Cereal
Pricing
Cereal
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: • Energy, cereal, granola and protein
- cold and hot breakfast cereal
bars are not included in this industry
MARKET SEGMENTATION 2016
PRODUCT SEGMENTATION 2016
Hot cereal
7%
Food Service Exports
Providers
6%
7%
Other foods
48%
Supermarkets
and
Convinience
stores
54%
Grocery
Wholesalers
33%
Ready to eat
wheat
breakfast food
17%
Ready to eat
corn breakfast
food
28%
Industry
Generic vs
Brand
Price 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
•
•
•
•
•
Industry
Generic vs
Brand
Price Elasticity
Revenue: $10.6bn
Profit: $574.3m
Annual Growth (2011-2016): -2.1%
Exports: $665.5m
Future Annual Growth: -0.6%
Businesses: 38
Taste Test
Size
Geography
Advertising
Industry Analysis
• CONCENTRATION –C4
Market Share
• 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
Industry
Generic vs
Brand
Price Elasticity
Taste Test
40
35
30
25
20
34.7
15
10
23.8
23.3
11.9
5
6.3
0
General Mills
Inc
Size
Kellogg
Company
Post Holdings PepsiCo Inc.
Geography
Other
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
Brand
Price 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
Brand
Price 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
Brand
Price 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
• Children’s food marketing calls for change
• Concerns of rising childhood obesity
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Key Drivers for Success
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.
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Generic Vs Name Brands
Industry
Generic vs
Brand
Price 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
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Brands Surveyed
• All in top 20 cereal brands (2011)
• Variety of tastes/demographics
• Kellogg’s & General Mills two largest
brands
Industry
Generic vs
Brand
Price 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
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Average Name Brand Markup Percentage
31.00%
30.00%
29.00%
• Average Cereal markup 28%
• Corn Flakes highest markup
28.00%
27.00%
26.00%
percentage
25.00%
24.00%
23.00%
Rice Krispies Corn Flakes Frosted Mini Lucky Charms
Wheats
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Cheerios
Advertising
Price/Oz Name Brand Vs Generic
$0.25
$0.20
• Wide Variety in markup percentages
$0.15
• Walmart- 10%
• Wegmans- 43%
$0.10
• Target- 38%
$0.05
$-
Walmart
Wegmans
Corn Flakes
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Target
Generic
Geography
Advertising
Can Generic Cereals Be More Expensive?
$0.18/Oz
$0.16/Oz
Industry
Generic vs
Brand
Price 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
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Price Elasticity of Demand: Results
Price Elasticity of Demand:
%∆𝑄𝑑
%∆𝑃
• Price Elastic: 1 < 𝐸𝑑 < ∞
• Price Inelastic: 0 < 𝐸𝑑 < 1
Wegmans Generic Cereal: 0.57
Walmart Generic Cereal: 0.65
Target Generic Cereal: 0.66
Branded Cereal: 0.29
Industry
Generic vs
Brand
Price Elasticity
$
$
$
$
$
$
$
$
PED
Taste Test
2
3
4
5
6
7
8
9
Wegmans
52
47
27
16
4
1
0.57
Size
Generic
Walmart
52
38
14
4
Target
52
37
13
4
0.65
0.66
Geography
Branded
Favorite
52
52
48
32
23
12
10
3
0.29
Advertising
Price Elasticity of Demand: Conclusions
Overall – Branded cereal is more price
inelastic than Generic cereal
Suggestion
• Brand Loyalty: Consumers are loyal to a
brand with an image
• Psychology: Consumers associate branded
cereal with superior quality
Average Price Per Box of Generic Cereal
$3.50
$3.00
Generics – Wegman’s 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”
Industry
Generic vs
Brand
Price Elasticity
$2.50
$2.00
$1.50
$1.00
$0.50
Taste Test
$Target
Size
Wegmans
Geography
Walmart
Advertising
3 Volunteers
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Blind Taste Test
• No Large-Scale studies yet comparing cereal specifically
• In Name Brand Vs Generic studies as a whole, the average
consumer cannot tell a difference
• In small scale cereal focused experiments, people are able to
taste differences in cereal in blind taste test
• Other items consumers could tell a difference in:
• Ice cream
• Orange juice
• Beer
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Should You Buy Generic Cereal?
• High discount percentage- but
not that expensive of a product to
begin with
• May depend on the type
• Are there larger sizes available for
National brands?
