The perils of brand extension
Consider the pressure on all executives to grow their companies. One reason for so many mergers and acquisitions is that external growth (at least in gross income) is far easier in many industries than internal growth. Companies grow internally in one of three ways, either through market expansion, developing new products, or extending old ones.
Expanding the market for an existing product gets harder as the industry matures. We've seen how the market for soda, beer, tobacco, and a large number of other market segments have stabilized in North America and Europe or even started to decline. It is still possible to for Coke to gain market share on Pepsi, but these are likely to be small moves, of a percentage point or two, hardly enough to excite the investor community. In an oligopoly market, where there are entrenched positions, larger moves happen but only if one of the companies involved is extraordinarily incompetent.
Developing wholly new products, as we've seen with the pharmaceutical industry, is easier said than done. If the new product is far away from the company's expertise in marketing and distribution, it gains little advantage from its association with the company. If it is too close, it threatens to rob sales from the company's existing products. Since the great majority of new products are failures, even for established companies, careers are often on the line. For many managers, the risks involved in developing truly new products are scary, which is why the innovations in big companies tend to be conservative, baby steps rather than big new strides. There are exceptions, of course, but they are rare.
The most conservative innovations are extending the brand, and that's been the favorite move of in-house products development. Trading on existing brand names has been the main thrust of product development in the last few decades. Mountain Dew Code Red, Bud Ice, X-treme Jell-O, Snickers Ice Cream, and Tropicana smoothies: all are examples of extending a brand. In some cases, this is a case of pseudo-variety; in others it is cross-branding between two product segments.
The most adventurous practicer of this method has been Kraft Foods (a division of Altria). But the concentration on brand extension seems to have worn out its welcome. Last week, Kraft co-CEO Betsy Holden, was fired apparently because brand extension had run out of steam.
That's the view of a Wall Street Journal article, "Kraft's Stale Strategy" (12/18/2003), which states: that Ms. Holden one of brand extension's "most brilliant practitioners" hit the wall.
Ms. Holden helped guide the creation of dozens of "new and improved" versions of the packaged-food giant's established brands -- Oreo cookies, Lunchables, Kraft cheese -- then watched the sales pour in.
The article gives examples of her successes, including recent ones. "During her CEO stint, sales of Oreo, the world's best-selling cookie, jumped 9% in 2001 after two chocolate-cream variations came out."
But while Kraft was happily extending its big brands, the article points out, it was not developing new products. "Kraft hasn't had a new-brand success of note since it launched DiGiorno, a frozen pizza brand, in the mid-1990s."
The article sites the brand-extension winners, like the Kraft/Nabisco brands Oreo Double Stuff, Mini Oreos, and Chips Ahoy Cremewiches, but also the losers, like Ooey Gooey Warm 'N Chewy Chips Ahoy!, a microwaveable cookie. The cost of that failure amounted to $17 million, showing that even brand extensions can be risky.
But years of failing to develop new categories and products has given Kraft a lineup that seems stuck in a time warp next to brands like Starbucks, Stonyfield Farm dairy products and Silk soy products. Some analysts and investors say Kraft was so good at building brands that it forgot to create new ones.
In other words, Kraft has missed out on newer trends in eating and nutrition, with at least a sizeable portion of the market electing "healthier" choices, whether organic, natural, or sugar-, fat-, or carb-free. Kraft has been embroiled in the controversy over roundly condemned transfats, which seem to be present in the majority of its offerings. While there's still a large percentage of the population that does not care about such matters, the most affluent shoppers are avoiding many of Kraft's products and thus choking off any chance at growth.
And when they did manage to gain a brand with health-marketing potential, they blew it. The acquired Balance Bar in 2000, but that brand "has since lost ground to rival brands such as Luna, Atkins and a host of cereal bars from other big manufacturers."
The dilemma here is a common one. Despite brilliant marketing, distribution, and manufacturing expertise, oligopolies that don't come out with a stream of innovations are likely to stall. Kraft is still a very profitable company, but that's not enough for investors who want to see growth. Many companies try to get around this problem by mergers and acquisitions, which at least presents a moving target to investors, But, done right, it relieves the company of the need to innovate from inside. As ever, small companies are more likely to come up with the new winners than the big companies, after which they can be bought out.
