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Cereal Cereal Pricing

StrategiesBy: 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:- cold and hot breakfast cereal

Hot cereal7% Ready to eat

wheat breakfast food

17%

Ready to eat corn breakfast

food28%

Other foods 48%

PRODUCT SEGMENTATION 2016

Supermarkets and

Convinience stores54%

Grocery Wholesalers

33%

Food Service Providers

7%

Exports 6%

MARKET SEGMENTATION 2016

• Energy, cereal, granola and protein

bars are not included in this industry

Industry Generic vs

BrandPrice 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

Revenue: $10.6bn

Profit: $574.3m

Annual Growth (2011-2016): -2.1%

Exports: $665.5m

Future Annual Growth: -0.6%

Businesses: 38

Industry Generic vs

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Industry Analysis

• CONCENTRATION –C4• 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

23.8 23.3

11.96.3

34.7

0

5

10

15

20

25

30

35

40

General MillsInc

KelloggCompany

Post Holdings PepsiCo Inc. Other

Market Share

Industry Generic vs

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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

BrandPrice 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

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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

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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

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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.

Key Drivers for Success

Industry Generic vs

BrandPrice Elasticity Taste Test Size Geography Advertising

Generic Vs Name Brands

Industry Generic vs

BrandPrice 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

BrandPrice 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

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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

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23.00%

24.00%

25.00%

26.00%

27.00%

28.00%

29.00%

30.00%

31.00%

Rice Krispies Corn Flakes Frosted MiniWheats

Lucky Charms Cheerios

Average Name Brand Markup Percentage

• Average Cereal markup 28%

• Corn Flakes highest markup

percentage

Industry Generic vs

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Price/Oz Name Brand Vs Generic

$-

$0.05

$0.10

$0.15

$0.20

$0.25

Walmart Wegmans Target

Corn Flakes Generic

• Wide Variety in markup percentages

• Walmart- 10%

• Wegmans- 43%

• Target- 38%

Industry Generic vs

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Can Generic Cereals Be More Expensive?

$0.16/Oz $0.18/Oz

Industry Generic vs

BrandPrice 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

BrandPrice 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

Branded

Wegmans Walmart Target Favorite

2$ 52 52 52 52

3$ 47 38 37 52

4$ 27 14 13 48

5$ 16 4 4 32

6$ 4 23

7$ 1 12

8$ 10

9$ 3

PED 0.57 0.65 0.66 0.29

Generic

Industry Generic vs

BrandPrice Elasticity Taste Test Size Geography Advertising

Price Elasticity of Demand: Conclusions

Overall – Branded cereal is more price inelastic than Generic cereal

• Brand Loyalty: Consumers are loyal to a brand with an image

• Psychology: Consumers associate branded cereal with superior quality

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” $-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Target Wegmans Walmart

Average Price Per Box of Generic Cereal

Industry Generic vs

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Suggestion

3 Volunteers

Industry Generic vs

BrandPrice 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

BrandPrice 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

BrandPrice Elasticity Taste Test Size Geography Advertising

Second Degree Price Discrimination in Sizing

Industry Generic vs

BrandPrice Elasticity Taste Test Size Geography Advertising

Price/Oz of Cheerios

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

21 oz 18 oz 12 oz 8.9 oz 1.3 oz

Target

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

40.7 oz 18 oz 12 oz 1.3 oz

Wegmans

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

21 oz 18 oz 12 oz 8.9 oz

Walmart

Industry Generic vs

BrandPrice Elasticity Taste Test Size Geography Advertising

Price/Oz (Branded)

$-

$0.02

$0.04

$0.06

$0.08

$0.10

$0.12

$0.14

$0.16

$0.18

68 50.1 43.5 30 27 18 15

Pri

ce P

er O

un

ce

Size of Package in Ounces

Price/Oz Malt O Meal (Generic)

$-

$0.02

$0.04

$0.06

$0.08

$0.10

$0.12

$0.14

$0.16

$0.18

36 oz 24 oz 18 oz

Pri

ce p

er o

un

ce

Size of Package in Oz

Industry Generic vs

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Price/Oz

Less than $.01 per ounce Delta

Great Value Marshmallow Treasures

Size Price/Oz

11.5 $0.1357

20.5 $0.1429

Great Value Shredded Wheat

Size Price/Oz

24 $0.1221

16.4 $0.1207

Industry Generic vs

BrandPrice Elasticity Taste Test Size Geography Advertising

Geographic Price Analysis: Raw Data

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

City Cheerios (54oz) Frosted Flakes (61.9 oz) Honey Bunch of Oats (48 oz) Lucky Charms (46oz) Mini Wheats (64oz) Income Level

Portland 8.89 8.99 6.89 7.19 9.89 46,090$

Chicago 9.79 9.29 8.09 7.39 10.99 51,046$

Atlanta 9.69 9.29 7.39 7.29 10.99 51,948$

New York 9.79 9.19 7.99 8.59 11.19 59,799$

San Francisco 9.99 9.49 8.29 8.79 11.29 63,024$

Industry Generic vs

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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

2. α = 0.01

3. Test Statistic: MS(T)

MS(E)

4. Reject H0 if FCALC > 4.20

5. FCALC = 10.12, Reject H0 at α = 0.01

6. There is evidence to suggest that there is a significant difference between cereal prices in cities across the USA.

6.00

7.00

8.00

9.00

10.00

11.00

12.00

Cheerios (54oz) Frosted Flakes(61.9 oz)

Honey Bunch ofOats (48 oz)

Lucky Charms(46oz)

Mini Wheats (64oz)

Geographic Pricing of Cereal

Portland Chicago Atlanta New York San Francisco

Industry Generic vs

BrandPrice Elasticity Taste Test Size Geography 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

𝑅2 value of 0.881 suggests that a strong linear relationship between Average Cereal Price and Median Income per city.

$46,090

$51,046 $51,948

$59,799

$63,024

y = 14115x - 73581R² = 0.881

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$8.20 $8.40 $8.60 $8.80 $9.00 $9.20 $9.40 $9.60 $9.80

MED

IAN

INC

OM

E ($

)

AVERAGE CEREAL PRICE

Median Income and Average Cereal Price

Industry Generic vs

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Advertising

Television

Online

Print

Social Media

Promotions

Industry Generic vs

BrandPrice Elasticity Taste Test Size Geography Advertising

Promotions

Toys in Cereal BoxesCoupons by

Company or BrandGiveaways to

Engage Customers

Industry Generic vs

BrandPrice 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

BrandPrice Elasticity Taste Test Size Geography Advertising

Advertising by Company

Industry Generic vs

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Kelloggs Brands

Industry Generic vs

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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

BrandPrice Elasticity Taste Test Size Geography Advertising

Questions?