CEREAL WARS IN TOKYO

In August 1996, Jane Waters, product manager for KRAFT FOODS BREAKFAST CEREAL group in Japan, sat at her desk in the Tokyo headquarters of KRAFT JAPAN and starting working on her 1997 business plan. KRAFTs major competitor in the Japanese breakfast cereals market, KELLOGG, had significantly increased their advertising and trade expenditures for the first two quarters of 1996, and the sales volume for KRAFTs breakfast cereals had declined by over 10 % versus the same period one year earlier. Senior management was anxiously waiting for her decisions on how Jane would combat this competitive threat.

Jane was particularly concerned about how to allocate her 1997 marketing dollars to continue the various marketing programs that the KRAFT breakfast cereals group had in place in 1996. She realized that both areas of marketing (sales promotion and advertising) had been important historically to the success of KRAFT brands, but was unsure what mix was most appropriate for the competitive environment now. She knew that, whatever she decided, she would have to provide a clear rationale for her decisions to senior management.

KRAFT entered the Japanese market in 1960s and introduced breakfast cereals in 1983. KELLOGG also entered the market around the same time. Their flagship breakfast cereal brands have been the market leader in the Japanese market since mid 1970s. While there were some local Japanese breakfast cereal brands earlier, they had lost much of the market share to KRAFT and KELLOGG brands by the mid 1990s. Now these brands were largely relegated to the low-price fringe of the market, and cumulatively commanded about 20% market share. The remaining share belonged to KELLOGG and KRAFT brands.

BREAKFAST CEREALS MARKET IN JAPAN The breakfast cereals market in JAPAN was about $ 158 million retail ($ 110 mil ex-factory) in 1995. In the middle-tier and higher tiers of the market, the average retail price for a box of breakfast cereal was $3.70 in 1996 and the average ex[1]factory selling price was $2.60. The breakfast cereals typically built a unit contribution of roughly 50 % into their ex-factory selling prices.

This was a relatively saturated market and growth annual growth rates of the category were not phenomenal. The two key players were KELLOGG and KRAFT. While market shares were relatively stable in the past, the last few years had seen some share movement.

KRAFT BREAKFAST CEREAL BUSINESS

KRAFTs breakfast cereal business in JAPAN was an extension of their larger packaged goods business in the country. Over the past few decades, KRAFT had become one of the largest consumer products company in JAPAN selling a variety of processed food items. Their breakfast cereals business included three major brands, and several minor ones. All three brands were sold through supermarkets and convenience stores in small and large sizes. In 1995, these brands held a combined 40 % share of the Japanese breakfast cereals market.

Along with its strong brand portfolio and huge size, KRAFT had well-established positions in its packaged goods channels and an excellent reputation for its brands. The company had established an aggressive leadership mission, which required its operations to achieve outstanding overall quality, to obtain excellent financial results and to build strong brand equity through advertising.

CONSUMER BUYER BEHAVIOR

Most of the breakfast cereal sold in JAPAN was purchased at supermarkets and to a lesser extent through warehouse clubs. Primary buyers were both men and women, but the key decision maker was thought to be women mostly stay-at[1]home homemakers as well as working women. Besides this, there was an active purchase segment of singles and smaller families.

While product changes were rare in this industry, companies always used to advertise peripheral changes in their products as significant improvements like more raisins, more vitamins, etc. Recently both KELLOGG and KRAFT had based their advertising on such claims. Market research demonstrated that while consumers did not find these claims to be very significant, they were influenced by this type of advertising to a certain extent. Moreover, constantly updating the brand with the help of these improvement/enhancement ads helped keep the brand name fresh in the consumers mind and aided in reducing price sensitivity and competition with lower-tier brands. However most industry watchers agreed that advertising did not significantly contribute to the growth of the market as a whole since the penetration levels of breakfast cereals was already very high. So advertising was largely instrumental in competitive share dynamics. Much of the advertising in the industry was through the medium of television. Retail store merchandising and sales effort also played a key role.

Sales promotion efforts were largely in the form of trade sales promotion aimed at the retailers/supermarkets in the form of volume purchase discounts and/or slotting fee. There was very little retail pass-through, but the retailers could play a major role in the marketing process. Running special marketing efforts in-store and proper shelf spacing of the breakfast cereal brands could significantly influence sales. There was no significant competition from store-brand breakfast cereals or private labels.

