The Ready-to-Eat Cereal Industry in 1994

The Historic Profitability of the RTE Breakfast Cereal Industry

Over the course of the century preceding 1994, the ready-to-eat (RTE) breakfast cereal industry was highly concentrated, with reliably high profitability for the industry’s “Big Three” branded cereal firms — Kellogg, General Mills, and Phillip Morris. As derived from Exhibits 1 and 6 of the case, as of 1993, the Big Three (with Phillip Morris’ acquisition of Post and Nabisco) enjoyed a cumulative market share in excess of 75 percent, with overall market consumption of cereal nearing three billion pounds per year and $8 billion in annual sales. As noted in the case, “[t]he largest cereal manufacturers were extremely profitable, routinely posting ROAs… in the 15-30 percent range.” Based on the data reflected in Exhibit 7, the Big Three also enjoyed ROEs of 39.7, 40.8, and 26.6 percent, respectively.

Employing the Five Forces Model, the following demonstrates why the RTE breakfast cereal industry was so profitable for branded cereal companies prior to 1994:

 Supplier Power — Supplier power was low relative to the Big Three. With the key ingredients of breakfast cereal commodities (e.g., wheat, oats, sugar, etc.), the Big Three could afford to be very price-sensitive and were able to buy from any suppliers they desired, which had little bargaining power of their own.

 Buyer Power — For at least two distinct, but interrelated, reasons, buyer power was also low relative to the Big Three. First, food stores (which constituted the bulk of the Big Three’s business) had succumbed to pressure from the Big Three over the course of time to allot premium shelf-space for cereals based on their historical sales performance. Naturally, with their history of market dominance, this afforded the Big Three a significant and self-replicating advantage, and helped ensure continued demand by highly brand-loyal consumers vis-à-vis less familiar products that could have been offered by new entrants. So...