Route to brand best strategy by jennyyingdi


									Route to a brand’s best strategy
New findings challenge the belief that market share alone correlates
with profitability. Bain & Company’s analysis of 200 brands shows
that products at the high end stand to earn considerably more
with a smaller share of the overall product category

by Cyrus Jilla, Nicolas Bloch                            Conventional wisdom holds that market           in the market to settle for 40-cent razors.
and Vijay Vishwanath                                     share alone determines profitability for        What’s more, 15 per cent of Sensor’s new
                                                         branded consumer products. But that             sales came from consumers who had
                                                         masks the full story. Consider what hap-        bought competitors’ disposable razors. The
                                                         pened to The Gillette Co. after its main com-   Sensor and its succeeding products
                                                         petitor Bic introduced low-cost disposable      returned the razor to a high-end category.
                                                         razors sold by the bag in the mid-1970s.            Gillette had decided that making the
                                                         Gillette, the global leader in razors,          entire wet-shaving category more premium
                                                         responded with its own razors in bags.          was more important than just getting back
                                                               Yet Gillette’s brand managers soon        its market share in a category that was
                                                         realised that even if they maintained a         becoming a commodity. The lesson is that
                                                         majority share in a value-oriented category,    market share indeed affects profits but
                                                         pre-tax operating profit, or return on sales    market share alone does not strictly corre-
                                                         (ROS) would be restricted to only 5-10 per      late with profitability. When Bain & Co.
                                                         cent. They looked for another road to prof-     studied the profitability of brands in more
                                                         itability. Gillette invested more than $200m    than 200 categories of global consumer
                                                         in research and development, culminating in     goods, we found that market share explains
                                                         the 1989 introduction of its Sensor razor.      only about half of the differences in brands’
                                                         The Sensor sold at a 25 per cent price pre-     profitability.
                                                         mium over its own Atra, which until then            A brand’s profit potential is swayed by
                                                         had been the highest-priced shaving system      both market share and the nature of the
                                                         on the market and it sold well.                 category in which the brand competes. In
                                                             Gillette’s innovation convinced con-        Europe, premium brands are those that
                                                         sumers to pay a premium for a new set of        command at least a 25 per cent to 30 per
                                                         shaving expectations. Consumers proved          cent higher price than value brands or pri-
                                                         willing to spend $3.75 for a shaving system     vate-label counterparts. Premium cate-
                                                         that required 70-cent replacement car-          gories are those in which more than 60 per
                                                         tridges, while there was an option elsewhere    cent of the volume sold is premium brands.
                                                                                                             These findings hold implications for con-
     Figure 1: Portfolio deployment matrix                                                               sumer goods organisations and brand
                                                                                                         managers. They affect not just individual
                                                                                                         brand strategy, but also brand portfolio

                                        'Hitch hikers'            'High road'                            strategy, category management, marketing
                                                                                                         mix, and organisational and investment
                                    ROS in Europe:              ROS in Europe:                           issues such as R&D, manufacturing capabili-
                                        10-15%                       >15%                                ties, and even divestitures and acquisitions.
                                    (in US 15-20%)               (in US >20%)
             'Premium'                                                                                       To begin with, the findings suggest new
             Per cent of                                                                                 criteria against which consumer product
                                                                                                         firms can manage their portfolios. The
                                         'Dead end'               'Low road'
                                                                                                         approach, which we call ‘High Road/Low
                                    ROS in Europe:              ROS in Europe:                           Road’, requires asking, first, is the category
                                         0-5%                        5-10%                               premium or value? And second, is the
                                     (in US 0-5%)                (in US 5-10%)                           brand’s market share high or low relative to

                                                                                                         competitors? For any given brand, there are
                                  LOW                                           HIGH
                                                                                                         four possible gradations. Each has its own
                                                                                                         strategic imperatives and each carries a
     Source: Bain & Company                      market share
                                                                                                         range of expected returns that enables

                                                                                                                                   EBF issue 21, spring 2005
                                                                                                                                    Sounding Board

companies to calibrate performance. (See
Figure 1: Portfolio Deployment Matrix) This         Figure 2: Winning brand strategies
is a useful exercise to truly identify under-
performing and outperforming brands.
                                                                           'Hitch hikers'      (eg Merci)              'High road'      (eg Danone)

