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Friday, July 23, 2010

Lower prices, less loyal consumers

On the call: Safeway CEO Steve Burd

Safeway Inc. reported its second-quarter results Thursday. The grocery chain's net income fell sharply and its revenue grew less than 1 percent. But Steve Burd, the company's CEO said it saw some of its best volume growth in years. He discusses the changes in shopping trends during a conference call with investors.

QUESTION: You suggested that a lot of your volume growth is coming from the occasional shopper. I'm just curious if you could talk a little bit about that shopper's basket relative to the average. I guess specifically, is that a cherry picker shopper only coming in for the deals? Or are you seeing that shopper kind of expand the breath of shopping across the store?

RESPONSE: I said that we've got our very loyal shopper who is less affected by the price reductions that we made (on everyday items). They really love the experience and they appreciate the lower prices, but there is not that much behavior change they can engage in.

So if you look at everybody below that -- which could be somebody that is visiting you twice a week but is not loyal, all the way down to the occasional (shopper) -- I did not mean to suggest that the occasional is the lion's share of our sales growth because it's not. But basically as you tier away from the most loyal, basically it's the other categories (of shoppers) that are generating most of the volume increase.

Thursday, October 29, 2009

P&G Considers Booting Some Brands

Procter & Gamble Co.'s new chief is ready to deal.

Facing mounting pressure to boost sliding sales and recalibrate his company, P&G CEO Robert McDonald is stepping up the hunt for acquisition and divestiture candidates, people close to the company said.

Since assuming the chief executive role in July, Mr. McDonald has been trying to shake-up P&G's slow, process-heavy culture. He has increased scrutiny of P&G brands including Braun small appliances, Iams pet food, Duracell batteries and Pringles potato snacks. While those businesses have long been considered extraneous to P&G's focus on beauty, health and nonfood household staples, Mr. McDonald now is presenting an ultimatum: The leaders of those businesses are on heightened notice to prove their brands' prospects or face a sale.


The division heads have been "pushed to perform better and make the case for more investment," according to one of these people, who said the implication was that those divisions could be divested "if they don't improve results soon."

Meanwhile, P&G has looked at the consumer-products portfolio of Schering-Plough, which is merging with Merck & Co., as well as that of Wyeth, which was just acquired by Pfizer Inc. Another possibility: Beauty-products maker Alberto-Culver Co. It's unclear, however, whether those companies would choose to sell.

P&G is getting closer to a deal to acquire Sara Lee Corp.'s international household-products unit, particularly its Ambi Pur air fresheners, which are popular in Europe, people familiar with the matter said.

Pfizer, Alberto-Culver and Sara Lee all declined to comment.

A P&G spokesman said, "We will continue to closely monitor our brand portfolio."

A deal with Sara Lee could be just the first of many acquisitions under consideration as Mr. McDonald seeks to "aggressively recalibrate and enhance" a company he knows is under-performing, said one of these people.

The world's biggest consumer-products company has struggled more than many of its competitors during this recession. Penny-pinching shoppers increasingly have forgone P&G's premium-priced staples, which can cost more than twice as much as competing brands, especially retailers' private-label goods. Many of P&G's high-end brands, including Tide detergent, Downy fabric softener and Dawn dish soap, have lost market share, pulling down P&G's overall sales and profits.

The Cincinnati-based company is expected to report another quarter of disappointing results on Thursday. Year-to-date, Procter shares are off 7.4%, compared to an 11% gain for the Dow Jones Industrial Average.

Acquiring faster-growing businesses, especially for its household-cleaning and beauty divisions, would allow P&G to buy its way back to sales gains, people close to the company say.

Some analysts insist that improving P&G's mega brands is the only way to turn around overall results. The company has 23 brands that each garner more than $1 billion in annual sales. They account for 69% of P&G's total sales and about 75% of profits, according to estimates by Deutsche Bank analyst Bill Schmitz.

"The health of these brands is crucial to the success of the company overall," hewrote

Last month, Mr. McDonald assured investors that the company was "in touch with reality," and detailed for investors his plans to reignite growth, including price cuts, overseas expansion and creating more low-cost products.

"We know that in fact you punish us for size," Mr. McDonald told investors at a presentation last month. "We're focused on turning that scale into a growth and cost advantage."

Instead of spending several months evaluating where to make changes, as would be the norm at P&G, Mr. McDonald aims to "get more aggressive and do deals that will enhance what the company has," said one person familiar with the matter.

A more aggressive deal-making stance from P&G could shake up the entire consumer-products segment, which is grasping for ways to improve profitability beyond cost cutting. With consumers pulling back on spending, a growing number of these companies are contemplating mergers, say consumer-product bankers.

Duracell—which P&G acquired when it bought Gillette in 2005—has been considered a questionable fit in P&G's cupboard because of its exposure to cheap private-label batteries and fluctuating commodity costs.

