1-5)
5. Rivalry (1-5)
Date: 22-03-2011
9
The Five Forces Framework (I)
1. Threats of Entry (1=weak, 5=strong)
Weightening 1: fragmentation from product proliferation
contributed to the difficulty of new entry
2. Bargaining power of buyers (1-5)
Weightening 1:no power
3. Bargaining power of suppliers (1-5)
Weightening 1: no power
4. Substitutes (1-5)
Weightening 1: less healthy and inconvenient
5. Rivalry (1-5)
Weightening 2: the Big Three toward brand-building activities
Date: 22-03-2011
10
Cereal industry changes
Trends at the turn of 1994…
 Expansion of national discount retailers into “supercenters”
(massive 150’000 square foot stores that combined a
supermarket, a general discount retailer, and specialty retailers
under one roof)
Trends for drug stores, convenience stores, discount retailers:
increased sales of food
less entrenched division of shelf-space
→ a market presence of start-up value oriented brands, without
paying a slotting allowance
Date: 22-03-2011
11
Cereal industry changes (I)
Characteristics and trends of the private label segment:
Sales grew by 50% from 1991 to 1994
Low price: $1.90/1 pound vs. $3.20/1 pound by the Big Three
Few attempts to differentiate products
Little advertising: only to raise awareness of their price
advantage
Rejection of coupon promotions
Date: 22-03-2011
12
Cereal industry changes (II)
Erosion of customers’ loyalty vs. branded labels:
Perception of private labels as an alternative:
lower price of private labels vs. higher price of branded labels +
coupon to get a discount
High failure rate among extensions of popular brands perceived
as the lack of being superior
Date: 22-03-2011
13
Cereal industry changes (III)
Further on the private label segment:
 Increased competence in technology and higher quality of
products
 Low costs of production (10-20% lower vs branded labels) due
to:
•
•
•
•
Focus on simpler cereals
Less intensive labor process
Fewer expensive fruits and nuts
Reduction of packaging costs by choice of plastic bags by some
manufacturers
Date: 22-03-2011
14
Cereal industry changes (IV)
Last but not least on the private label segment:
Better margins to the retailers
Absence of proper distribution channels, reliance on
wholesalers and 3d party distributors
Absence of the on-site presence of private label sales-force
Date: 22-03-2011
15
Cereal industry changes (V)
Suppliers of private label cereals:
 Ralston – the only branded cereal manufacturer to produce
private label cereals (50% of private lable market in 1993)
 Malt-O-Meal
 Grist Mill
 McKee Baking
Date: 22-03-2011
16
Cereal industry changes (VI)
Corporate news:
August, 1993: Kellogg announced its 3d price decrease by 2.1%
April, 1994: General Mills announced its intentions to reduce
prices and to stop the coupon policy pricing and discounting back
1 coupon saves 50 Cents to consumers, but the manufacturing
cost per coupon is 75 cents!
.
Date: 22-03-2011
17
Cereal industry changes (VII)
Field for discussion:
 What changes can be observed in the cereal industry in terms
of five forces?
 What could You say about the industry attractiveness?
Date: 22-03-2011
18
Cereal industry changes (VIII)
Conclusions:
Lower industry attractiveness due to decreased BTE and
increased rivalry
Reasons for decreased BTE:
 Lower barriers to enter private label segment
 Excessive price of branded labels not perceived as a value
 New channels of distribution, including non-food stores
 Absence of slotting allowances
 Imitation (cheaper version of known commodity) & less cost for
introducing a new product
Date: 22-03-2011
19
Cereal industry changes (IX)
Reasons for increased rivalry:
 Low growth of cereal industry
 Decreased BTE & share-stealing by private labels
 Announcement by General Meals, i.e. no commitment to
following the price increase by Kellog (price leader), price
reductions and no coupon policy
→ broken discipline among branded labels
From brand-building competition to price war?
Date: 22-03-2011
20
Strategies and responses to threats

reduction of prices

elimination of inefficient coupons

shift in some trade promotions

reduction of reliance of coupons
Date: 22-03-2011
21
Cereal Industry Changes (X)







rivalry intensifies
low growth
tight shelf space
easy entry for private label
price gap widens
new channels
fewer product necessary
Date: 22-03-2011
22
Solutions to these changes:

shift to snacks

new brands and products

cut coupons

international view
Date: 22-03-2011
23
Thank you for your attention!
Q&A
Date: 22-03-2011
24