RTE Cereal Assignment
Barriers-to-entry
Examples
Investment
To achieve minimum efficient scale, it is estimated that a RTE cereal plant needed to produce 75 million pounds per year, which requires a capital investment in excess of $100 million and about 125 employees.
High Research and Development Cost
The RTE cereal industry spent about 1% of gross sales on R&D in 1993, whereas the food industry spent only 0.7% of gross sales. It requires 2-4 years and $5-10 million to develop a new brand
Distribution barrier
New entrants need to pay ‘slotting allowance’ to most of the food stores to secure a shelf space for a new brand. Even large cereal firms were not exempt from paying the fee, they still have advantage on distribution. The large firms can shift brands among their own space, or sometimes replace a failed brand with a new one.
High Advertising Cost
The major RTE cereal firms are advertising their products through different media and introduce new products frequently. RTE cereal industry’s advertising/sales ratio was higher than most of the consumer products businesses. It is possibly because of the high competition in the industry.
Customer Loyalty
Because RTE cereal has a very long history and usually people eat RTE cereal since they were little, people tend not to change their choice of brand. The customer loyalty of certain brands makes it harder for new entrants to compete in the market, even they offer a lower price.
Ready-to-Eat Breakfast Cereal Case
Recommendation for new entrants:
1. Buy/acquire an existing RTE cereal plant instead of starting up a new one.
2. Introduce new brands in mass merchandisers, like Wal-Mart and Target, because these outlets do not require slotting allowances and more customers can be reached out to.
3. In order to lower the advertising cost, utilize social networking and other internet medium instead of traditional media, such as TV commercial, to advertise the new product
Examples
Investment
To achieve minimum efficient scale, it is estimated that a RTE cereal plant needed to produce 75 million pounds per year, which requires a capital investment in excess of $100 million and about 125 employees.
High Research and Development Cost
The RTE cereal industry spent about 1% of gross sales on R&D in 1993, whereas the food industry spent only 0.7% of gross sales. It requires 2-4 years and $5-10 million to develop a new brand
Distribution barrier
New entrants need to pay ‘slotting allowance’ to most of the food stores to secure a shelf space for a new brand. Even large cereal firms were not exempt from paying the fee, they still have advantage on distribution. The large firms can shift brands among their own space, or sometimes replace a failed brand with a new one.
High Advertising Cost
The major RTE cereal firms are advertising their products through different media and introduce new products frequently. RTE cereal industry’s advertising/sales ratio was higher than most of the consumer products businesses. It is possibly because of the high competition in the industry.
Customer Loyalty
Because RTE cereal has a very long history and usually people eat RTE cereal since they were little, people tend not to change their choice of brand. The customer loyalty of certain brands makes it harder for new entrants to compete in the market, even they offer a lower price.
Ready-to-Eat Breakfast Cereal Case
Recommendation for new entrants:
1. Buy/acquire an existing RTE cereal plant instead of starting up a new one.
2. Introduce new brands in mass merchandisers, like Wal-Mart and Target, because these outlets do not require slotting allowances and more customers can be reached out to.
3. In order to lower the advertising cost, utilize social networking and other internet medium instead of traditional media, such as TV commercial, to advertise the new product