P&G has shopped Duracell to potential buyers, but so far no deal has emerged, according to a person close to the matter. Duracell will post about $2.5 billion in sales for the fiscal year ending June 30, according to Sanford Bernstein analyst Ali Dibadj.

Iams, with an estimated $1.8 billion in sales according to Mr. Dibadj, has struggled to improve its profit margins amid fluctuating commodity costs. As one of the most expensive brands in the pet-food aisle, Iams has been a tougher sell in the recession and its market share has slipped.

Braun, with annual sales estimated at $1.3 billion, is also deemed outside of P&G's core businesses. Like Duracell, the brand came along with the acquisition of Gillette.

P&G executives have been examining Braun's small-appliance technologies used in its electric shavers and power toothbrushes to determine whether they can be applied to other products like beauty devices, such as facial cleansers or depilatories.

Monday, October 19, 2009

'Exotic Functionals' Among Next-Wave Drinks

Cocktails and exotically flavored drinks with functional properties will be key beverage category influences in the years ahead, as consumers' love affair with nutritional offerings that can satisfy their demand for taste combined with health and wellness benefits continues, according to a new Culinary Trend Mapping Report from the Center for Culinary Development (CCD) and Packaged Facts.

Cocktails will continue to experience a renaissance as interest in artisan liquors, as well as retro drinks, gathers momentum. "The same consumers who value local foods, artisan products and traditional food preparation methods are finding those values expressed in the new cocktail movement, with its glorification of pre-Prohibition libations, micro-batch spirits and culinary inspiration," sum up CCD's analysts.

CCD expects cocktails to inspire a wave of ready-to-drink, non-alcoholic beverages as this trend continues to mature.

On the exotic functionals front, pomegranate and blueberry have been overshadowed by goji berry, mangosteen and açaí, and these, in turn, will be overshadowed by aronia, yumberry and other next-wave flavors within the next year or two, according to the beverage trends report, which notes that 53% of U.S. consumers said that they purchased a product specifically for its antioxidant content last year.

Other RTD beverage trends identified and examined in the report include RTD drinks offering a convenient way to ingest traditional ingredients from Eastern cuisines believed to contribute to health and longevity; coconut water (rich in potassium, calcium, magnesium and electrolytes, as well as refreshing); "21st Century sodas" offering sugar cane sugar, natural ingredients and exotic flavors as replacements for high-fructose corn syrup and artificial ingredients; kids' functionals that make ingesting probiotics, antioxidants and vitamins fun; and stevia-sweetened drinks.

CCD believes that major beverage manufacturers betting on stevia's ability to revive the soft drink category will be far from alone in launching beverages that take advantage of stevia's versatility.

Tuesday, October 6, 2009

The Vanguard Corporation

In her new book Supercorp, Rosabeth Moss Kanter argues that capitalism is near a crossroads. The old ways of doing business no longer work. Traditional leadership roles are breaking down. And the public is fed up with greedy executives and their institutions that feast on their surrounding communities like leeches.

The time is ripe for a new corporate model, driven by a new type of business leader, where creating business value also means creating value for society.

Surprisingly, Kanter finds models for these so-called vanguard companies in very established, very large corporate titans including IBM, Procter & Gamble, Banco Real, Omrom, and Cemex. "I could have included Cisco, Avon products, Novartis, Toyota, and others," she says in her Harvard Business School office on a recent rainy afternoon.

We asked Kanter to expand on the ideas presented in the book, whose full title is Supercorp: How Vanguard Companies Create Innovation, Profits, Growth and Social Good (Crown Business).

Sean Silverthorne: What is a vanguard company?

Rosabeth Moss Kanter: Vanguard means ahead of the pack, the leaders, the ones who show the way. In this case they are leading the parade toward being values-based, led by principles and a sense of purpose at the heart of the enterprise. They are dealing with the crisis of capitalism by offering a new and different model.

Q: Why do we need a new corporate model?

A: There have been signs for the last 10 or more years that the companies that were going to succeed and prosper needed to manage risks better, have a stronger sense of purpose to motivate their employees, and satisfy a public already agitated about scandals such as Enron in the corporate world.

What I didn't see until I did the research was how companies with a very strong sense of purpose could use that to guide innovation. One of the exciting parts of Supercorp and the rise of this company model is that it's actually a way to develop products and services faster, to get more innovation, and to showcase innovation to the world in a faster way. So it should be at the heart of the enterprise.

And that's what I found. For companies like IBM and Procter & Gamble, this is definitely at the heart of the enterprise. The Japanese company Omron has sustained itself since its founding on principles and on a mission about sensing society: What does society need? They ask: Can we use our capabilities in the electronic sensor business to deal with these problems and issues? For example, one of the things they are working on is biosensors that can be attached to the food chain, so that the freshness of food can be immediately identified. That's potentially a big market as well as something with enormous social value because a lot of food goes to waste.

