Competitive strategies within the mature stage of the industry life cycle include: low-cost, differentiation, and focusers. The cereal industry, which undoubtedly is in the mature stage, uses two of these strategies, low-cost and differentiation.

Low Cost Strategies

The companies pursue a low-cost strategy by the use of coupon reduction, streamline marketing, and economies of scale, all effective tools. Coupon reduction has been a strategy within the industry that very recently has been pursued. General Mills was the first to incorporate this strategy beginning in 1994. That year the company cut coupon promotion costs by $175 million. Since then Kellogg's, Post, and the others have followed suit attempting to reduce the cost of coupon promotions. The industry has also taken a turn toward streamline marketing. Streamline marketing refers to the companies marketing a variety of products together instead of marketing just a single product. This is done to cut marketing costs. For example, Post took a new advertising tack in May of 1996 with an estimated $10 million, anthem-like TV and print campaign that dials up the Post brand identity over that of Grape-Nuts, Shredded Wheat and 11 other adult cereals. Setting the tone and strategy for future ads, a 60-second TV spot entitled "Portraits" shows still photos of employees of the Kraft Foods unit as a voice over explains that consumer dissatisfaction prompted Post to cut prices on all its cereal. Post's estimated that their $175 million in ad spending may shrink too as little as $50 million. Likewise, Kellogg's has also used streamline marketing. Kellogg Co. is celebrating its 90th anniversary with a nostalgic promotion package that plays up the longtime equity of its top brands. The idea again is to promote Kellogg's name in general rather than focusing one specific brand. "There's so much equity in the Kellogg name, and so much history behind the brand," said Shireen Moore, VP-account services at Davidson Marketing, the Chicago shop where Kellogg had all its promo work done last year. "An anniversary gives you a chance to remind consumers of that". The cereal industry also attempts to produce low-cost strategy by using economies of scale. All the companies involved in this industry use capital intensive production methods rather than labor intensive method. This is proven by the decreasing amount of workers used and the increasing capital investments. This is also supported by the high levels of value added between raw materials and the final product. Industry averages for return on assets further reflect the strength of their production processes since they are far higher than most other manufacturing industries. The industry triples the value of the original materials by the time they reach the store shelf. Both of these statistics prove that this a very capital intensive industry.

Differentiation Strategy

The cereal industry without question uses the strategy of differentiation. The companies produce a range of name brands aimed at different market segments. There are brands for kids, teenagers, adults (parents), and the health conscious. Sometimes, by creating market segmentation it reduces the threat of entry. This strategy of pursuing a broad product line to deter entry is known as product proliferation. Within the cereal industry competition is based on the production of new kinds of cereal to satisfy or create new consumer desires. Currently there are over 75 brand names on the shelves today. Companies continuously search for new brands to attract various market segments. For example, Kellogg's is trying to energize its market share in introducing Cocoa Frosted Flakes with an anticipated $30 million ad push. TV advertising breaks April 1, 1997, with drops of freestanding insert coupons set for April and May. Likewise, Post has expanded their brand name cereals by recently introducing Cranberry Almond Crunch. The cereal industry has also tried to differentiate by pushing its value as a finger snack. While cereal accounts for a tiny segment of snacks, its consumption as a finger food has grown over the last 10 years, according to NPD Group, a company that tracks eating habits. And the snack market holds potential: Americans consumed an average of 200 snacks annually, compared to 300 or so breakfasts, the research firm reported.

Pricing Strategies

The industry has historically worked with only one pricing strategy, price discrimination. However, recently the industry has seen some of the key players begin to use price competition, previously an unused tactic, to gain an advantage.

Price Discrimination

A staple aspect of the cereal industry has been coupons. Coupons are designed to give consumers a lower price if they take the time to get and use the coupons. By using coupons the industry can charge a higher shelf price and the more price sensitive consumers will use the coupons. This allows the industry to receive higher profit margins on impulse buyers while still allowing the price concerned to not complain about high prices. This two tiered pricing system has been popular with consumers and is obviously favorable to the industry.

Price Slashing

Price competition has rarely been used in the industry to gain any competitive advantage, until recently. In an attempt to regain market share General Mills tried to slash prices in 1994 but met with little success and discontinued the strategy. Post tried the same strategy in 1996 in order to gain market share and compete with low cost generics. This time, the rest of the industry is taking notice and making plans to cut prices roughly 20% across the board. Consumers and government agencies have pressured for these price reductions and are finally going to get what they have asked for. For the industry, the price cuts will not be as painful as they sound since the average gross profit for the industry has been greater than 40% for the past 10 years. While the reduced price will reduce their profit margins, strategies to cut their costs (especially for advertising) will help offset any losses in profit.

