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Rte Cereal Industry

In: Business and Management

Submitted By youguizi1980
Words 1011
Pages 5
The Ready-to-Eat (RTE) Breakfast Cereal Industry in 1994

The Big Three (Kellogg, General Mills, and Phillip Morris) had been enjoying the stable Ready-to-Eat breakfast cereal industry with above average profitability since its start in 1894 until the recent surge of the private label sales and slowing demand.

The Big Three had been extremely profitable because they were able to maintain high prices by restraining from direct price competition among themselves, which would have resulted in a lose-lose situation with a decrease in the overall profitability of the industry. The Big Three monopolized 82.5% on average of the concentrated market through 1950 to 1980, as they controlled the whole value chain.

The coopetition was formed through unwritten agreements among the Big Three to limit special offers, which would only increase one firm’s market share temporarily at the expense of its competitors. These tactics would initiate a cycle of escalating costs, decreasing industry profitability. To avoid this sequential game, all major players simply followed the price increase of Kellogg, the market leader, who was aware of its power to effectively determine the price levels of the industry by analyzing prior reactions of the competitors.

The major manufactures utilized coupons and trade promotions heavily, which resulted in over one fourth of all cereal purchases made with coupons. These price promotions made the hike of RTE cereal prices possible by seemingly lowering the purchase prices with coupons. The branded manufactures controlled the willingness to pay of end-consumers and captured most of the value created in the whole value chain.

Another key factor of success was the whole chain management that imposed bargaining powers over suppliers and buyers. Since the raw materials are commodities and the Big Three have advantages to choose among many...

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