Executive Summary: The cereal market is a booming industry. It has been around for over one hundred years and continues to attract millions of customers’ everyday. The market structure of the cereal industry is an Oligopoly. This is because there are four large firms, Kellogg, General Mills, Post, and Quaker Oats, which dominate the industry. There are also a few small firms who are involved in the cereal industry as well. The cereal industry targets all different age groups from young kids to adults.
They also target people who try to eat healthy. Their main pricing strategy is price discrimination. They use this by handing out coupons, so that people can get their cereal at a discounted price. Price competition is rarely used in the cereal industry, and when it has been used it has been unsuccessful. Finally, there is a lack on competitors in the industry do to two large barriers to entry. This is accounted for when performing a Porter’s Five Forces analysis within the industry.
These barriers are due to the lack of money for proper advertising and the brand image that many of the top cereal companies have already established. Kellogg, General Mills, Post, and Quaker Oats will continue to dominate the cereal industry for many years to come.
Purpose: The purpose of this analysis is to take a closer look at the cereal industry. In order to do so it is necessary within this analysis to identify the market structure of the industry. It is also imperative to recognize the main competitors within the industry in order to calculate the market share of the main companies that dominate the current industry. I will also conduct a Porter’s Five Forces analysis on the cereal industry in order to make known the possible threat of entry, the threat of rivalry, the bargaining power of the consumers, the bargaining power of the suppliers, as well as the threat of substitutes.
I will also touch on the differentiation strategy used by the companies within the industry in order to give a better understanding on how the main competitors diversify their products to meet consumer’s needs. The consumers being looked at are people of all ages whether it be children looking for a character to identify with such as Lucky (from Lucky Charms) or whether it be an adult trying to maintain a healthier diet and choosing the more beneficial cereal to their reformed diet.
This will give us a further understanding on not only the market structure but also how this popular breakfast food has been able to dominate the market with four main competitors due to their ability to dish out millions and millions of dollars on advertising. The smaller companies within the industry are unable to do so for multiple reasons giving the main competitors within the industry an absolute competitive advantage over these smaller scale companies. Analysis: Cereal has been apart of the American diet for over one hundred years.
It was created by eccentric health reformers and is said to be eaten by approximately 80 million Americans every day. (Roy, Matthew) Throughout world history cereal has been present, but it was not until the 20th century that Americans built cereal into an $8 billion dollar industry. (Roy, Matthew) By 1915, tons of Americans chose cereal as their main food to consume for breakfast. This was in thanks to two people, John Harvey Kellogg and C. W. Post, who launched the breakfast-food industry in the 1980’s.
Today, cereal is one of the main breakfast foods chosen by people all across the world. In almost every household you will likely find some brand of cereal within their home. The different brands you will find are Kellogg, General Mills, Post, and Quaker Oats, which are the four main firms in the popular cereal industry. The structure of the cereal industry is an oligopoly that is made up of 4 large firms and a couple smaller companies. (Roy, Matthew) The small companies hold a very small part of the market; approximately 13. 6%. (Roy, Matthew)
The four larger companies hold the other 86. 4% of the market. (Roy, Matthew) These four big cereal manufacturers are Kellogg, General Mills, Post, and Quaker Oats. “Great Barriers to entry and the inelastic nature of cereal allow this oligopoly to exist and numerous government attempts to end it have failed. ” (Roy, Matthew) Due to the oligopolistic nature of the industry companies are able to turn large profits as well. (Roy, Matthew) The cereal industry is very adamant on using a differentiation strategy to make one’s brand stand out in the minds of certain people.
The companies break down the public into different target markets; and then make products that will be attractive to their target markets. Companies make different brands for young kids, teenagers, adults, and people who are health conscience. Currently, there are 387 different brands of cereal sold in the United States and each family is estimated to purchase 17 different brands per year. (O’Connor, Amy) Companies continue to brainstorm for new product ideas to attract the various market segmentations. The cereal industry has only really worked on one pricing strategy, price discrimination.
They have used price discrimination by giving out tons of coupons to potential customers. Coupons are designed so that customers can use them to buy the cereal of their desire for a lower price. Coupons also allow these firms to charge higher shelf prices. Sensitive customers will use the coupons to gain a lower price, but impulse buyers will buy the cereal without the coupons. Either way, this allows cereal companies to receive high profit margins. Price competition has rarely been a pricing strategy in the cereal industry until recently.
Many of these cereal companies attempt to slash the prices of their cereal in hopes that customers will buy the cheaper box of cereal. This strategy has been pretty unsuccessful thus far though. There is a serious lack of competitors in the cereal industry. With the lack of supplier power as well, it is pretty simple for an entrepreneur to think of ways to innovate and create a new cereal brand. “However, there are a variety of barriers to entry in the industry which makes in near impossible to enter this potentially profitable market.” (Roy, Matthew)
The main barrier to entry that new cereal companies are faced with is the extremely large advertising budget that the main cereal firms have. Recently, it is reported that approximately 1. 3 million advertisements for cereal are aired on American television each year. (Roy, Matthew) The cost of these advertisements were said to be $762 million. (Roy, Matthew) This advertising budget was the second largest in the United States behind auto manufacturers.
This is a barrier to entry because new start-up cereal companies will not be able to afford such lavish and constant advertisements that the large firms are able too. The other main barrier to entry is brand recognition. Consumers have grown up and grown to know the companies Kellog, Post, General Mills, and Quaker Oats. “The different cereals under these companies also pose significant name recognition. Cartoon characters such as Tony The Tiger, the Trix rabbit, Lucky, Count Chocula, Snap Crackles and Pop, and Toucan Sam to name a few.” (Roy, Matthew)
This is a barrier to entry because competitors find it extremely hard to compete with brands that have been around and been ingrained in consumer’s minds for many years. These barriers of entry are some of the main reasons why there is a serious lack of competitors present in the cereal industry. Conclusion: In conclusion it is clear through this analysis that the cereal industry as a whole is an oligopoly. The fact that the industry is an oligopoly makes it extremely hard to enter into the market.
Brand recognition is also an important part of the main competitors within the industry giving their name the brand recognition over the rest of the companies. It is extremely difficult to build nationwide brand recognition without a certain amount of advertising. The oligopolistic competitors have built their brand recognition through their vast amount of advertising expenses and will continue to do so. Through this analysis we can conclude that Kellogg, General Mills, Post, and Quaker Oats will continue to dominate the cereal industry for many years to come.