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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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