RTE Cereal – Barriers to Entry
Barrier #1: Reputation
The most obvious barrier to entry for the RTE cereal industry is the reputation of the Big Three cereal companies (i.e. Kellogg, General Mills, Philip Morris). The predecessors of these three companies “collectively accounted for 59% of 1993 RTE sales by volume” (2). At least two generations of Americans knew these brands that had been established around the turn of the century to the 1900s (2). Besides their century-long existence, they advertised heavily – “The RTE breakfast cereal industry had always been among the most advertising intensive of all industries, with an advertising/sales ratio as high as 18.5% in the 1960s” (5). They were well-known in America, and for a new RTE cereal company to start up, they would face an uphill battle to make themselves as well-known as the Big Three.
Another aspect of reputation that acts as a barrier to entry is the co-branded cereals that the Big Three have frequently launched. In 1994, Kellogg partnered with Healthy Choice to launch “Healthy Choice from Kellogg’s”, and General Mills partnered with Hershey Foods to launch “General Mills’ Reese’s Peanut Butter Puffs” (6). The reputation that non-cereal companies such as these add to co-branded cereals is hard to compete with for a new RTE cereal company with little power or influence.
Barrier #2: Capital Requirements and High Sunk Costs
A second barrier to entry is the high capital investment cost for a new RTE cereal company to enter the market. The kind of RTE cereal plant needed to compete with existing firms “that combined production and packaging together in one plant…required a capital investment in excess of $100 million” (3). That is a big hoop a new competitor would have to jump through to be a viable competitor.
Another capital requirement for a new firm is a “large sales [staff] that worked closely with major supermarket chains and food stores to ensure the proper stocking, display and promotion of [the] firm’s brands” (4). This staff worked with food stores on such things as “making better use of scanner data to manage inventories”, increasing the efficiency of both the