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Second Degree Price Discrimination in Sizing
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Price/Oz of Cheerios
Target
Wegmans
Walmart
$0.80
$0.80
$0.80
$0.70
$0.70
$0.70
$0.60
$0.60
$0.60
$0.50
$0.50
$0.50
$0.40
$0.40
$0.40
$0.30
$0.30
$0.30
$0.20
$0.20
$0.20
$0.10
$0.10
$0.10
$-
$21 oz
Industry
18 oz
12 oz
8.9 oz
1.3 oz
Generic vs
Brand
$40.7 oz
Price Elasticity
18 oz
12 oz
Taste Test
1.3 oz
21 oz
Size
18 oz
Geography
12 oz
8.9 oz
Advertising
Price/Oz
Price/Oz Malt O Meal (Generic)
$0.18
$0.18
$0.16
$0.16
$0.14
$0.14
$0.12
$0.12
Price Per Ounce
Price per ounce
Price/Oz (Branded)
$0.10
$0.08
$0.10
$0.08
$0.06
$0.06
$0.04
$0.04
$0.02
$0.02
$-
$36 oz
24 oz
18 oz
68
50.1
Size of Package in Oz
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
43.5
30
Size of Package in Ounces
Geography
27
18
15
Advertising
Less than $.01 per ounce Delta
Great Value Marshmallow Treasures
Great Value Shredded Wheat
Size
Price/Oz
Size
Price/Oz
24
$0.1221
11.5
$0.1357
16.4
$0.1207
20.5
$0.1429
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Geographic Price Analysis: Raw Data
City
Portland
Chicago
Atlanta
New York
San Francisco
Cheerios (54oz)
Frosted Flakes (61.9 oz) Honey Bunch of Oats (48 oz)
8.89
8.99
6.89
9.79
9.29
8.09
9.69
9.29
7.39
9.79
9.19
7.99
9.99
9.49
8.29
Lucky Charms (46oz) Mini Wheats (64oz)
7.19
9.89
7.39
10.99
7.29
10.99
8.59
11.19
8.79
11.29
Income Level
$
46,090
$
51,046
$
51,948
$
59,799
$
63,024
Is there a significant difference between the price of cereal in cities across the
USA?
Method:
• Conduct a Randomized Block Test designed to eliminate the variability in size of each
cereal brand and solely analyze the difference between average cereal price in each city
• Use a 99% Confidence Interval
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Geographic Price Analysis: Hypothesis Test
1. H0 : The means of cereal prices in all cities are
equal HA : The means of cereals prices in all
cities are not equal
12.00
11.00
2. α = 0.01
3. Test Statistic:
Geographic Pricing of Cereal
10.00
MS(T)
MS(E)
9.00
4. Reject H0 if FCALC > 4.20
8.00
5. FCALC = 10.12, Reject H0 at α = 0.01
7.00
6. There is evidence to suggest that there is a
significant difference between cereal prices in
cities across the USA.
6.00
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Cheerios (54oz)
Portland
Frosted Flakes
(61.9 oz)
Chicago
Size
Honey Bunch of
Oats (48 oz)
Atlanta
Lucky Charms
(46oz)
New York
Geography
Mini Wheats (64oz)
San Francisco
Advertising
Geographic Cereal Prices: Further Analysis
Conducted a regression analysis to understand the correlation between Median Income
in select cities and the Average Cereal Price in each city
Median Income and Average Cereal Price
$63,024
$65,000
MEDIAN INCOME ($)
$59,799
$60,000
y = 14115x - 73581
R² = 0.881
$55,000
$51,948
$51,046
$50,000
$46,090
$45,000
$40,000
$8.20
$8.40
$8.60
$8.80
$9.00
$9.20
AVERAGE CEREAL PRICE
$9.40
$9.60
$9.80
𝑅2 value of 0.881 suggests that a strong linear relationship between Average Cereal
Price and Median Income per city.
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Advertising
Television
Online
Print
Social Media
Promotions
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Promotions
Giveaways to
Engage Customers
Industry
Generic vs
Brand
Coupons by
Company or Brand
Toys in Cereal Boxes
Price Elasticity
Taste Test
Size
Geography
Advertising
Advertising Data
• 8pm-10pm Primetime; 2014
• 727 Total Advertisements
• ABC, CBS, NBC, FOX, CW
• Kelloggs, General Mills, Kashi, Post
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Advertising by Company
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Kelloggs Brands
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Health Differences
General Mills
• Cheerios: 89 ad slots
• Lucky Charms: 18 ad slots
Kelloggs
• Special K: 114 ad slots
• Frosted Flakes: 18 ad slots
Industry
Generic vs
Brand
Price Elasticity
Taste Test
Size
Geography
Advertising
Questions?