Big-name products are increasingly flexing their muscles on the world market. Barry Jones and Roger Ramsden report on changing rules in the battle of the brands.
Brand wars are the spice of the packaged goods trade. They have been going on ever since brands were invented, and have been conducted with increasing ferocity and sophistication. Now the rules of engagement are changing again, in ways which promise to alter the face of the industry just as decisively as the massive wave of acquisitions which took place in the 1980s. The key to continued growth is no longer simply the ability to develop new products, or the resources to purchase a portfolio of brands that someone else has built up. Growth in the 1990s will come from the much more complex task of managing an existing brand portfolio and doing so on an international or global basis.
Brand wars are becoming contests to see who can innovate first, fastest and, above all, most broadly. A handful of leading companies, among them Procter and Gamble, Unilever and Mars, are already demonstrating how the battle for dominance will be fought in this decade. The implications for their competitors are alarming.
The struggle between competing brands has been waged on many fronts in the past but the objective of every packaged goods producer has always been the same: to create (or secure control of) a brand or brands that would command the loyalty of the customer to the extent of winning repeat purchases time after time.
In the 1950s, 1960s and 1970s saturation advertising was the key to brand building. In the 1980s, however, as the cost of advertising soared and its effectiveness diminished, companies found that it was cheaper to buy than to build, hence the wave of acquisitions that washed over the industry. Unilever, for example, spent £1.3 billion acquiring three major companies in the toiletries and cosmetics field, and currently shares leadership of this £28 billion market with L'Oreal. At the end of the decade P and G paid the equivalent of $108 million for Noxell Corporation. Philip Morris bought General Foods, then Kraft and then Jacobs Suchard, itself the product of multiple acquisitions. In the past four years the top five European multinationals have made at least 14 acquisitions of more than $500 million each and more than 100 smaller purchases.
The result has been a major consolidation of brand leadership, with potential global dominance now being vested in a handful of giant multinational companies.
The operative word here, however, is "potential". With a few notable exceptions, the potential has been under-exploited, at least until the very recent past. But we are now beginning to see companies capitalising on their strengths by using their international reach to leverage their brand portfolios - and vice versa. These companies are filling out the already well established "personalities" of their brands, extending their range, reinforcing and, at times, transforming them. A new generation of global "power brands" is coming into being, created and maintained by ever more intensive product innovation.
Competitive spending on research and development these days is massive. In 1989 Unilever and P and G between them spent almost £800 million. Nestle and Philip Morris also spent several hundreds of millions of pounds each.
R and D activities which were once dispersed across laboratories in several countries, each under the direction of local management, are now closely co-ordinated by the centre - if not actually centralised - and research expertise developed in one area is increasingly being extended to others.
The speed, scale and intensity of effort that they can focus on innovation are the most powerful weapons that the major multinationals possess. A continuous cycle of innovation, rapid roll-out and innovation again is the best means of consolidating their position and ensuring that competitors remain outmanoeuvred.
Innovation is most effective when it follows one of three related, but nevertheless distinct, directions. The first is product reinforcement: strengthening the brand within its traditional product category. The second is extension: carrying the brand into new categories which fit well with its concept and personality. The third course involves exploiting some technological breakthrough to bring about a transformation of the market itself.
The first of these strategies - reinforcement - can also, occasionally, cause significant change in the market, simply by upgrading the product. L'Oreal, which adopted a strategy of micro-segmenting the hair care market and launching brand variants into each segment, offers one of the best examples of intensive innovation on a limited front. Throughout the 1970s and early 1980s the hairstyling market steadily declined as traditional products, notably hairspray, lost their appeal. In 1984 L'Oreal introduced a new product, a mousse under the Free Style brand name, which stemmed the market's decline. From this base, over the next two years the company went on to create an entire stable of new products targeted at different market segments under a range of umbrella brands. Originally introduced in France, these brands were extended rapidly to the United States, to Asia and to other markets in Europe. By the end of 1990 L'Oreal's hairstyling products had annual sales in excess of FFr 13 billion.
Mars's entry into the ice cream market is probably the most significant example of the second strategy - brand extension. Mars experimented with ice cream products for several years before introducing its Mars bar ice cream in 1988/89. After a short test market in the UK, the company launched the product across 15 European countries simultaneously, pricing it at a significant premium to existing hand-held ice creams. A year later the range was extended to a number of other brands in Mars's chocolate countline portfolio, and once again these were launched across Europe without test marketing. By the end of the year European retail sales of Mars's ice cream were estimated at £200 million. Combined sales of the Mars bar and Mars bar ice cream ranges were about a third higher than before the company moved into ice cream. Across the board, the Mars brand had a European turnover approaching £500 million.
Similarly, the original Flora margarine has projected its personality into new categories. With eight range developments in the past three years, Flora has joined the elite top 10 in the UK grocery brand list.
In recent years P and G and Unilever have both, up to a point, been demonstrating how to transform a market by innovation, with their moves into liquids and concentrates in the laundry detergents area. But Pampers, which P and G has built into a true "Eurobrand", offers a much better example of market transformation by technological breakthrough. Originally introduced across most of Europe in the early 1980s, Pampers' share rapidly peaked and even began to fall in several countries in the face of intense competition.
P and G's response was typical of its tradition: a significant technological development which increased the absorbency of the product, and which was expensive for competitors to copy because it required major investment in manufacturing plant. Launched as Pampers Ultra in the US in 1986, the improved disposable diaper was introduced throughout Europe in late 1986 and early 1987 - and was an immediate success.
