Short-Term Gains and Brand Damage

Marketing is a long-term proposition. A company can get in trouble if it changes its marketing strategy to cope with a short-term problem.

Years ago, Packard was the premier luxury car, not Cadillac. The 1915 introduction of the Twin-Six Packard, one of the first 12-cylinder automobiles, created a crescendo of favorable publicity. In its time, Packard was known as "the American Rolls-Royce."

For many years, Packard outsold Cadillac by a wide margin. From 1925 to 1934, for example, Packard sold 243,748 cars versus just 134,341 for Cadillac.

Of course, 1934 was near the bottom of the depression. Even though Packard outsold Cadillac that year, the company was concerned because its 1934 sales (6,552) were only a fraction of the 44,634 cars Packard sold in the boom year of 1929.

What should Packard do? Hey, things are bad. We need to come out with a cheaper version of our product. (How often have you heard that said in the boardroom?)

So in 1935 Packard introduced the 120 (pictured above), its first middle-market vehicle. Sales took off. That year Packard sold 37,653 cars, more than five times as many vehicles as it sold the year before. Obviously the new strategy was working.

And it continued to work for more than a decade. From 1935 to 1941, Packard sold three times as many cars as Cadillac, 456,503 versus 135,628.

But the brand was getting tarnished. More and more car buyers perceived Packard to be just another mid-priced vehicle and Cadillac to be the only luxury car. In 1941, for example, the cheapest Cadillac sold for $1,445. The cheapest Packard was just $927. (You can't build a premium perception on a middle-of-the-road price.)

As soon as the economy improved after World War II, Packard started to fade. By 1950, Cadillac was way ahead of Packard. By 1957, Packard was gone and Cadillac was king of the luxury-car market.

Some companies today are making the same mistake as Packard. They are ignoring their long-term positions in order to fix a short-term problem. Marketing people, in particular, are being asked to prepare programs to deal with the recession. Far too often, the marketing strategy gets pushed aside as the company goes for a short-term sales boost.

You might have thought that Cadillac would have learned a lesson from its marketing victory over Packard, but apparently not.

Over the years, Cadillac has cheapened its brand with low-priced models like the Cimarron and the Catera. And according to trade reports, Cadillac is currently working on a line of inexpensive 4-cylinders cars. ("I'm not quite sure what it is," reported a senior editor of Automotive News, "but it certainly isn't a Cadillac.")

Today, Cadillac has lost much of its luxury-class luster. Last year, for example, Cadillac was far behind the three leading luxury-car brands.

Lexus: 260,087
BMW: 249,113
Mercedes-Benz: 225,009
Cadillac: 161,159

Now what do you suppose Cadillac is going to do about its fourth place position? Of course, keep expanding the line. "I compete today in about 65% to 68% of the market," said Mark McNabb, VP of Cadillac-Hummer-Saab sales. "Obviously we would like to compete in a greater portion of the marketplace."

Last year, Cadillac-Hummer-Saab had 1.6% of the total automobile market, or 2.4% of the market they claim to compete in. Those are signs of awfully weak brands.

A strong brand will compete in a narrow segment of the market and then dominate that narrow segment. Competing in 10% of the market with a 50% share is a typical example.

Cadillac, like the rest of General Motors' brands, is going in the wrong direction. Cadillac is very likely to follow in the footsteps of Packard.

The most valuable thing a company owns is its position in the consumer's mind. When you tamper with this position, you are asking for trouble. Yet many companies spend much of their time doing just that. Tampering with the brand's position. Walmart's move into fashion, for example, was a total failure. Actually, Walmart was lucky its fashion foray didn't work. That would have hurt its low-cost reputation.

Sears, Roebuck and Co. made this mistake. Sears was the Walmart of the '50s and '60s and the largest retailer in the country until the early 1980s. Then the company drifted upwards into the mushy middle. Sears wasn't cheap and it wasn't chic. (Today, Walmart is more than seven times the size of Sears. Furthermore Walmart's net profit margin last year was twice as much as Sears: 3.4% vs. 1.6%.)

