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1. Describe in detail the breakfast cereal price war in 1995.
The cereal war started in March 7, 1995 with Congressman Samuel Gejdenson and
Senator Charles Schimer issued “Consumers in a Box” and “when the companies started
searching for ways to grapple with stagnating demand in the nearly $9 billion industry.”
(nytimes.com) A heavy weight in the industry, Post and Nabisco a division of Kraft Foods,
which is also a division of the Philip Morris Cos cut its prices “by an average of 20 percent on all
of its brands including Grape Nuts, Raisin Bran and Nabisco Shredded Wheat.”
(ChicagoTribute.com) Why? You ask, due to the overwhelming dissatisfaction in the value
compared to the price, which has been making consumers extremely unhappy and the industry as
a whole was declining in sales. Post believe that in such a competitive market cutting the price
was the only way to stay ahead of the game. Along with Post other cereal companies such as
General Mills Inc., Kellogg Co. and Quaker Oats were also feeling the heat with single-digit
declines in cereal volume. Post took the largest hit was a 20 percent decline in volume in the
previous year. “Industry analysts point to the growing popularity of more convenient breakfast
foods, such as bagels, muffins and breakfast bars, as a factor, apart from price, in slowing down
cereal sales.” (ChicagoTribute.com)
The decrease in volume was causing companies huge problems elsewhere according to
Ellen Baras, an industry analyst with Nesbitt Burns Securities, “If you don't maintain volume, the
problem gets compounded because you can't keep the plants operating at full capacity and you
have less revenue to spread against your overhead” (ChicagoTribute.com) Due to Post cutting its
prices Kellogg, General Mills, and Quaker decided to make price-cutting plans of their own, all
in the name of increasing revenues. “Kelloggs followed on June 10th with a 19 percent price cut
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on two-thirds of its cereals. (Mayer, 1996) General Mills cut price 11 percent on 42 percent of its
volume on June 19th (Julien, 1996), and, Quaker cut prices 15 percent on 87 percent of its
volume on June 26th (Quaker, 1996). On a market share weighted basis these announced price
cuts produce an industry average price cut for branded cereals of 9.66%”
(ageconsearch.umn.edu)
2. Who were the firms that were engaged in the breakfast cereal price wars?
The main companies involved were Post and Nabisco, Kellogg, General Mills Inc. and
the Quaker Oats Company.
3. What was the effect on the revenues and profits?
Due to the cereal price wars Kellogg was expected to lose about $350 million off
revenues, and shares fell $2.875 dollars to $72 dollars on the New York Stock Exchange.
(nytimes.com) Kellogg Co. cut prices on two-thirds of its domestic brands by 19 percent.
General Mills brands including Lucky Charms, Raisin Bran, etc. by an average of 11 percent,
and increased the package size of seven other brands by the same 11 percent. “General Mills
shares fell 25 cents to $54.125 and Kellogg rose 25 cents to $69.875 on the New York Stock
Exchange. Shares of Philip Morris Cos., Post's parent, fell 12.5 cents to $102.375, also on the
NYSE. Stephen Sanger, General Mills' chairman and chief executive, said his company's cereal
sales had grown 10% over the last year.” (latimes.com)
But the price cuts would end up reducing sales for the fiscal year by 4 percent or $100
million. Post “in 1995, sales of store brand cereals grew by 10.8% while total cereal sales fell
3.3%, according to Information Resources.” (latimes.com) Due to the costs in the Post and
Nabisco cereal prices shares on the New York Stock Exchange rose 37.5 cents at $89.375
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dollars. “Shares of Kellogg closed at $71.375, down $1.25 and General Mills closed at $55.375,
down 25 cents.” (latimes.com)
4. Was there a winner?
If there were to be a winner based on the percent of market share each firm started with
and ended with after the price wars; I believe that General Mills and Quaker made out better
than the other name brands because of the amount of market share they originally had
increased after the price wars while the other brands, such as Kellogg lost market share about
one fourth of their share all due to the wars.
5. How was it resolved?
Companies, such as General Mills had to increase their prices by an average of 2.6
percent across the board due to the inflation and as a possible signal to the ending of the price
war. The inflation of U.S feed grains in 1995 and 1996 increased the prices for corn, soy-
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beans, and wheat because of the rise of foreign demand for those items, which in-turn made
those items very expensive for the cereal companies.
6. Explain the Price Leadership Model.
Price Leadership as described by investopedia.com is when a firm is the leader in its
sector and it can determine the price of goods and services. This can have a positive effect
only if the prices are set high. Competitors will be able to justify higher prices as well, and
not lose market share; thus, creating improved profitability for all firms involved. Economist
have discovered three types of Price Leadership Models; the barometric model, the dominant
firm, and the collusive model. The barometric model is the relationship that the one firm,
which is the most adept at spotting and adapting to changing market forces is the leader. It is
the leader for the simple fact that it is agile and flexible; more so, than its competitors. The
dominant firm is a model when the firm that is the biggest often surrounded by clusters of
tiny companies with similar products sets the price for that niche. Lastly, the collusive model
is when a “few key firms all tacitly agree to keep their prices the same. This often happens
without any outright agreement -- which could be illegal -- and tends to occur when the
barriers to entry are high and the costs involved in producing the product are well known to
everyone.” (smallbusiness.chron.com)
7. How can firms avoid price wars?
The best way for firms to avoid price wars is for all companies to use the dominant firm
leadership model, which will keep all firms on the same page because all would be under the
understanding that the dominant firm sets the market price either high or low, and that all
other smaller firms shall follow that same shift.
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8. What competitive strategy can a firm use to win in a price war?
The best way to handle a nasty price slashing battle is to simply just avoid it; instead of
cutting prices use superior value to fight against your competitors. Start by re-targeting your
market, then by differentiate your offering, and sell benefits not features, which is one
strategic way to emphasize the results your market wants and deliver on it. Offer money back
guarantees and offer a free trail to get the issue of money out of the way and start winning
back the customer!
9. What is the rationale behind a meet the competition clause?
This is a contractual arrangement between company and customer; it states that the company
has an option to retain the customer’s business by meeting any rival bids. The pros of this is that
it reduces the incentive for competitor to bid, it takes the guesswork out of bidding, and lets you
decide whether to keep the customer. A con is that it allows competitors to bid without having to
deliver.
