Very concentrated industry, big rivalry between 5 main players, with high barriers for new entrants and a lot of difference products in the market.
1. What are the barriers to entry in the RTE cereal industry?
Potential entrants in the RTE cereal industry will have to overcome different barriers if they want to be success in this business.
Capital requirements: The capital costs of becoming established in an industry can be very large. In the RTE Cereal industry we can see these capital requirements in different examples.
• Research & Development: The RTE cereal industry as a whole spent about one percent of gross sales (or $80 million) on R&D in 1993, compared with ...view middle of the document...
Access to the raw materials: For a new entrant, it can be very difficult to get access to raw materials such as wheat or corn if they are in scarcity. From the supplier´s point of view, it is less risky to sell corn or wheat to Kellogg or General Mills which are more likely to pay, instead of selling the raw materials to a new entrants.
New product introductions: Once a cereal brand detects an incursion of a new company in this market, they can launch new products which will make consumers to forget about the new entrants.
Lots of different products: In this particular case where there are a few player in the industry but with a wide range of products, creating an impact on the customer seems difficult. Apparently when a brand captures more than 1% of the market it is considered a hit.. If the new entrant cannot create and impact will have to decrease its price, but the other companies have coupons and promotions. In conclusion new entrant will have a short margin.
Threat of substitutes: The price that the customers are willing to pay for cereals depends on the price they are willing to pay for biscuits or other substitutive products such as yogurt, doughnuts, etc..
2. Is the recent decrease in profitability a temporary phenomenon or a permanent change in industry profitability?
I think is a permanent phenomenon because there is a change in consumer
• Private labeled firms work well during recession periods, but usually offer better prices to the consumers, and better margins to the retailers, getting good positions in the supermarkets and grocery stores.
• Advertising to sales ratio has fallen dramatically perhaps people are more price sensitive or they do not perceive big differences between a private labeled firm and a branded one.
• They have lower costs of production because it is easier to produce their types of cereals and because they use plastic bags instead the expensive cartoon packages. All these features make them offer better prices. Although it is true that they need to offer a good quality.
• Brand Loyalty eroded
• From 1989 to 1994, sales grew from $94 million to $210 million, about three quarters of which derived from RTE cereals. This growth led to numerous plant expansions, and by 1994 Malt-O-Meal had spent over $120 million to expand and equip a massive...