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 Volume2009

1 Coke 6 Diet Pepsi 

2 Pepsi-Cola 7 Sprite (Coke)

3 Diet Coke 8 Diet Mtn Dew (PepsiCo)

4 Mtn Dew (PepsiCo) 9 Fanta

5 Dr Pepper (Dr Pepper Snapple)

10 Diet Dr Pepper (Dr Pepper Snapple)

World Market

The Economics of Cereal

Top Cereal Producers

Firm 1999 2005 2008

Kellogg 32% 32% 33%

General Mills 31% 26% 25%

Post 16% 15% 15%

Private Labels 8% 14% 14%

Quaker Oats 9% 6% 7%

Malt-O-Meal 3% 5% 5%

Other 1%

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 Bran 3.0%K Froot Loops 2.6%GM Cinnamon Toast Crunch 2.4%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 95th 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 3rd 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