Case Study: The Joint Venture between General Mills and Nestle

?  Kellogg virtually created the market for breakfast cereals in Europe. The maker of such popular brands as Kellogg’s Corn Flakes, Rice Krispies, and Frosted Flakes, Kellogg began introducing its products in the United Kingdom in the 1920s and on the continent in the 1950s. However, Europeans traditionally favored bread, fruit, eggs, and meats for breakfast, so the firm had a tough sell on its hands. Indeed, it has taken decades for Europeans to accept cereals as a viable breakfast choice.

?During the last several years, however, demand for breakfast cereals in Europe has begun to accelerate, as European consumers have become more health-conscious and started looking for breakfast alternatives to eggs and meat. The busy schedules of the increasing number of dual-career families have also spurred demand for prepackaged foods. Another contributing factor has been the emergence of supermarkets in Europe. Traditionally most food products in Europe were sold at small specialty stores, which were often reluctant to stock cereals because they take up so much shelf space. In recent year, however, more full-line supermarkets have opened in Europe, and shelf space is now available for a wider array of products.

?Finally, the growth of commercial TV outlets in Europe has helped firms increase brand awareness and demand through advertising. Needless to say, the enormous potential of the European cereal market also attracted the interests of Kellogg’s competitors.?

One of Kellogg’s biggest competitors in the United States is General Mills, which makes such popular brands as Cheerios and Golden Grahams. General Mills has traditionally concentrated on the North American market. But in 1989 General Mills’ managers decided it was time for the company to enter the European market. However, they also recognized that taking on Kellogg, which controlled 50 percent of the worldwide cereal market and dominated the European market, would be a monumental battle.

?After careful consideration, General Mills’ CEO, Bruce Atwater, decided that the firm could compete most effectively in Europe if it worked with a strategic ally located there. It didn’t take him long to choose one: Nestle, the world’s largest food-processing firm. Nestle is a household name in Europe, has a well-established distribution system, and owns manufacturing plants worldwide. One major area in which Nestle had never succeeded, however, was the cereal market. Thus Atwater reasoned that Nestle would be a logical and willing partner.

?When he approached his counterpart at Nestle, he was amazed to discover that that firm had already been considering approaching General Mills about just such an arrangement. From Nestle’s perspective, General Mills could contribute its knowledge of cereal technology, its array of proven cereal products, and its expertise in marketing cereals to consumers, especially children.

?Top managers of the two firms met and quickly outlined a plan of attack. Each firm contributed around $80 million to create a new firm called Cereal Partners Worldwide (CPW). CPW’s corporate offices were established in Lausanne, Switzerland. General Mills agreed to install its proprietary manafacturing systems in existing Nestle factories, oversee the production of cereals, and help develop advertising campaigns. Nestle, in turn, agreed to use its own globally recognized corporate name on the products and to handle sales and distribution throughout Europe. The two partners set two major goals for CPW: They wanted CPW to be generating annual sales of $1 billion and to be a strong number two in market share outside North America by the year 2000.

?By almost any measure, CPW has been a big success. Among its first triumphs was a deal struck with Disneyland Paris to supply breakfast cereals to the restaurants and hotels at the French theme park and to use Disney characters to promote the firm’s cereals. The firm quickly established itself as a major player in the European cereal market, where it achieved its goal of being number two in that market with a 12 percent market share, with an impressive 25 percent of the United Kingdom market. Having solidified its beachhead in Europe, CPW then expanded its operations to Latin America and Asia. With revenues of $1.8 billion in 2004, it now operates in over 130 countries, delivering a steady and growing stream of earning for its parents, Nestle and General Mills.

Question

1. Why did General Mills and Nestle choose to participate in the joint venture for cereal business rather than operate their own wholly owned subsidiary in Europe?

2. Does General Mills get success in forming the joint venture with Nestle in cereal business? Why?

Also describe about the potential of this joint venture in the near future. ?