Q: Can you give us other examples of how this works in practice?

A: In Brazil, Banco Real has grown in 10 years from a small behind-the-pack bank to the second largest and probably the most highly admired bank. They differentiated themseves in the marketplace by centering their strategy around social and environmental responsibility. They said, they don't want to be a "green" bank—they are a for-profit endeavor—but they want to do the right things right. That was their strategy and it brought in customers even though they screened out clients with environmentaly shaky projects.

So despite having stringent standards for potential borrowers to meet, and stringent standards for employees, Banco Real has flourished. Its competitors are now adopting that strategy and advertising themselves as banks that are more responsible socially and environmentally.

Q: How prevalent are vanguard companies? A small parade?

A: It's a growing parade, but it's not clear yet whether they are the exception or the rule—that's true of every change. And of course I was looking at certain very large companies. But here's what makes me think the parade is growing: Companies that do not operate this way will not only lose the advantages of innovation, motivation, and public support, they will also have trouble being coherent and finding business opportunities.

So Banco Real definitely led a parade. Banco Real has created change, and that's why I think the parade will grow. As companies gain marketplace benefits by doing the right thing right, others will follow.

Q: It's interesting that Supercorp was published on the first-year anniversary of the fall of Lehman Brothers. How have the companies you profiled performed during the recession?

A: All the companies I studied, with one exception, outperformed their peers. Their share price declined less at a time when everyone else's declined greatly, and now they're prospering again. They outperformed their markets often, and in some cases they stunningly outperformed the market. The one exception was a company that got caught with a lot of debt because of acquisitions, as well as being in an industry, construction, that was the first to be hit.

Now, there are critics of each of these companies, and the companies must still make a lot of changes. IBM has moved many jobs to other countries. They are not perfect. But they aspire to meet higher standards, and in their operations around the world they also try to raise the standards.

Q: A critical point for you is that a company needs an underlying set of core principles out of which strategy develops. But how do companies embed these principles throughout the organization such that decisions are based upon them?

A: It's not the words; it's the conversations. Leaders must engage employees broadly in discussions of what these principles should be and how they apply.

Sam Palmisano, as a fairly new CEO at IBM, led a conversation in which all 400,000 employees could participate on a Web chat over three days about what the company's values should be for the 21st century, a "values jam." People were in a conversation. That doesn't mean there is total consensus, that doesn't mean that they've eliminated cynicism, but it means employees know "Top management thinks this is important, so I better think so, too."

A.G. Laffley, the chairman of Procter & Gamble, and Bob McDonald, now the CEO, would go around the world and talk about P&G's "PVP," or Purpose, Values, and Principles. Bob McDonald announced in August that P&G's growth strategy for the future is "purpose-inspired growth." So P&G makes it a conversation. Decisions get made in the company that can be tied back to the purpose—that is, you can see that the company makes decisions that would not have made been made on purely financial grounds.

It's like P&G's Children's Safe Drinking Water program. When P&G could not make a commercial market out of water purification powder, it created a nonprofit and gave it away. That told P&G employees that their company is serious about serving society.

Q: How important are mission statements or guiding principles in helping a company focus on core values?

A: Many companies have a mission statement or statement of principles. The words sound pretty much the same. They have something about customers. Something about employees. Something about shareholders. But the words (in vanguard companies) are a little different; they don't just talk about creating great value.

The statement of values will address looking broadly outside the company to the needs of society. One of IBM's values from its Values Jam chat was "Innovation that matters for our company and the world." The addition of those words "and the world" opened the walls of the company. There are IBM employees I've interviewed all over the world who actually invoke that phrase in conversations. They say, "I look at what my community or state or country needs, and ask how the capabilities of the company can contribute to that."

P&G's statement of purpose says they "improve the lives of the world's consumers." More recently they added "now and for generations to come." Adding these words focused people on the long-term impact, so disposable products need to be more environmentally friendly.

Again, it's not the words, it's the conversation. It's the actions of top leaders and the fact that they get successes out of innovations that are tied to the principles and that people are able to make that connection. And then it's part of the selection of people. People who do not really want to live by these values may not want to come to work for the company. It's also a conversation that is often held with companies being acquired, which makes them feel they are in good hands.

Q: What are the roles of CEOs and leadership in vanguard companies?

A: Leadership matters even more when you have to symbolize purpose and values as well as look to the future. People look at what leaders do, not just what they say. So leaders have to model the values. They have to put their investments behind the sense of purpose. If P&G had let the Children's Safe Water program wither just on financial grounds, employees would have looked at top management and said, "You don't mean those words."

