Differentiated Products AG BM 102

Commodity Products Consumer (or buyer) doesn’t care who made commodity products Commodity products are sold on price Quality matters but many sellers can provide a given quality Producers have very little customer loyalty Barriers to entry low – at least in comparison

Differentiated Products These products have a distinct identity The manufacturer has some control over the price It need not sell for the same price as the competitor’s price Keys to success are product characteristics Entry very difficult

Advertising Backbone of differentiated products – remind consumer of the differences Costs a lot of money Lots of effort spent

Growth Hard to win customers from competitor May raise prices for a while Entering new markets can be difficult New product strategy common

Rationale for New Product Development emerging demands counter competitors broaden product line product life cycle

Types of New Products Innovative – Lite Beer New to firm – Sprite for Coke copied 7Up Product line extension – Vanilla Coke Product improvements – new Cheer

Leading Soft Drinks by Volume Coke6Diet Pepsi 2Pepsi-Cola7Sprite (Coke) 3Diet Coke8Diet Mtn Dew (PepsiCo) 4Mtn Dew (PepsiCo)9Fanta 5Dr Pepper (Dr Pepper Snapple) 10Diet Dr Pepper (Dr Pepper Snapple)

World Market

The Economics of Cereal

Top Cereal Producers Firm Kellogg32% 33% General Mills31%26%25% Post16%15% Private Labels8%14% Quaker Oats9%6%7% Malt-O-Meal3%5% Other1%

Leading Brands 2008 GM Cheerios 12.6% K Special K 5.4% P Honey Bunches of Oats 4.9% K Frosted Flakes 3.8% K Frosted Mini Wheats 3.5% K Kellogg Raisin Bran3.0% K Froot Loops 2.6% GM Cinnamon Toast Crunch2.4% GM Lucky Charms 2.4% Q Cap’n Crunch 2.4% Source: Topher's Breakfast Cereal Character Guide

Inputs Inputs are commodity products Input supplier power is very low

Cereal Company Power Moderate Sole source of branded products Some essential to store Yet Kellogg needs store just like store needs Kellogg Store has more power for new products

Supermarket’s Power Supermarket’s power is medium Is increased by supplier dependence on –Distribution channels –Shelf space –Consumers –Advertisements Is decreased by buyer’s need for –Cereal products –Other food items produced by the companies

Threat of Substitutes Threat of substitutes is medium The threat is increased by –Increased pace of life –Fast food alternatives –Fewer people eating breakfast –Fewer manual jobs The threat is decreased by –Health Awareness –Company Diversification

Threat of New Entrants The threat of new entrants is very low Barriers to entry include –Economies of scale –Product differentiation –Capital requirements –Buyer switching costs –Access to distribution channels –Brand proliferation

Intensity of Rivalry Rivalry is very intense Rivalry is increased by –A few similar sized competitors –Slow industry growth –High fixed costs –High degree of differentiation –Low consumer switching costs

General Mills Largest market share in ready to eat cereal industry. #1 in all but one out of the major product categories it has products 1 out of every 11 boxes of cereal sold is Cheerios.

Strengths Brand Names –Cheerios, Trix, Total, Lucky Charms, Wheaties, Golden Grahams, Cocoa Puffs Innovation –Hamburger Helper, Fruit Rollups Industry Focused –Divested all non-food products –Acquired Pillsbury

The Kellogg Company W.K. Kellogg ran a health resort where (Kellogg’s claims) cereal was invented Today, they are the world’s second largest producer of cereal

Strengths Knowledge –In 95 th year of producing cereal commercially –Founded by the (claimed) creator of cereal –Invested a lot of resources in R&D Brand Name –Great reputation –Tony the Tiger, Snap, Crackle, and Pop

Post Cereal Company Postum Cereal company started in 1895 by C.W. Post. Grape-Nuts introduced in 1897 Post now ranks 3 rd in industry in market share. Post took initiative in 1996 by lowering prices an average of 20 percent

Strengths Established Since 1901 Diversified –Gatorade, Rice A Roni, Aunt Jemima Nutrition Late entrant to cold cereals Part of PepsiCo since 2001

Concluding Comments Branded foods have special role in marketplace Consumer loyalty Grocer must carry strong brands Gives manufacturer leverage Requires investment in brand Price competition rare