Rte Cereal Industry Case
The RTE cereal industry had historically been one of the most concentrated of all U.S. industries characterized by stability and above average profitability. This industry was a classic example of oligopoly with the three big players controlling more than 75% of the market share in 1993.
Profitable markets typically attract new entrants. However, the RTE cereal industry had moderate entry barriers. Incumbents collectively offered around 200 brands to cover every foreseeable market niche preventing new entrants introduce new brands. Also, the market share of one brand was low (average less than 1%). This made it difficult for any new entrant to get the expected market share from the new brand. Hence, the initial capital investment (more than $100 million) required for the manufacturing facilities might not be recovered easily.
Prior to 1994, big players had demonstrated profit maximizing behavior and successfully avoided market share maximization price wars. In 1994, the industry sales growth had slowed to fewer than 2%. This happened due to the strong rivalry between the private label companies who started producing high quality products compared to before. Their quality was comparable to the quality of the name brands but with 40% lower costs (due to little advertising).
The bargaining power of buyers, both consumers and retailers was strong. With more quality products available on the market with fewer prices, consumers had low switching costs. Discount retailers opened up new retail channels with no traditional shelf space allocation constraints and started preferring carrying private labels as profit margins were higher.
The threat of substitutes was moderate. Any breakfast time substitute like toast, bagels, bars, doughnuts, fruits etc. could be a substitute for cereal. The substitutes were generally priced competitively relative to cereals and available from same retailers resulting in minimal search costs for price comparisons.