Leaders also need two additional characteristics beyond the things we've always said they need. They need to be great systems thinkers. They've always needed that, but they need it even more as they look beyond the walls of the company. They manage their purpose through networks of partners. In fact, one of the values of these companies is end-to-end responsibility, the idea that you are responsible for your supplier's supplier and your customer's customer.

We also need leaders who are relationship-oriented, willing to have partners sit at the table, willing to sometimes put their own ego in check. Leaders need to feel they are safeguarding the future of the institution, not just managing a current portfolio of assets. These leaders have a sense of now and of generations to come.

Sam Palmisano said in one of the quotes I like best in the book: "Managers come and go, the business portfolio changes, so the only thing that endures is our culture."

Q: From the perspective of a worker bee, what's it like to show up to work each day in one of these companies?

A: Here is what I think characterizes these workplaces. They are much more dynamic and flexible, and people exercise much more control about when and where they work. Now, there are still factory jobs and sit-at-the-desk jobs where the hours matter, but an increasing number of jobs are run by self-managed work teams, in essence, where employees join virtual teams working from anywhere. IBM has done surveys that show that on any given day 40 percent of the work force is not working in an IBM office.

That's very striking. It shows the trust and respect these companies have for their people. By giving staff certain goals they need to meet, as well as work on teams that may cut across many parts of the business, employees are motivated very strongly to do the work because they care about achieving the goal, not because their boss is telling them to do it.

This is a new way of working that is very promising, but also very difficult to do. That's where leadership matters. Goals have to be very clear. People have to be coached in collaboration. The networks have to be strong. But if you can do that the benefits in speed of execution are remarkable.

Q: What do you mean by bringing society in the organization?

A: "Bringing society in" is the thinking of people who say, "We have a purpose beyond today's markets and products, and we should think about that. How is society changing? What are the big problem areas? What are our capabilities so that maybe we can find a commercial opportunity that also does good?"

That's a way of thinking that is part of the purpose guiding everyday life. They're always thinking about an opportunity to serve. At the same time their customers get very inspired by this work, so they are solidifying their partner networks and motivating their employees.

People like going to work every day with the idea that they have two jobs. One job is "do my job" and the second is "change the world." That motivation has driven a lot of entrepreneurs.

That's what "bringing society in" means. It's more than thinking that the organization should be customer oriented. It means, "Let's think about our community."

Q: President Obama: vanguard leader?

A: President Obama is subject to Kanter's Law, which says everything can look like a failure in the middle. President Obama has been in office less than a year, has tackled big problems—big problems are always controversial—and yet he is strong, steady, and focused on purpose. Therefore I bet that despite the controversy he will get a health-care bill passed and make progress on these issues.

One reason is that he keeps reminding Americans of our higher moral purpose. He doesn't get dragged down into the mud when people attack him on all sides. That kind of leadership is necessary to deal with volatility. If you don't stay centered in a set of moral principles, a sense of purpose, then it is very difficult to see beyond today's controversy. CEOs of vanguard companies know this sense of purpose helps them even when the stock price is down. They have a longer-term vision that keeps them focused and helps them weather storms.

A leader who has a strong sense of purpose and is willing to seek collaboration is likely to solve problems.

Q: What are you working on now?

A: My colleagues and I are "bringing society in" to Harvard by continuing to develop the Harvard Advanced Leadership Initiative, a workforce of experienced leaders who now have time and want to make a difference on some of the world's big problems. We're close to finishing the first year and getting ready for the second year of fellows.

I'm also working on "Smarter Cities, Smarter Communities," a project about how people build the connections and networks that reach beyond a single building. Education is bigger than schools; health is bigger than hospitals. Communities need to provide the context and the interconnections across parts of the system so that all institutions of a city see the role they play in improving the quality of life and the quality of the environment, in having better health outcomes, and in having a more educated population, all of which attracts jobs.

All of this new work is a continuation of what I learned from SuperCorp. It is important to channel the clout of successful companies and successful universities like Harvard to see problems ripe for innovations that can make a difference in the world. It is a privilege to work with enlightened SuperCorps to create partnerships across sectors combining capabilities for the greater good. That has the potential to solve enormous social and environmental problems and, as a by-product, restore confidence in business. I hope that is the 21st-century model for the future of capitalism.

Monday, September 28, 2009

Media Brands Bringing Licensing Dollars Home

NEW YORK ( -- The beleaguered media business is still marching aggressively on at least one front: store shelves at a big retailer near you.

More and more media-branded consumer goods are squaring off against similar products from rival media brands. Earlier this month Martha Stewart Living Omnimedia announced a major home and outdoor line due exclusively in Home Depot next January, when its contract with Kmart officially ends. Kmart and Sears stores began selling more than 700 home products from Hearst Magazines' Country Living. And Meredith Corp.'s Better Homes and Gardens line at Walmart continues to grow, now numbering about 1,000 products after starting last year with half that number; Meredith said its total brand-licensing revenue grew 15% during the 12 months ending in June.

