Ready-To-Eat Breakfast Cereal Industry

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it held about 50% of the private label market in 1993. In addition to the private labels, Ralston also developed a line of licensed cereals that would be tied to a movie or television show. The popularity of licensed cereals would decrease and Ralston would discontinue the cereals in 1993.

The sales of private labels grew 50% over four years; by 1994, they were 9.2% of all cereal volume and expected to be 15% by 2000. While some of the major cereal firms did not see private labels as a threat, there were a few factors that led to the success and growth of the private label cereals.

● Increased quality: For years private labels suffered from poor quality and limited product variety, so after the short-lived success in 1980s, private label manufacturers discovered that even a price-sensitive customers demanded a level of quality similar to branded products. The increase in technological competence of private label manufacturers finally made the quality of such cereals similar to those of branded products.

● Lower retail price: After prices of the Big Three spiraled upward in lockstep, private labels were able to gain a toehold in the market by undercutting prices. Private labels averaged $1.90 per pound at retail as compared to $3.20 for the Big Three brands, approximately 40% less. With small advertising budgets and limited product differentiation, private labels spent limited funds on advertising. Any advertising was used to show the price differences between them and the branded products.

● Appeal to consumers: Private labels came at a time when consumers were upset by the continued price increases in the branded cereals. Private label advertising appealed to the consumer who felt like they were getting no value from paying a higher price/premium for a Big Three cereal brand.

● Lower wholesale price: Private labels offered grocers better margins compared to the branded cereal (15% compared to 12%). As a result, retailers were more willing to promote private labels in stores.

General Mills changes strategy

What does General Mills hope to accomplish with April 1994 reduction in trade promotions and price?

What are the risks associated with these actions? How do you expect General Mills’ competitors to respond? What should General Mills’ do?

In August 1993, Kellogg announced its third price increase of the year, bringing the year’s total price increase to 6.2%. However, General Mills decided not to follow suit for the first time and announced that it had no immediate plans for another price increase. This seemed to be a signal that the era of coordinated price increases was over. General Mills, one of the Big Three at this time, had now decided to divert from the strategy of the other two major cereal manufacturers.

At this time, General Mills’ stock price had also taken a hit. Its stock price had dropped from a high of $74 in March 1993 to $51.50 in April 1994. Growth had slowed and the cereal division, historically the firm’s “cash cow”, was suffering. Historically, the cereal brand had provided cash for General Mills’ other enterprises - including its other packaged foods and restaurants.

As new senior management (Sanger and Gaillard) took up the helm, they quickly changed course. Unhappy with the current state of the industry, Sanger had been complaining about promotional spending and the inefficiency of coupons. Senior management hoped to reposition General Mills’ positively in the consumer’s’ eyes. Given the higher cost of printing and processing coupons as compared to the savings, Sanger hoped to put these savings in the consumer’s pocket by eliminating the coupons and dropping prices. By dropping prices, General Mills hoped to become competitive with the increasingly popular private labels and also offer grocers more competitive margins.

With General Mills decided to break course from following Kellogg’s price increase, there were definite risks for increased competition from its main two competitors. Up until this point, the Big Three have enjoyed a quasi-partnership - not being too competitive with each other and ensuring the market continues to work to each of their benefits. With Kellogg still holding the largest amount of market share in the RTE cereal industry, it has more power than General Mills.

At this point, we see this situation playing out in one of two ways. It is not in General Mills’ best interest to start a price war with its competitors. When Sanger of General Mills states, regarding the decision to cut out promotions and lower prices, "this is a move that’s good for General Mills and good for our industry. I would guess other manufacturers see the same wastefulness in coupon and other price promotions", it is very possible he is signalling to his competitors that he wants to move to a more profitable position, and is inviting his competitors to do the same. In response to General Mills’ move, Kellogg and other cereal companies will almost certainly drop prices as well. If Kelloggs maintains their high prices they will continue to lose profits and revenue share. If Kellogg and others follow General Mills to match their lower price, but then hold prices at that level, they can all likely operate from a more efficient and profitable place, going after some of the market share from lower priced private labels. The Big Three cereal companies have a history of engaging in “soft” competition in the past, so this scenario is not unlikely.

Unless prices settle quickly at a new and more profitable equilibrium for General Mills and its competitors, General Mills should abandon this strategy and maintain high prices, and even find further ways to commit to higher prices. Absent this, they should prepare for the possible repercussions of its strategy change, and should continue to focus on what it does best. It should begin to build out its distribution network, especially with the national discount retailers. Additionally, it should focus on building out its packaged food brands which are sold through the same network as the cereal brand. It should also reconsider its place in the restaurant business. Historically, General Mills has seen success with a focused business line; it may be a good time to go back to its roots.