RTE CEREAL INDUSTRY:
Loss of dominant position by the Big Three:
Kellogg; General Mills; and Philip Morris.
Slowing demand growth (under 2%)
Increase in private labels (5% market share by sales and 9% by volume for the first time. “Price increases by the Big three had widened the gap between branded and private label products.” From 1990 to 1993 RTE cereal prices increased by 15.6% compared to 5.9% increase overall. Non-traditional channels (e.g. drug stores and mass merchandisers) lead to less cost and less risk in product introductions. Example: US universities are seen as the top. High price. International students Barriers to Entry:
-Economies of Scale
-Supplier distributor relationships
Economies of Scope example: the fact that you are doing more than one product line is beneficial:
-They could make all the cereals in the same facility and then vary them later.
LEARNING VS SCALE EFFECTS (WILL BE ON THE TEST) – LOOK FOR IN BOOK
-BECAUSE I MADE MILLIONS OF CEREAL, ITS CHEAPER TO MAKE
-LERNING EFFECTS ARE DIFF. IF IT TOOK ME 100 HOURS TO MAKE MY MASTER PIECE PAINTING
THE SECOND TIME IT WILL TAKE ME MUCH LESS TO DO THE SECOND ONE.
80% LEARNING RATE MEANS YOU MULTIPLY (1-.8) X HOWEVER LONG IT TOOK -WHY WOULDN’T LEARNING EFFECT KEEP GOING DOWN. – THERE IS A LIMIT TO THE LEARNING EFFECT – YOU CAN ONLY DO THINGS SO FAST.
PREEMPTION: “Predatory” Product Proliferation
-Exhibit 5:67 new brands introduced and 4.4 % achieved
-note: Walmart pursued a preemption strategy in geographic space. -RTE brands saturated the market and left little for the other companies.
-75 cents advertising and sales/pound for Big Three firms
-High advertising intensity
-over ¼ (27%) of wholesale price is due to advertising and sales -Economies of scale in marketing (TV…think brewers)
New product introduction is very risky
-High sunk cost commitments –
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