The recession is battering retail just like everything else, of course. But that's only making exclusive, established brand names more desirable to retailers and a diversified revenue stream more appealing to media brands. Rumors have even circulated that the top-to-bottom business review at Condé Nast could also foster a new openness to activities like licensing.

"When revenues tighten up, all of a sudden things you may have never considered before start to look more possible," said Martin Brochstein, senior VP at the International Licensing Industry Merchandisers' Association. "Licensing is definitely an area than can generate significant revenue, particularly in a time when magazines are under a lot of pressure on the revenue and advertising side."

And media brands actually have a renewed opportunity to earn shelf space right now, said Glen Ellen Brown, VP of Hearst Group brand development. "Three-plus years ago, retailers were thinking 'My goodness,' particularly in the home space, 'I need to be much more economical and build my own brands.'" Ms. Brown said. But the recession has made the costs and effort required to grow those brands look a lot less attractive, she said. "The cycle is turning a bit so the retailers are going back to developed brands that have real consumer loyalty and resonance."

Besting Kmart deal
Martha Stewart Living Omnimedia, for its part, needed to fill the void left by the expiring Kmart deal, which generated $1.6 billion in retail sales at its peak in 2002. It did that partly by getting into Macy's, but the Home Depot deal represented an important next step. "Between Home Depot and Macy's it's my view that we have the potential to have a much bigger business than Kmart in our heyday," said Charles Koppelman, executive chairman.

Wall Street will be watching: A J.P. Morgan analyst downgraded Martha Stewart stock after the deal was announced, partly because the Home Depot deal's "great potential" still didn't include minimum income guarantees like the Kmart deal did.

Home Depot has high expectations for the line, which is a departure of sorts because the retailer hasn't traditionally turned to celebrity or media brand partnerships. "We believe it will translate to additional top line sales," said Jean Niemi, a spokeswoman for Home Depot. "There's a level of credibility [Martha Stewart] brings." Ms. Niemi said a "robust" marketing campaign to introduce the line is in the works.

Perhaps retailers are hoping the tie in with trusted media brands will help. Sales of home goods were particularly lackluster for 2008, the latest figures available from The NPD Group. The bedding category sold $9.8 million, but that was down 10% compared to 2007; Bath sales were $4.2 million, off 9.5%; Bakeware sales were $211 million and cookware equaled $736 million, both down 4%; Dinnerware sales fell 12% to $488 million; and flatware brought in $199 million, down 11%. So far the first half of this year has been equally tough, with sales flat or down across many of the categories.

The deals can also be fruitful for media companies, which don't have to bear the cost of manufacturing products or operating a national retail chain. That means high margins when it's working right. Last year, for example, Martha Stewart Living Omnimedia collected $163.5 million in publishing revenue and just $57.9 million in merchandising revenue. But merchandising delivered almost $33 million in operating income, compared with just $6 million from publishing.

While there can be significant rewards, though, licensing is hardly foolproof. Time Inc.'s Real Simple has been successfully selling home office products in Target since 2006 and is introducing calendars to Target, Borders and Barnes & Noble stores in the fourth quarter.

But it discontinued its home cleaning products at the end of last year, said Gary Ryan, VP-brand development and strategy at Real Simple. "We were up against some stiff competition from Swiffer and Clorox," said Ms. Ryan. " It was also a much more price-sensitive category than we were anticipating."

Licensing deals can be risky for retailers too, especially if the personality that once helped move product starts going negative. In an interview with CNBC, Martha Stewart seemed to blame Kmart parent Sears Holdings for the end of her company's partnership with Kmart.

Sears Holdings let the Martha Stewart Everyday collection lose its luster, Ms. Stewart alleged. "I would say it has been diminished," she said. "The quality is not what I am proud of."

Sears said she ought to blame herself for any problems. "Given that the product is designed by Martha Stewart Living Omnimedia, manufactured to their specifications and subject to approval by the Martha Stewart team, we think that Ms. Stewart should accept responsibility for her product," said Chris Brathwaite, a Sears spokesman.

Saturday, September 19, 2009

Coca-Cola Retains Title as World’s Best Global Brand (Table)

Sept. 18 (Bloomberg) -- Following is a table ranking 100 global brands from Interbrand’s Best Global Brands 2009 report.

Rankings are based on five criteria and excludes those brands which are privately held.