But P and G did not stop there. The company quickly followed the Ultra innovation with the introduction of "Boy/Girl" formats across all of its markets. Pampers' market share in the UK more than doubled to 40%, and competitors across Europe were left in disarray. In France, two competitor brands (Lotus and Tendresse) withdrew from the market, and Celatose (manufacturer of Peaudouce and a significant supplier of own-label diapers) was forced into liquidation.
What this serves to show is that innovation by itself is not enough to carry the day. Speed is critical. Leading companies often pursue similar breakthroughs on parallel tracks, fully aware that their competitors' responses to any initiatives of their own are likely to be rapid and aggressive. In today's markets the value of "first in" status lies not only in the immediate ability to monopolise the breakthrough. It has a positive effect on the company's image which lasts for a long time. Speed of innovation can actually supplant brand loyalty, and achieve a long-term shift in market share that might otherwise take years - and fortunes - to bring about.
The combined effect of speed, innovation and global reach can be seen in the march of P and G's two-in-one shampoo - a shampoo and conditioner. Launched in the US as Pert Plus in 1986, the product has since been rushed into 30 markets worldwide. In this case, however, P and G used different brand names in order to maximise local impact. The results have been spectacular. In the US, Pert Plus has grown to market leadership with 12% of the £850 million market. In Europe P and G has more than doubled its share to 15% of the market, generating an estimated £80 million in additional retail sales in the first two years. In Japan, where it had no previous experience, the company rapidly captured 6% of the shampoo market. As chief executive officer Ed Artzt says: "The key is speed, particularly if significant capital is required."
Global reach confers on companies the ability to capitalise on innovations on a hitherto unknown scale, and to extract maximum return from the substantial capital investments often required. Thus Mars, when entering the ice cream market, was able to build a single plant to serve the whole of Europe. Once the factory was commissioned, the company ramped up volume as quickly as possible by launching in every European country, and then going on to extend the range.
Gillette's introduction of the Sensor shaving system provides an even more vivid demonstration of the advantages of global reach. After more than 10 years in development, at a cost of $200 million, Sensor was finally launched in 1990, covering 19 markets. It was supported by an advertising and promotion budget of $175 million, and by just two manufacturing plants, in Boston and Berlin. Gillette increased its overall market share by almost 5% before its competitors, hampered by the scale of the operation and by 22 patents, could begin to respond.
However, many of the leading packaged goods companies have adopted a clear strategy of concentrating major investments behind existing brands in preference to trying to create new ones. Technological breakthroughs no longer lead inexorably to a new product. They are more likely to result in the development and upgrading of an existing brand. Nor are brands any longer prescribed by category and history but are increasingly defined by the strength and breadth of their own personalities.
The category of power brands which is currently emerging is an altogether new phenomenon. The brands themselves are often bigger than the operating subsidiaries in most countries. They command significant economic advantages compared with run-of-the-mill national brands. Moreover, the combination of power brands with the innovation that creates and sustains them sets up a virtually unbreakable cycle. Innovation leads to brand growth and the power brand umbrella reduces the cost and risk of innovation, permitting an increase in its level and frequency. Frequent roll-out of brand innovations all round the world in turn accelerates the convergence of geographic markets. This creates further economies of scale as specifications are harmonised, and manufacturing optimised at regional rather than national level.
This new environment presents rival managements with several strategic challenges. Companies need to consider whether the shift towards power branding is likely to make them net winners or losers in each product category. The answer will depend on the current strengths of their brands and whether the category represents an attractive extension opportunity for a power brand which is not currently regarded as a competitor.
It is vital that businesses should get to grips with the role or potential role of innovation in individual brand categories. Managements need to appreciate how innovation can be used as a competitive tool to unbalance competitors, and to speed up the convergence of different geographic markets. They need to decide whether innovation can best be managed locally, regionally or globally.
Lastly companies need to look closely at their organisations. The organisation whose centre is responsible for supervision and co-ordination, with country-based units retaining profit and loss responsibility, is built on the assumption that market differences are more important than similarities. The fast-moving innovator, on the other hand, while recognising that differences exist, will allow the similarities to guide decisions.
The aggressive packaged goods producer of the 1990s will structure the organisation around two pivotal tasks, constantly striving to reduce the time that each consumes. The first of these is R and D. Top management will recognise innovation as a top priority and seek to remove the extraneous day-to-day clutter that constantly diverts its attention. Time wasting will be eliminated by, for example, increasing the number of activities performed in parallel; and variants will be developed to take account of the differing profiles of individual projects - size of opportunity, capital exposure, risk of pre-emption, etc.
Second, the thrusting manufacturer will seek to roll out products rapidly, with a minimum of adaptation to individual countries or markets. The organisation will include clear demarcation of responsibility between the centre and the country-based units, and explicit systems for managing the "critical path" from single country to full global roll-out. Any grey areas of responsibility will be closely examined, and some painful decisions taken.
The changes in structure, methods and behaviour required to become a global innovator threaten serious upheaval to many cosy corporate cultures. They imply significantly greater central co-ordination and direction of all aspects of the business. It is perhaps not surprising that the innovation leaders in the packaged grocery arena tend to be US-based multinationals rather than European. Their cultures require less change to compete in the new environment. But regardless of nationality, the race to pre-eminence in the 1990s will be won by the swift. It may well come close to being a winner-take-all contest.
(Barry Jones is a senior vice-president of Boston Consulting Group; Roger Ramsden is a manager in BCG's consumer goods practice group.)