Cereal Pricing Cereal Strategies - Cornell University presentations... · Cereal Pricing Cereal...
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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
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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
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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.
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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
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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
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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
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Generic Vs Name Brands
Industry Generic vs
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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
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Brands Surveyed
• All in top 20 cereal brands (2011)
• Variety of tastes/demographics
• Kellogg’s & General Mills two largest
brands
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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 $0.18/Oz
Industry Generic vs
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Price Elasticity of Demand: Survey
• Conducted 52 surveys:
• Generic Cereal (Wegmans, Walmart and Target) + Favorite Cereal Brand
• Methodology:• Created a maximum and minimum price range through a sample group (5 people)
• Minimized framing bias by placing each question on different page
• Target Audience: Students at Cornell University
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Price Elasticity of Demand: Results
Price Elasticity of Demand: %∆𝑄𝑑
%∆𝑃
• Price Elastic: 1 < 𝐸𝑑< ∞
• Price Inelastic: 0 < 𝐸𝑑< 1
Wegmans Generic Cereal: 0.57
Walmart Generic Cereal: 0.65
Target Generic Cereal: 0.66
Branded Cereal: 0.29
Branded
Wegmans Walmart Target Favorite
2$ 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
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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
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Suggestion
3 Volunteers
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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
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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?
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Second Degree Price Discrimination in Sizing
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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
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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
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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 $0.1207
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Geographic Price Analysis: Raw Data
Is there a significant difference between the price of cereal in cities across the USA?
Method: • Conduct a Randomized Block Test designed to eliminate the variability in size of each
cereal brand and solely analyze the difference between average cereal price in each city
• Use a 99% Confidence Interval
City Cheerios (54oz) Frosted Flakes (61.9 oz) Honey Bunch of Oats (48 oz) Lucky Charms (46oz) Mini Wheats (64oz) Income Level
Portland 8.89 8.99 6.89 7.19 9.89 46,090$
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$
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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
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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
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Advertising
Television
Online
Social Media
Promotions
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Promotions
Toys in Cereal BoxesCoupons by
Company or BrandGiveaways to
Engage Customers
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Advertising Data
• 8pm-10pm Primetime; 2014
• 727 Total Advertisements
• ABC, CBS, NBC, FOX, CW
• Kelloggs, General Mills, Kashi, Post
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Advertising by Company
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Kelloggs Brands
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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
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Questions?