Since the beginning of the cereal business, companies have relied on the domination of a market through tremendous marketing and promotion budgets supported with high-priced products. Barriers to entry through these promotional wars have made market share virtually unattainable for smaller companies. This environment has caused the evolution of four dominant firms in the breakfast industry: Kellogg, General Mills, Phillip Morris (Post), and Quaker Oats. For years these companies have literally swamped supermarkets with different cereal brands in search of profits. The substantial profit margins realized by the four firms has been criticized and questioned in the past. Particularly because of the fact that by 1983 branded cereal prices had increased at twice the rate of other foods, and profit margins were twice as large as the food industry's average. By the 1980's, however, a force emerged within this once secure industry that continues to be a threat to these companies' market share today. Generic and private-label brands have captured consumers' purchases because of significantly lower priced products that are comparable (in the eyes of an increasing number of consumers) in quality and taste.

Consumer Trends

Breakfast cereal consumers today have chosen to forego purchasing these higher-priced products, and private-label brands are becoming more popular (primarily because they are about $1.50 cheaper per box than the brand-name cereals). Industry leaders have become aware of this threat, and begun to pursue solutions to problems such as premium pricing (which has been a primary reason for the loss of market share over the past several years). For example, Kellogg's market share has decreased from 41% to 33% between 1988 and 1996. As a result, these four major companies have slowly engaged in a "price war" beginning with General Mills' initial price cuts in 1994. Kellogg and Post have reluctantly surrendered, and beginning to lower prices. These manufacturers have traditionally raised prices aggressively and promoted their products in the supermarkets with inefficient and ineffective couponing. Companies such as Post are accepting the fact that the most effective form of promotion is through competitive pricing and price slashing. Post has recently lowered 22 of its cereal brands an average of 20%, and changed its coupon strategy to a "universal coupon" for all of its products. The price competition in this industry, with Post taking the lead, has been referred to by many analysts as "Grape Nuts Friday", when Phillip Morris cut the cost of Marlboro's in 1993 and sparked an industry-wide break in cigarette prices. The difficult aspect of this strategy that these firms must now be prepared for is the power of grocers to decide whether or not to reflect these price cuts in their product prices. Kellogg and its major competitors will now need to persuade grocers to extend these lower price opportunities to individual customers. This steep price cutting trend, and the necessary strategies that come along with it, is one that is relatively new to these "cereal kings". After profitable years of premium pricing, Kellogg and its brand-name rivals are now focusing on ways to lower costs to make up for the lost profits that price reductions are presently causing. The most evident area that will be targeted is the gigantic advertising budget each of these companies have developed. More efficient marketing techniques will be pursued, and reductions in in-store promotions are likely. Kellogg has also resorted to cutting its work force by one-tenth this past year in order to drive costs down. Pricing leverage in the breakfast cereal industry has begun to reflect that of the rest of the food industry, and customer value is now becoming a reality and priority within this industry.

Trends in Product Development

Other strategies that these dominant firms are incorporating into their defensive plans are strategies that will help to limit the ability of private-label brands to tap into this lucrative market. Research and development has always been and important variable of the cereal industry. Company success has been influenced and driven by new product development. New cereal flavors, crunchier cereal, healthier cereal, and cartoon-affiliated cereal are just a few examples of avenues explored throughout the history of product development. Private-branded cereal companies, however, can effectively offer their lower-priced imitation brands to the market because of their comparable technology and speed. This has resulted in various co-branding ventures among the "big four" that has produced products such as Hershey's and General Mills' Reese's brand, and Kellogg's and Con Agra's Healthy Choice brand. Through these co-branding agreements these dominant companies are able to establish brand equity that is virtually impossible for private-branded labels to imitate. If researchers from both companies can actually achieve a state of (as John Bryne calls it) "co-evolution", then Kellogg and others will be able to cut the enormous costs of launching a new product. One difficulty with co-branding ventures, however, is the weariness of companies to proceed with such a strategy in fear of tarnishing or losing previously established brand equity. The time taken to introduce a product to the market may also be much longer when co-branding considering the need for cooperation and agreement between the two companies!

Growth Trends

As competitors in the cereal industry attempt to ensure success and growth in the future, strategies including global expansion and operating cost reductions will be pursued. Companies such as Kellogg (which is currently the global leader in new-market development) recognize the importance and potential of foreign markets. Consumers throughout the world are developing similar tastes and preferences due to technological and economical improvements, and this provides many opportunities for global market share. Lower costs are essential for successful global expansion and also domestic competition. As product pricing trends continue to lean toward competitively lower prices, companies in the cereal industry will strive to improve efficiency in areas such as manufacturing and advertising. The security provided by premium pricing is no longer present, and cost control is the key to future success!

All of the information presented here was prepared by a student at St. Norbert College
in St. Pere, Wisconsin in the Spring of 1997. This analysis is only one part of a larger
report on Kellogg's. This report has been reprinted by permission of Matthew Roy, Ph.D.

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