Reason for the high-profitability of the RTE cereal business:
The "Big Three" cereal manufacturers have jointly monopolized the market and have reaped high profits from their monopoly pricing combined with the tacit co-ordination they share regarding price hikes. The "Big Three" have backed up their monopoly strategy with their strong relationships with each other and with regional and national grocers. This relationship allowed them to control or buy shelf space and ideal positioning of their product on the grocers shelves. Moreover, the major cereal manufacturers also owned national distribution system and flooded the market with a wide variety of cereals. Another key factor is the coupon redemption process driving consumer demand. The industry spent more than one billion per year on coupon redemption and advertising, enticing customers into purchasing their products. This marketing practice prohibits any new independent players that don't have deep financial pockets from entering the market.
Taking into account the initial capital cost's to build and maintain the factory, advertising costs, distributions requirements, grocer's relationships for shelf space, product proliferation and minimum production requirements for efficiencies purposes, the barriers for entry for a new player are pretty high.
Success of Private labels is due to their better cost structure and price incentives:
With the emergence of mass-merchandisers like Walmart in the 1990's, the smaller players and private labels manufacturers, found a new avenue for placement of their cereal brands appealing to the value-conscious customer who felt that the "Big Three" were exorbitantly expensive. The "Big Three" were also caught off-guard when demand for natural cereals surged and the smaller players capitalized on this opportunity. One of the branded players, Ralston, also began producing private label cereals probably in order to use excess capacity in production effectively. The private labels...