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Cereal Pricing Cereal Strategies - Cornell University presentations... · PDF fileCereal Pricing Cereal Strategies By: Anna DeLucia, ... Industry Analysis ... Kellogg's Corn Flakes,

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  • Cereal Cereal Pricing Strategies

    By: Anna DeLucia, Mahir Chadha, Puneet Brar, and Tayyaba Arshad

  • Agenda

    Industry Overview

    Generic vs Branded

    Price Elasticity of Demand

    Volume / Size

    Geographic Pricing

    Advertising

  • Introduction

    Main activities involve manufacturing:- cold and hot breakfast cereal

    Hot cereal7% Ready to eat

    wheat breakfast food

    17%

    Ready to eat corn breakfast

    food28%

    Other foods 48%

    PRODUCT SEGMENTATION 2016

    Supermarkets and

    Convinience stores54%

    Grocery Wholesalers

    33%

    Food Service Providers

    7%

    Exports 6%

    MARKET SEGMENTATION 2016

    Energy, cereal, granola and protein

    bars are not included in this industry

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Industry structure

    Regulation Level Heavy

    Technology Change Medium

    Barriers to Entry High

    Industry Globalization Medium

    Competition Level High

    Life Cycle Stage Mature

    Revenue Volatility Medium

    Capital Intensity Medium

    Industry Assistance Low

    Revenue: $10.6bn

    Profit: $574.3m

    Annual Growth (2011-2016): -2.1%

    Exports: $665.5m

    Future Annual Growth: -0.6%

    Businesses: 38

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Industry Analysis

    CONCENTRATION C4 C4 = 65.3

    Industry concentration is expected to increase over the next five years

    Mergers will be challenged since HHI >1800

    Big players are acquiring niche healthy cereal companies to increase their attractiveness to consumers

    23.8 23.3

    11.96.3

    34.7

    0

    5

    10

    15

    20

    25

    30

    35

    40

    General MillsInc

    KelloggCompany

    Post Holdings PepsiCo Inc. Other

    Market Share

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Main players

    General Mills Inc.

    Market Share: 23.8%

    Brand Names: Cheerios, Chex, Fiber One, Cascadian Farm, Lucky Charms, Total, Wheaties

    Kellogg Company

    Market Share: 23.3%

    Brand Names: Kellogg's Corn Flakes, Frosted Flakes, All-Bran, Apple Jacks, Crispix, Rice Krispies, Bear Naked, Froot Loops, Mini-Wheats

    Post Holdings Inc.

    Market Share: 11.9%

    Brand Names: Honey Bunches of Oats, Pebbles, Shredded Wheat, Raisin Bran, Grape-Nuts, Honeycomb

    PepsiCo Inc.

    Market Share: 6.3%

    Brand Names: Quaker Foods North America (QFNA), Quaker Oatmeal, Life , Cap'n Crunch

    Other: Gilster-Mary Lee Corporation

    Estimated market share: less than 1.0%

    produces variations of popular brands, such as Corn Flakes, Honey Frosted Flakes, Toasted Oats, Fruit Whirls, Cinnamon Oats and Krispy

    Krunch for major companies like Walmart.

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Key Industry Trends

    Profit is expected to decline at 2% per year High price of wheat and supply shocks for input costs

    Consumer tastes shift towards portable food as economy recovers Want convenience food breakfast bars

    Low carb diets limits the number of consumers Looking for low cholesterol/ gluten free options

    Consumers leverage rising disposable income to buy luxury breakfast items Grabbing breakfast in cafes- muffins, omelets

    Pressure for using all natural products has encroached on profit margins Increases cost of production

    Industry facing a lot of consolidation due to rising pressure on margins

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Trade imbalance

    Domestic demand accounts for 95.9% of revenue

    Exports LOW and DECREASING Expected to rise at an average rate of 1.9% per year to $665.5 million

    Dollar has strengthened in the international market, making it relatively more expensive to consumer American cereal.