-----Rank----- Value
2009 2008 Chng. Company Country Industry $ blns
1 1 0 Coca-Cola U.S. Beverages $68.734
2 2 0 IBM U.S. Computer Services $60.200
3 3 0 Microsoft U.S. Computer Software $56.647
4 4 0 GE U.S. Diversified $47.777
5 5 0 Nokia Finland Consumer Electronics $34.864
6 8 2 McDonald’s U.S. Restaurants $32.275
7 10 3 Google U.S. Internet Services $31.980
8 6 -2 Toyota Japan Automotive $31.330
9 7 -2 Intel U.S. Computer Hardware $30.636
10 9 -1 Disney U.S. Media $28.447
-----Rank----- Value
2009 2008 Chng. Company Country Industry $ blns
11 12 1 Hewlett-Packard U.S. Computer Hardware $24.096
12 11 -1 Mercedes-Benz Germany Automotive $23.867
13 14 1 Gillette U.S. Personal Care $22.841
14 17 3 Cisco U.S. Computer Services $22.030
15 13 -2 BMW Germany Automotive $21.671
16 16 0 Louis Vuitton France Luxury $21.120
17 18 1 Marlboro U.S. Tobacco $19.010
18 20 2 Honda Japan Automotive $17.803
19 21 2 Samsung Korea Consumer Electronics $17.518
20 24 4 Apple U.S. Computer Hardware $15.433
21 22 1 H&M Sweden Apparel $15.375
22 15 -7 American Express U.S. Financial Services $14.971
23 26 3 Pepsi U.S. Beverages $13.706
24 23 -1 Oracle U.S. Computer Software $13.699
25 28 3 Nescafe Switzerland Beverages $13.317
26 29 3 Nike U.S. Sporting Goods $13.179
27 31 4 SAP Germany Computer Software $12.106
-----Rank----- Value
2009 2008 Chng. Company Country Industry $ blns
28 35 7 Ikea Sweden Home Furnishings $12.004
29 25 -4 Sony Japan Consumer Electronics $11.953
30 33 3 Budweiser U.S. Alcohol $11.833
31 30 -1 UPS U.S. Transportation $11.594
32 27 -5 HSBC U.K. Financial Services $10.510
33 36 3 Canon Japan Computer Hardware $10.441
34 39 5 Kellogg’s U.S. Food $10.428
35 32 -3 Dell U.S. Computer Hardware $10.291
36 19 -17 Citi U.S. Financial Services $10.254
37 37 0 J.P. Morgan U.S. Financial Services $9.550
38 38 0 Goldman Sachs U.S. Financial Services $9.248
39 40 1 Nintendo Japan Consumer Electronics $9.210
40 44 4 Thomson Reuters Canada Media $8.434
41 45 4 Gucci Italy Luxury $8.182
42 43 1 Philips Netherlands Diversified $8.121
43 58 15 U.S. Internet Services $7.858
44 51 7 L’Oreal France Personal Care $7.748
-----Rank----- Value
2009 2008 Chng. Company Country Industry $ blns
45 47 2 Accenture U.S. Computer Services $7.710
46 46 0 Ebay Inc. U.S. Internet Services $7.350
47 48 1 Siemens Germany Diversified $7.308
48 56 8 Heinz U.S. Food $7.244
49 49 0 Ford U.S. Automotive $7.005
50 62 12 Zara Spain Apparel $6.789
51 61 10 Wrigley’s U.S. Food $6.731
52 57 5 Colgate U.S. Personal Care $6.550
53 55 2 AXA France Financial Services $6.525
54 52 -2 MTV U.S. Media $6.523
55 53 -2 Volkswagen Germany Automotive $6.484
56 59 3 Xerox U.S. Computer Hardware $6.431
57 42 -15 Morgan Stanley U.S. Financial Services $6.399
58 63 5 Nestle Switzerland Food $6.319
59 60 1 Chanel France Luxury $6.040
60 66 6 Danone France Food $5.960
61 64 3 KFC U.S. Restaurants $5.722
-----Rank----- Value
2009 2008 Chng. Company Country Industry $ blns
62 70 8 Adidas Germany Sporting Goods $5.397
63 73 10 BlackBerry Canada Consumer Electronics $5.138
64 65 1 Yahoo! U.S. Internet Services $5.111
65 67 2 Audi Germany Automotive $5.010
66 68 2 Caterpillar U.S. Diversified $5.004
67 69 2 Avon U.S. Personal Care $4.917
68 71 3 Rolex Switzerland Luxury $4.609
69 72 3 Hyundai Korea Automotive $4.604
70 76 6 Hermes France Luxury $4.598
71 74 3 Kleenex U.S. Personal Care $4.404
72 41 -31 UBS Switzerland Financial Services $4.370
73 50 -23 Harley-Davidson U.S. Automotive $4.337
74 75 1 Porsche Germany Automotive $4.234
75 78 3 Panasonic Japan Consumer Electronics $4.225
76 80 4 Tiffany & Co. U.S. Luxury $4.000
77 79 2 Cartier Switzerland Luxury $3.968
78 77 -1 GAP U.S. Apparel $3.922
-----Rank----- Value
2009 2008 Chng. Company Country Industry $ blns
79 81 2 Pizza Hut U.S. Restaurants $3.876
80 92 12 Johnson & Johnson U.S. Personal Care $3.847
81 82 1 Allianz Germany Financial Services $3.831
82 83 1 Moet & Chandon France Alcohol $3.754
83 84 1 BP U.K. Energy $3.716
84 89 5 Smirnoff U.K. Alcohol $3.698
85 88 3 Duracell U.S. Consumer Electronics $3.563
86 98 12 Nivea Germany Personal Care $3.557
87 91 4 Prada Italy Luxury $3.530
88 93 5 Ferrari Italy Automotive $3.527
89 94 5 Giorgio Armani Italy Luxury $3.303
90 85 -5 Starbucks U.S. Restaurants $3.263
91 New n/a Lancome France FMCG $3.235
92 97 5 Shell Netherlands Energy $3.228
93 New n/a Burger King U.S. Restaurants $3.223
94 100 6 Visa U.S. Financial Services $3.170
95 New n/a Adobe U.S. Computer Software $3.161
-----Rank----- Value
2009 2008 Chng. Company Country Industry $ blns
96 90 -6 Lexus Japan Automotive $3.158
97 New n/a Puma Germany Sporting Goods $3.154
98 New n/a Burberry U.K. Luxury $3.095
99 New n/a Polo Ralph Lauren U.S. Luxury $3.094
100 New n/a Campbell’s U.S. FMGC $3.081
Source: Interbrand