High road/Low road brand strategies                                        Strategy: Don't rock the boat            Strategy: Innovate, innovate
                                                                          - follow the leader's pricing                       and innovate
In shorthand, the varying strategic options
                                                                          - steal share through innovations         - trade customers up to new
for each brand can be expressed as follows:
                                                                                                                      value-added product
●   High road Protect and grow the high end                                                                         - hold/raise prices on value-added
    through innovation after innovation.              Premium                                                         products
●   Low road Grow volume relentlessly by             per cent of
    focusing on operational efficiencies to           category
                                                                                   'Dead end'                                'Low road'
    reduce costs faster than prices. Only                                                                                 (eg Anheuser-Busch)

    then, with a substantial leadership                                   Strategy: Completely rethink               Strategy: Grow the high end
    position, consider moving the category                                - move right                              - lower value added costs
                                                                          - move north                                faster than prices
                                                                          - re-evaluate category participation      - plough difference into advertising
●   Hitchhiker Target niche segments to                                                                               and promotions

    profit from premium prices set by high                                                                          - innovate over time
    road players, but avoid competing on
    price, which could commoditise the                                    LOW                                                                       HIGH
    category.                                       Source: Bain & Company                              market share
●   Dead End Rigorously rethink
    participation in the category, retreat to     average price premium moved up from 37                      grating into low-price, high-quality can pro-
    a premium niche, or exit entirely.            per cent to 68 per cent. But the Danone and                 duction. The total system savings let the
The shorthand rule for consumer products          Gillette experience also underscores another                brewer beat competitors on price and
firms, no matter what quadrant, is that a         hard and fast rule: taking a value category to              plough more cash into advertising and pro-
company must pay attention to the nature          the high road is only possible if you’re                    motion. Moreover, it changed the game in
of its category, not just market share. Let’s     already a clear leader in the category.                     beer to one of national scale, which AB was
examine how each quadrant works:                                                                              uniquely positioned to win.
                                                  Low road
High road                                         When a brand competes in a value category                   Hitchhiker
As the Gillette example shows, the way to         and has a high relative market share, we call               The rule to follow in this quadrant is ‘live
beat back commoditisation is through fre-         this a low-road brand. For better or worse,                 and let live’. Players here have learned to
quent and meaningful innovation. Gillette         many European brands compete in this cat-                   target niche segments to profit from the
has transformed the safety razor into an          egory. The winning strategy here can be                     premium prices set by high road players.
increasingly high-value device. Its new           summarised as ‘bigger is better’. That is, it               The game here is all about stealing share
M3Power not only features battery-pow-            doesn’t suffice just to be number one or two                through innovations and acquiring other
ered vibration or ‘micro-pulsation’ and new       to thrive in a value category. Winning brands               niche players. But it’s not about price com-
edge technology for a closer shave, it dis-       must have at least two or three times the                   petition, which almost invariably leads the
penses vitamin E and aloe to help heal skin.      market share of their nearest competitor.                   entire category downward. One coffee
Since the MP3 launch in 2004, the product         Low-road leaders therefore focus on several                 brand in Germany learned this the hard way
has helped Gillette slightly increase its share   inter-related tactics to maximise the bene-                 when it undercut the leader, only to see the
in the global blade market.                       fits of scale: they eliminate costs and                     entire market move downscale. That also
    Similarly, Groupe Danone, the French          complexity throughout the system; they                      happened with Procter & Gamble’s US
food maker, has continually upgraded its          devise ways to win at the store level through               coffee brand, Folger’s, which took a long
yogurt products’ ‘premiumness’, lifting an        trade and promotional activities; they                      time to recover. A good example of main-
entire category in the process. Historically,     manage distribution tightly, and relentlessly               taining a ‘tagalong’ pricing strategy can be
the majority of its product was plain and         use price to knock out the competition.                     seen in the market for pralines chocolates.
fruit-flavored yogurt, simply packaged.               US brewer Anheuser-Busch is a classic                   In this category, Germany’s Merci brand has
Today, that percentage has shrunk dramati-        example of a company that mastered low-                     maintained high margins by sheltering
cally, market by market. In the US, for           road leadership before embarking on the                     under Italian chocolatier Ferrero’s Mon
example, simple yogurts have dropped from         high road. Thirty years ago it dug a wide                   Cheri, Raffaello, and Rocher brands.
80 per cent of the firm’s output to less than     trench of cost advantage by innovative beer                 Successful hitchhiker brands typically either
5 per cent. In the interim, Danone has intro-     packaging, shifting from traditional bottles                attract a base of loyal users or lead in a sub-
duced a host of new yogurt products,              to cans that stack more efficiently in trucks               segment of the market.
including its health-centred Actimel and          and increase gallons of beer delivered per
Activia brands in Europe. In France, the com-     run. This single innovation lowered costs                   Dead end
pany’s share rose from 35 per cent in 1999 to     across AB’s value chain. It extended the                    This quadrant is home to follower brands in
37 per cent in 2004. Meanwhile, the volume        brewer’s distribution radius, which justified               a value category, which makes it difficult to
of premium product in the French category         building larger breweries with better                       find growth and make decent returns. This
rose from 52 per cent to 72 per cent and the      economies of scale and vertically inte-                     is an important category under pressure

