Escolar Documentos
Profissional Documentos
Cultura Documentos
Naveen Prakash Strategy, MBA FT, 2012 new entries. That is the cost of fighting the new entrant is limited to only the brands near the new entries, and would not affect the revenues of any of the incumbents significantly. Another entry deterrent is the strong relationship that the manufacturers had with the retailers. A new entrant (unless it is the retailer private label) would not be able to get the adequate shelf space to achieve high sales. Although the FTC believed that the major manufacturers deterred entries in an anti-competitive way, the charges were later dropped during the Reagan administration. The effect of the use of coupons on the profitability of the RTE cereal firms is not very clear. It seems that the coupons were meant as a way to increase profit through price discrimination. Consumers who are price sensitive would use the coupons, but other consumers would pay the full price. However, it is not clear that coupons achieved this, since a quarter of the people used coupons and probably most of those would have bought at the higher prices anyway. Moreover, the coupons were very inefficient and introduced extra costs. The threat of private labels: Starting in the 1990 s the industry faced the threat of private labels. As shown in exhibit 1 in the case, private labels grew to 9.2% by volume and about 5% by sales. Private label sales were also predicted to grow further by 2000. Private labels competed mainly on price, which is new to the industry. Even the extremely fragmented industry designed by the incumbents to prevent entry, did not prevent the private labels from gaining market share rapidly. The reason for the rapid gain of market share for private labels is that private labels were attractive to both the consumers and the retailers. To the consumers, they offered an average of 40% discount over branded cereals. To the retailers, they may offer higher profit margins, and in addition they may be a weapon in the hand of the retailers to pressure branded cereal firms to offer them higher margins. Private labels were able to offer the lower prices because they had a much lower cost. For example, a typical Big Three cereal producer spends about 75c per box of cereal in advertising and sales costs. In addition to advertising costs, production and distribution costs for private labels were much less than the big producers. The main reasons are reduced R&D spending, focus on simpler cereals that are cheaper to produce, and rely on third-party distributors. Private labels aggressively focused on reducing costs, without sacrificing quality much. Their message to consumers was: we are the same quality at a much lower price. Moreover, one other factor that helped private labels succeed is that the strategy of coupon use may have backfired, and reduced the value of the brands in the eyes of the consumers. General Mills Decision and its Risks: Facing the threat of private labels, Kellogg continued its regular price increase, but the rest of the industry did not follow this time. Instead, General Mills decided to change its strategy and reduce prices and at the same time reduce the levels of coupons. Probably what General Mills hoped to accomplish is to reduce the gap between its prices and the private labels, so that loyal consumers would not switch. Moreover, General Mills thought that the coupons are very inefficient and add additional unnecessary costs. In addition, it may be the case that many people expected the coupons and would perceive the brands to be expensive otherwise and not buy it without coupons. General Mills didn t intended to start a price war by its decision, with the other big cereal producers. To the contrary, General Mills expected the rest of the big three to follow its decision and present a unified front against the private labels. There are several risks associated with General Mills decision. First, some consumers may have grown accustomed to the coupons and would not pay without the coupons, because they think they may be overpaying. Second, other manufacturers may perceive this move by General Mills as the start of a price war, and may compete more aggressively on price. Moreover, if other big manufacturers do not follow
Naveen Prakash Strategy, MBA FT, 2012 General Mills and adhered to the higher prices, General Mills may be forced to increase prices again which would be unpopular with consumers. Was General Mills Decision Right? In terms of reducing inefficiencies General Mills was right. The coupons just added extra costs to the price which could be eliminated. However, it seems many consumers got accustomed to the coupons and it may be risky to remove them suddenly. It s recommended that GM find some technological way to get rid of the coupons inefficiencies while maintaining their effect. For example, partner with the retailers to develop electronic loyalty programs that give automatic price reductions the more you buy without having to print, distribute, clip, cash and handle coupons. The uniform reduction in prices across the board does not make sense. Since General Mills have so many brands in its portfolio, why not target the price reduction to the brands that are the most threatened by the private labels. These are the simpler, lower cost brands. Industry will probably not follow General Mills strategy because the consumers got so accustomed to the coupons. Re-Evaluation of the industry Although the RTE breakfast cereal industry was very efficient at preventing big entry for decades, and for preserving and growing their profits over the years by competing on new product introductions and product differentiation rather than price, they did not prepare well for the entry of low cost producers. If they had predicted the success of low cost producers, they could have followed the same strategy of product proliferation along the price dimension, in addition to the other dimensions they chose to differentiate their products on. This strategy could have had the dual effect of offering a natural price discrimination strategy that can replace coupons, and could have pre-empted entry by low cost producers since that market segment would have already been crowded. Conclusion The RTE cereal industry managed to maintain high profitability for many decades by making it very unattractive for new entrants by increasing the minimum efficient scale by spending heavily on advertising, and by preventing any new entrant from gaining any significant market share by filling the RTE cereal product space with a large number of differentiated products. The high profitability is also a result of the high coordination between the incumbent firms, and their strategy of not competing on price, but by new product introductions, and heavy advertising. They also do not attack each other products aggressively. A new entrant needs to be an extremely low cost producer, and have a small efficient scale in order to compete in this market. But the new entrant risks destroying the high profitability structure of this market, by introducing price competition and price wars. Private labels have a very good chance at succeeding in this market due to the retailer support, and their strong focus on the cost. Big RTE cereal manufacturers could have protected their industry better from the threat of entry of low cost producers and private labels, by pursuing the same strategy of product proliferation and differentiation, but along the price dimension in addition to the taste and perceptual dimensions. If they have offered cheaper products in addition to their more expensive products, they may have pre-empted the entry of private labels and reduced the private label payoffs. Also it may have been a better means of price discrimination rather than the reliance on the inefficient coupons.