Sunday, September 13, 2009

Slowly But Surely, Line Extensions Will Take Your Brand Off Course

Would you like to steer the ship?" is a question I used to hear in the Merchant Marine.

The helmsman on duty would tell the neophyte, "Just take the wheel and keep the compass reading at 180," or whatever the course called for.

Steering a ship is not like driving a car. The ship drifts to the left, so the neophyte turns the wheel to the right to try to correct the course. But the ship keeps turning left, so the neophyte figures maybe he needs to do the opposite, so he turns the wheel to the left ... and the ship turns to the right. Now he's convinced that he's got the hang of it, until the ship turns left again. After a while, the poor soul is convinced the wheel isn't connected to the rudder at all.

It takes time to turn a ship and it takes time to build a brand. If you want to turn a ship to the left, you turn the wheel to the left ... and then you wait and you wait and you wait. Finally the ship turns to the left.

Marketing is like steering a ship. If you don't wait long enough for a marketing effect to run its course, you can draw exactly the wrong conclusion.

Take the 1981 introduction of Bud Light by Anheuser-Busch, virtually the last major brewer to introduce a light version of its regular beer.

I asked management, "Won't that hurt sales of Budweiser regular? Instead, why don't you introduce a totally new brand?"

"Oh, no," came the reply. "We're not positioning Bud Light against Budweiser. We're going to take business from Miller Lite, Coors Light, Schlitz Light and all those other light beers out there.""

Sure enough, the 1981 introduction of Bud Light did not hurt the regular Budweiser brand. Year after year, sales of regular Budweiser went up.

1982 ... Budweiser was up 4.1%
1983 ... Budweiser was up 6%
1984 ... Budweiser was up 3.9%
1985 ... Budweiser regular was up 4.2%
1986 ... Budweiser regular was up 3%
1987 ... Budweiser regular was up 3.1%
1988 ... Budweiser regular was up 2%

Seven years of sales increases seemed to prove me wrong. "And you thought that Bud Light would hurt our regular Budweiser brand? Are you crazy?"

Then came 1989, which saw regular Budweiser down one-fifth of 1%, the start of the deluge.

As of today, Budweiser volume has fallen every year for 20 years in a row, to 23.5 million barrels in 2008 from 50.6 million barrels in 1988.

Does anyone have any doubt that regular Budweiser will someday become a marginal brand in the U.S. market? We call line extension the "hockey-stick effect." Short term, you get the blade and score a few goals. Long term, you get the shaft.

Oddly enough, what gave Anheuser-Busch confidence in its line-extension strategy was the track record of Miller Lite. Introduced nationally in 1975, Miller Lite also did not hurt sales in the short term of Miller High Life, the company's regular beer.

Year after year, Miller High Life climbed up the beer ladder, from 5 million barrels in 1971 to 20.8 million barrels in 1978, the most explosive growth ever recorded by a beer brand. That was the year Advertising Age named John Murphy, Miller president and CEO, "Adman of the Year."

What drove the brand to such heights?

"Miller Time," in my opinion the most effective advertising strategy ever developed for a beer brand.

The target market: cowboys in hard hats. The psychological hot button: a reward at the end of the day for blue-collar men doing rugged jobs in outdoor occupations. (What Miller Time did for men, McDonald's was doing for women with "You deserve a break today," a campaign which coincidentally was also launched in 1971, the same year as Miller Time.)