COMPETITION

In 1995, KELLOGG was the co-leader in the Japanese breakfast cereals market with a 41 % share, primarily due to the strength of two major products. More recently, KELLOGG had changed its business objective to aggressive volume growth in early 1996. As a result of this change, the amount of funds offered to the trade was raised significantly to support more store display and co-op retail advertising. TV Advertising expenditures also grew about 35 % in the first two quarters of 1996. KELLOGGs volume responded to this increased spending with a 12 % increase.

Local Japanese brands and a few low-end brands shared the remaining market with some store-brands and private labels. All of these targeted the lower tier segments, and were priced significantly below KRAFT and KELLOGG brands.

MARKETING BUDGET ALLOCATION

KRAFT breakfast cereal sales volume grew from $27 million in 1991 to $43.5 million in 1995 as a result of aggressive marketing. In the same period, marketing expenditures increased from $7.5 million to $16 million. However, in looking at the data for this period, it was not clear to Jane which marketing programs (trade promotions and/or advertising) were most effective at building sales, since it was extremely difficult to attribute sales increases to specific marketing efforts.

The cost structure in the industry was such that other than marketing expenditures in the form of sales promotions and advertising, there were no other significant fixed costs, and they were usually constant from year to year.

BUDGET ALTERNATIVES

Although no incremental funds were available for the balance of 1996, Janes 1997 marketing budget had been increased by senior management to $19 million, an increase of about 15 %. This increase reflected KRAFTs continued commitment to the breakfast cereals business. Given this increase, Jane was considering several alternate courses of action. She could ask for a change in the final budget allocated to her for 1997. She could also increase or decrease the proportion of the budget going towards TV advertising or sales promotion. Finally she wondered what competitive response would be forthcoming given her own actions.

Question:

Can you make any intelligent guesses about why KELLOGG suddenly increased their marketing expenditure?

Note:

This is for a marketing class.

JAPAN BREAKFAST CEREAL MARKET 1990 1991 1992 1993 1994 1995 1996 +2 +3 +4 +3 +3 +2 +2 % Market Volume Growth 73 77 81.5 85 94.5 110.5 118* Market Sales (ex- factory) (in $ million) *Estimated forecast as per mid-year trends KRAFT BREAKFAST CEREALS (in $ million) 1990 1991 1992 1993 1994 1995 1996 KRAFT Breakfast cereals 26.5 27 29.5 32 36 43.5 39-40.5* Ex-Factory Revenue 3.5 3.5 5 5 6 8 8 Sales Promotion Expenditure 4 4 4 5.5 6.5 8 8.54 Advertising Expenditure *Estimated forecast as per mid-year trends # Budgeted spend KELLOGG BREAKFAST CEREALS (in $ million) 1990 1991 1992 1993 1994 1995 1996 KELLOGG Breakfast cereals 34 36 37.5 38 40.5 45 48.5-52* Ex-Factory Revenue 9.5 9.5 10 10.5 11 12 16-174 Total Marketing Expenditure *Estimated forecast as per mid-year trends # Estimated spending as per mid-year spending trend JAPAN BREAKFAST CEREAL MARKET 1990 1991 1992 1993 1994 1995 1996 +2 +3 +4 +3 +3 +2 +2 % Market Volume Growth 73 77 81.5 85 94.5 110.5 118* Market Sales (ex- factory) (in $ million) *Estimated forecast as per mid-year trends KRAFT BREAKFAST CEREALS (in $ million) 1990 1991 1992 1993 1994 1995 1996 KRAFT Breakfast cereals 26.5 27 29.5 32 36 43.5 39-40.5* Ex-Factory Revenue 3.5 3.5 5 5 6 8 8 Sales Promotion Expenditure 4 4 4 5.5 6.5 8 8.54 Advertising Expenditure *Estimated forecast as per mid-year trends # Budgeted spend KELLOGG BREAKFAST CEREALS (in $ million) 1990 1991 1992 1993 1994 1995 1996 KELLOGG Breakfast cereals 34 36 37.5 38 40.5 45 48.5-52* Ex-Factory Revenue 9.5 9.5 10 10.5 11 12 16-174 Total Marketing Expenditure *Estimated forecast as per mid-year trends # Estimated spending as per mid-year spending trend