Factors Affecting PIE
Value Creation Factors
Industry Demand
There are more than 100 brands of cereals in the U.S. Because of the proliferation of brands, the top ten account for 27.4 of total sales. Cereal producers market to both children and adults via the media and the use of coupons. Kellog has dominated the US. RTE cereal market. The increase in demand for organic foods has resulted in cereal producers producing organic products.
Changes in Technology
Can influence the competitive dynamics, value capture, and value creation of an industry. Another way that technology can change the dynamics of an industry is by changing the minimum efficient scale.
Availability of Inputs
Breakfast cereal manufacturing includes companies that make ready-to-serve packaged cereal. It does not include the manufacturing of granola bars or breakfast bars. Some of the inputs used are grains (oats, corn) and sweeteners like beet and cane sugar.
Availability and Price of Substitutes
Breakfast cereals compete with other breakfast items cooked at homes, such as eggs, bacon, bread, donuts, or muffins and restaurants.
Value Capture Factors
Degree of Rivalry
Consumers tend to be heavily influenced by advertising, the main tool used by competitors to differentiate their products. The two primary players in the RTE cereal industry are Kellogg and General Mills, with Kellogg in the lead. However, General Mills has diversified its product by introducing organic cereals and health foods in the mid-1990s. While Kellogs only responded to the organic segment in June 2000. For the lower-margin products, we have companies, such as Kraft and Quarker oats. The distribution and price-fixing of cereal products is also a determining factor for competition between the different brands. For example, supermarkets normally have lower prices than independent food stores.
Another aspect to be considered is the entrance of supermarkets in the RTE industry. This affects the competitive dynamics of the industry. For example, because grocery stores control product placement, they often place their label products in the end cap and display units, emphasizing the price advantage of their product.
Barriers to Entry
Government can influence an industry through the regulation of key variables, such as entry into the industry, competitive practices, and exit from the industry, for example, tariffs. The marketing and branding of cereal products impact the sustainability of a company.
Strength of Buyer Power
Supermarkets have been able to maintain their buying power through manufacturers slotting fees.
Strength of Supplier Power
Supplier power is dependent on consumers’ choice of products. For example, because consumers were dissatisfied with the high-priced brand name cereals and consolidation of supermarket chains, they resorted to buying products produced by RTE’s at lower prices. Furthermore, the consolidation of supermarkets increased the power and prevalence of RTE’s.
Memo on Industry’s Profit Potential
The cereal industry is lucrative. There are companies that experience high margins of profitability. Kellogg has dominated the US RTE cereal industry for decades.
It Gross profit margin has been 51.75%, followed by Kraft at 44.91% and General Mills at 40.29%.
Memo on Governmental Regulation of Slotting Fees
Slotting fees are fixed time per unit payments from manufacturers to grocery stores for shelf space (Shotlander, 2006). Some food makers complain that the estimated $9 billion in slotting fees they pay each year is disguised extortion, while supermarkets argue they need protection from a product failing to attract consumers and lingering on the shelves. Food makers pay slot fees for anything from a meeting with a supermarket buyer to a guarantee their products will stay on shelves. Legislators recently examined the grocery fees and the rise in food and agricultural mergers, to see if the government must step in to ensure that producers and farmers receive fair prices.
Not everyone agrees with the scrutiny that slotting fees are receiving. “Slotting fees, if properly structured, are a legal and rational approach to allocating the cost of new product introductions in a way that can benefit consumers,” said Tim Hammonds, president of the Food Marketing Institute, representing 21,000 retail food stores (Food & Drink weekly, 1999). If the government decides to ban slotting fees, supermarkets will lose out since they benefit from charging more on shelf space, while manufacturers will lose out because slotting fees compensate them for the costs associated with selling new products (Shotlander: 2006: 1276).
Works cited
Hoovers. Breakfast Cereal Manufacturing. 2008. Web.
Food & Drink Weekly. Slotting Fees, Consolidation in Food Industry Examined. 1999. Web.
Shotlander. D.S. Slotting Fees and Merger efficiencies: Can fewer competitors yield a lower price? 2006. Web.