    Imports LOW and INCREASING Expected to decline at an annualized rate of 1.2% to $567.3 million

    Canada and Mexico are the largest trade partners, because of their geographic location and participation in NAFTA

    Imports are subject to certain tariffs as imposed by the United States International Trade Commission (USITC)

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Regulation level

    Public health Nutrition Labeling and Education Act

    Food Ingredient Safety Program

    Product labeling FFDC Act, FPL Act

    Environmental regulation EPA- food processing

    Advertising to Children Childrens food marketing calls for change

    Concerns of rising childhood obesity

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Ability to adapt to change: Ability to anticipate and respond to changes in consumer preferences through constant innovation and new product introductions.

    Ability to pass on cost increases: Given the volatility of commodity and energy prices, the ability of producers to pass on cost increases down the supply chain

    Product differentiation: Due to the homogeneous nature of products, differentiate products from other brands to maintain market share and increase revenue.

    Supply contracts for key inputs: Maintain reliable contracts with suppliers of key raw materials to get supplies at fixed prices minimize input costs and aid production planning.

    Economies of scale and scope: Have a large scale and breadth of production to reduces per unit costs.

    Key Drivers for Success

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Generic Vs Name Brands

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Generic Cereals

    Generally the same price and size for every type offered

    Often made by the same manufacturer as name brands

    Usually still sold above cost

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Brands Surveyed

    All in top 20 cereal brands (2011)

    Variety of tastes/demographics

    Kelloggs & General Mills two largest

    brands

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Pricing Differences

    Larger pricing differences between name brand and generic than other products 23% Average

    28% Cereal

    Delta of anywhere from about $0.30 to $1.50 for the same sized box Usually about $0.70 - $1.00

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • 23.00%

    24.00%

    25.00%

    26.00%

    27.00%

    28.00%

    29.00%

    30.00%

    31.00%

    Rice Krispies Corn Flakes Frosted MiniWheats

    Lucky Charms Cheerios

    Average Name Brand Markup Percentage

    Average Cereal markup 28%

    Corn Flakes highest markup

    percentage

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Price/Oz Name Brand Vs Generic

    $-

    $0.05

    $0.10

    $0.15

    $0.20

    $0.25

    Walmart Wegmans Target

    Corn Flakes Generic

    Wide Variety in markup percentages

    Walmart- 10%

    Wegmans- 43%

    Target- 38%

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Can Generic Cereals Be More Expensive?

    $0.16/Oz $0.18/Oz

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Price Elasticity of Demand: Survey

    Conducted 52 surveys:

    Generic Cereal (Wegmans, Walmart and Target) + Favorite Cereal Brand

    Methodology: Created a maximum and minimum price range through a sample group (5 people)

    Minimized framing bias by placing each question on different page

    Target Audience: Students at Cornell University

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Price Elasticity of Demand: Results

    Price Elasticity of Demand: %

    %

    Price Elastic: 1 < <

    Price Inelastic: 0 < < 1

    Wegmans Generic Cereal: 0.57

    Walmart Generic Cereal: 0.65

    Target Generic Cereal: 0.66

    Branded Cereal: 0.29

    Branded

    Wegmans Walmart Target Favorite

    2$ 52 52 52 52

    3$ 47 38 37 52

    4$ 27 14 13 48

    5$ 16 4 4 32

    6$ 4 23

    7$ 1 12

    8$ 10

    9$ 3

    PED 0.57 0.65 0.66 0.29

    Generic

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

  • Price Elasticity of Demand: Conclusions

    Overall Branded cereal is more price inelastic than Generic cereal

    Brand Loyalty: Consumers are loyal to a brand with an image

    Psychology: Consumers associate branded cereal with superior quality

    Generics Wegmans cereal is more price inelastic than other Generic cereal

    Quality of Store: Wegmans is known to be healthier and has a positive image

    Type of Store: Walmart and Target are discount stores $-

    $0.50

    $1.00

    $1.50

    $2.00

    $2.50

    $3.00

    $3.50

    Target Wegmans Walmart

    Average Price Per Box of Generic Cereal

    Industry Generic vs

    BrandPrice Elasticity Taste Test Size Geography Advertising

    Suggestion

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