EBF issue 21, spring 2005
across Europe, as pricing and volume growth
have flattened in the face of declin-ing popu-        Figure 3: Brand Co's water portfolio by country
lation growth and the incursions of
private-label players and hard discounters.                      1.5
                                                       High            'Hitch hikers'                                                  'High road'
    Consumer product firms in this position            portion
are often tempted to spend more on promo-              premium                                                          FR
tion and trade incentives with retailers to try        market
to revive sales, or to increase advertising in a                                                                          BEL UK
                                                                 1.0                                            Italy
saturated media environment. But these
efforts frequently fall short. Instead, execu-                              F          G SW            IRL                      Spain
                                                                                                P NL
tives should confront some hard questions:
Should they retreat into a premium niche, a
strategy of shrinking to grow later? Should                      0.5
they begin manufacturing private-label prod-                                                             SWI
ucts for retailers themselves? Or, should they         Mostly                                                Germany
exit the category by selling to a scale player         value
                                                                                                                                                          3,000 M L
to whom the business is worth more? Firms              market
                                                                          'Dead end'                                                    'Low road'
that focus on just one of these strategies do                    0.0
best, whereas those that attempt to do some                        0.01         0.02     0.05    0.1    0.2       0.5     1       2          5       10
of each can become schizophrenic as they try                                            Relative market share Brand Co. 2001
to manage the complexity of two completely            Source: Bain & Company
different business models and organisations.
(See Figure 2)
                                                   Moving around the matrix                                    vodka’s, which catalysed its low-road cate-
Europe’s complex market reality                    Each category dictates a distinct strategy                  gory to move to the high road. But such
Without a doubt, every company would               with related metrics, organisation and                      feats can take decades and are thus rare.
prefer to be in a high-road position like          people. This means that a common strategy                   Indeed, we have found the only quick and
Gillette or Danone. But most important,            – for example, attempting to pursue only                    easy category move is downward.
companies need to understand their                 high-road opportunities – will not succeed.
starting position. With that knowledge,            Some of the greatest dangers consumer                       Managing the brand portfolio
firms in all quadrants can develop strategies      products firms face in Europe involve trying                What does this say about growth prospects?
to grow market share and profitability.            too hard to get out of the box they are in.                 First, that there is no correlation between
    In Europe, this means getting to grips             Such can be the case for companies with                 being in a premium or a value category and
with a market reality far more complex and         brands in value categories that ambitiously                 unit sales growth. Rather, each quadrant
challenging than in the more homogenous            seek to take the whole category premium.                    offers a unique growth opportunity that
open US markets. There are major differ-           Sometimes referred to as the ‘Starbucks                     calls for a tailored strategy to adjust market-
ences. The same categories can behave              effect’ in the US, this happens when a com-                 ing spend, research and development based
very differently in different countries, and       pany creates a step-function change in                      on the category’s profit potential. Brand
market fragmentation means that achieving          market innovation and perception. In                        owners with portfolios that span multiple
scale is more difficult. Moreover, the level of    Starbucks’ case, this came from an outsider                 countries and categories can use the High
expected return in each quadrant is about          creating a wholly new coffee-drinking occa-                 Road/Low Road as a framework to allocate
five percentage points lower in Europe than        sion and experience, leading to growth and                  resources differentially across the most
in the US. Finally, the growing strength of        pushing the packaged goods coffee cate-                     promising businesses and stop spending it
private-label brands and hard discounters          gory in the US more premium.                                on dead ends. However, there is a correla-
make business much more challenging for                A second example is the UK’s Walkers                    tion between understanding your position-
brands in the dead-end category.                   Crisps, which used innovation in packaging                  ing – and whether your category is shifting
    A multi-country portfolio strategy there-      to segment its offering and drive growth in                 south or north – and profitable growth.
fore starts by charting categories by              a very mature value category. Today,                            Whether you’re selling yogurt or mobile
country. (See Figure 3) For instance, bottled      Walkers, owned by PepsiCo, leads savoury                    phones, picking the right strategic direction
water is a value category (or ‘low road’) in       snacks in the UK, with half of the market. To               begins with an understanding of what road
Poland, but is more premium in France.             drive upward, Walkers used innovations in                   you are travelling. In the end, the High-
    In most of the world, even companies in        packets that lock in flavor with a patented                 road/Low-road matrix emerges as a
a dead-end position can retrench to prof-          foil design; it created premium-priced ‘posh                dynamic instrument of corporate strategy
itable niche plays. But the pressure toward        crisps’ and rolled out smart advertising fea-               that calls for regular and systematic review.
‘value’ categories has been building in            turing a top comedian and football players.
Europe. This reflects the growth of hard dis-          When such feats are carried out from                    Cyrus Jilla is a partner with Bain & Company in
count retailers like Germany’s Aldi and Lidl,      inside, they are nearly always accomplished                 London and heads the firm’s European Consumer
which sell private-label goods, and it reflects    by a leader with a leading market share, as                 Products Practice. Nicolas Bloch is a partner in
the private-label counterstrategies of other,      was true for Gillette, Danone and Walkers.                  Brussels. Vijay Vishwanath is a partner in Boston
higher-end retailers, like Carrefour. How          It’s tempting to imagine one’s company                      and leader of the firm’s Global Consumer
should consumer products firms respond?            engineering a marketing coup like Absolut                   Products practice

                                                                                                                                              EBF issue 21, spring 2005

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