Milagro De Japon

Harvard Business School

9-795-191
Rev. February 14, 1997

DO

The Ready-to-Eat Breakfast Cereal Industry in 1994
(A)
All is not well in the land of Tony the Tiger.1

T
NO

In early 1994, the ready-to-eat (RTE) breakfast cereal industry had reached a critical turning
point in its evolution. In an industry historically characterized by stability and above average
profitability,slowing demand growth and a surge in private label sales threatened to undermine the
dominant positions of the Big Three: Kellogg, General Mills, and Philip Morris. The 1993 year-end
statistics showed that industry sales growth had slowed to under 2%, while private labels had topped
5% market share by sales and 9% by volume for the first time. Price increases by the Big Three had
widened the gapbetween branded and private label products. The competitors had traditionally
avoided destructive head-to-head competition, but this mutual restraint appeared to be crumbling. Each
of the firms faced major decisions going forward about whether to break with the industry’s lock-step
moves and how to deal with the threat of private labels.

History of the RTE Breakfast Cereal Industry2

PYCO

The ready-to-eat breakfast cereal industry got its start in 1894, when Dr. John Kellogg and his
brother W.K. Kellogg invented wheat cereal flakes in an attempt to make whole grains appealing to the
vegetarian clients of the Seventh-Day Adventist sanitarium Dr. Kellogg ran in Battle Creek, Michigan. 3
W.K. went on to invent the corn flake and to found the Kellogg Company, still the numberone producer
of ready-to-eat cereals in the world a hundred years later. Also in 1894, Henry D. Perky, founder of
Perky's Shredded Wheat Company, promoted his cereal at the 1894 World's Fair in Boston with the
claim that, "From the most abject physical wreck, I have succeeded, by the use of naturally organized

1 James B. Treece, “The Nervous Faces Around Kellogg’s Breakfast Table,”BusinessWeek, July 18, 1994.

2 A comprehensive account of the history of the U.S. RTE cereal industry can be found in Frederick M. Scherer,

“The Breakfast Cereal Industry,” in The Structure of American Industry (6th ed.), W. Adams, ed., (New York:
Macmillan, 1982).
3 Cara de Silva, “The cereal crunch; antitrust suits focuses on something consumers have known for years:
cereal prices are sky high,”Newsday, February 24, 1993.
Professor Kenneth S. Corts prepared this case as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
Copyright © 1995 by the President and Fellows of Harvard College. To order copies or request permission to
reproduce materials, call 1-800-545-7685 or write Harvard Business SchoolPublishing, Boston, MA 02163. No
part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in
any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the
permission of Harvard Business School.

1

795-191

The Ready-to-Eat Breakfast Cereal Industry in 1994 (A)

DO

food, in reorganizing my body intoperfectly healthy condition."4 Perky sold his company to Nabisco in
1928, and his shredded wheat became their flagship brand. In 1898, a patient of Dr. Kellogg's, C.W. Post,
introduced Post's Grape Nuts, which early advertisements claimed could tighten loose teeth and cure
appendicitis. By 1994, Philip Morris had acquired both the Post and Nabisco lines of RTE cereals. The
Quaker Oats Companydiversified from its strong position in hot cereals into the RTE market with the
introduction of puffed rice and puffed wheat cereals at the 1904 World's Fair in St. Louis. Thus, by just
after the turn of the century, the predecessors of the Kellogg, Quaker, and Philip Morris cereal lines,
which collectively accounted for 59% of 1993 RTE sales by volume, had already been established.
Sales...