By 1979, the combination of Miller High Life and Miller Lite (34.8 million barrels) outsold Budweiser (30.0 million barrels) by a significant margin. No wonder Anheuser-Busch pushed the panic button.

Too bad. If they had had a little more patience they would have realized that line extensions are inherently unstable. A successful line extension almost always damages the core brand ... over the long haul.

It's like a teeter-totter. When one side goes up, the other side goes down.

For Miller Brewing, 1979 was a year of high hopes. That was the year Miller broke ground on a new $411 million brewery in Trenton, Ohio.

That was also the year Miller High Life started its long decline, from 23.6 million barrels in 1979 to 5 million barrels in 1992, where it remains today.

The Trenton brewery? It sat idle for almost a decade and didn't open until 1991.

We kept forgetting the teeter-totter principle. When Bud Light declined this year, its first decline in 27 years, all hell broke loose. There were stories in all the major media.

"Anheuser-Busch InBev NW plans to tweak its marketing campaign for Bud Light and ratchet up spending," reported The Wall Street Journal, "in the hopes of reviving a brand that is facing a rare slump."

What slump? Bud Light is up 5% this year, not down 2.5% as reported in the media.

How can that be when everybody else is reporting a decline? The difference is that we included Budweiser's lime extension in Bud Light's volume. Bud Light Lime is the fastest-growing beer in America, with 1.2% of the market, and naturally that success came at the expense of Bud Light.

Budweiser, Bud Light and Bud Light Lime are not three brands with three different marketing strategies. They're one brand with three different flavors and three different marketing strategies that often cause confusion.

Line extension is a loser's game. It doesn't usually work, but even if it does, it almost always damage the core brand.

On the other hand, there's the well-documented evidence that a line extension doesn't hurt a leading brand as much as it does an also-ran. Why is this so?

A leading brand has a very strong position. It's the leader. And nothing works as well in marketing as leadership. Google in search. Hertz in rent-a-cars. Hellmann's in mayonnaise. Heinz in ketchup. Campbell's in soup. Thomas' in English muffins.

Many No. 2 or No. 3 brands become successful by narrowing their focus to segment the market, either demographically or in some other way. Miller High Life targeted the blue-collar segment.

Bud Light didn't destroy Budweiser's leadership perception. But Miller Lite definitely undermined Miller High Life's blue-collar perception.

What's a Miller? Over time, Miller became known as a light beer. And the cowboys in hard hats weren't about to drink a light beer.

What's a Budweiser? It's still perceived as the leading beer, but now available in a number of different flavors.

In the years that followed the fall of High Life, Miller Brewing tried to inject new life into its Miller brand with a raft of line extensions including: Miller Genuine Draft, Miller Genuine Draft Light, Miller Genuine Draft 64, Miller Lite Ice, Miller Lite Ultra, Miller High Life Light, Miller Chill, Miller Genuine Red, Miller Reserve, Miller Reserve Light, Miller Reserve Amber Ale and Miller Clear.

They even spent $60 million introducing Miller "regular" beer.

All for naught. Today, Miller sells considerably less beer under the Miller name than they did in the glory days of 1979.

So it is in many marketing situations: What works in the short term often doesn't work in the long term.

Well, you might be thinking, what about the trend towards light beer? It's true that light beer is now the largest segment of the market, but regular beer still accounts for 44%.

Why not have your beer and drink it, too? Why not try to dominate both segments with two separate brand names? Like Toyota and Lexus. Or Black & Decker and DeWalt.

Or Hanes and L'eggs.

Marketing people are often sheep when it comes to categories. Once a line extension becomes a big success, all the competitors get in line and say, me too.

Without giving a second thought to the possibility of launching a new brand that could clearly define the new market as a separate category.

It happened in light beer. It happened in diet cola. It happened in lithium batteries. It has happened in many other categories.

In 1995, to pick one year at random, the top 40 brands of light beer all used "light" in their names -- even Amstel Light, a brand that didn't have a "regular" version.

Line extension is a teeter-totter, but not necessarily in the short term. In the short term, both sides often go up. It takes time to turn a ship. It takes time to kill a brand.

You can't know whether a marketing move is effective or not until enough time has passed. Yet many companies are driven by short-term thinking -- promotions, coupons, special offers and discounts. And line extensions.

If it took Bud Light seven years to damage the regular Budweiser brand, how long are you taking to measure the success of your programs?

A month? Three months? Six months? A year?

Marketing is messing with minds. Getting into minds and changing them is not for the faint-hearted or for the impatient. You need to launch a marketing program and then have the patience to wait and wait and wait.

Which reminds me.

Maybe my misspent youth will start to pay a dividend. The House of Representatives has just passed a bill providing a monthly stipend to those who served in the U.S. Merchant Marine.

Good things happen to those who have patience.