It can take awhile to damage a strong brand. American Express is the dominant high-end charge-card brand. In 1987, it introduced the Optima card, its first credit-card product. In 1999, it launched a massive marketing campaign behind its "Blue" card, another credit-card product.

Recently The Wall Street Journal reported, "As defaults rise, bruised AmEx returns to its roots."

"American Express Co., after outclassing its rivals for the past 50 years," reported The Journal, "is looking uncomfortably like just another credit-card company."

In January of this year, its defaults on its securitized loans rose to 8.3%. That's one reason American Express is now offering some Blue and Optima cardholders a $300 gift card if they pay off their balances and cancel their accounts.

Why turn American Express into "just another credit-card company"? (That's exactly what Packard did. Turn a high-end brand into "just another car company.") What American Express did makes no sense to me. Its upscale reputation not only is a powerful attraction for consumers, but it also allows AmEx to charge merchants more than Visa or MasterCard does for handling its charges.

Starbucks is making the same mistake. What is instant coffee going to do for Starbucks except to cheapen the brand?

Think about it this way. Why is Starbucks slowing down? Because consumers are switching from fresh-brewed to instant coffee? I think not. Starbucks is slowing down, in my opinion, because the economy is bad. If the company hangs in there, without damaging the brand, sales are likely to rebound quickly after the economy turns around.

In spite of what you might have read in the papers, Starbucks is not doing that badly. Last year, sales were actually up 10.3% over the previous year. What's down is Starbucks' net profit margin which dropped from 7.1% to 3%.

What would I do if I were running Starbucks? I would focus on the core problem. It doesn't take a genius to know why consumers are lining up at Dunkin' Donuts instead of Starbucks, or "Fourbucks" as it is commonly known. Consumers need a reason to go back to Starbucks. If I were running Starbucks, I would slightly reduce prices across the board. Maybe 10% or 15%. But I would still keep them significantly higher than McDonald's or Dunkin' Donuts. The lower prices would give consumers an excuse to go back to Starbucks.

Wouldn't this hurt the brand? Not necessarily. As long as Starbucks is more expensive than the alternatives, the brand will still be perceived as upscale.

In the long run, the only thing that counts is the perception of the brand in the consumer's mind. That's what marketing people should focus on. Not current sales which for luxury brands are certain to be hurt by the economy.

Save the brand and when the economy improves, so will the brand's sales.

Damage the brand in order to reap additional sales in the short term and you'll wind up like Packard.

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Comments

[Ethan]

Hi, thanks for the article. So I was wondering about your opinion on what Abercrombie & Fitch is currently doing. For some time now they refuse to lower prices to generate sales and monthly sales are tumbling by 20+% every month. Is this a viable strategy or what could they do to slow the bleed?

[Edward Boches]

Couldn't agree more with much of what you say. The real problem is short term thinking. Where does that come from? Wall Street and the fact that all it cares about is next quarter's profits. It wasn't always this way. Up until the late 1970s there was value given to long term thinking. There was greater emphasis put on R and D that would contribute to the distant future. Now all anyone cares about is short term results. Exec compensation, stock price, definition of success seems to know nothing else.

[P.M.]

Your story of Packard vs. Cadillac makes sense but trying to relate it to today's automotive market doesn't work. For example, take your quote from Mark McNabb:

"I compete today in about 65% to 68% of the market. Obviously we would like to compete in a greater portion of the marketplace."

That says to me that they don't have products in their lineup to compete with those of other car makers. For instance, someone shopping a BMW 3-series may never venture to a Cadillac dealer because there is no Caddy of comparable size. Lexus, Mercedes, Infinity all have these smaller cars. So, if Cadillac is developing a smaller car to compete in this class of car it seems to me they're grabbing at the 35% of their perceived market where they have no product. It does not look to me as if they're de-valuing themselves.

With respect to a top brand losing its luster offering cheaper options, do you think BMW has done this by introducing its 1-series? I'm not so sure. However, I would say it almost never works the opposite way. Continuing with the automotive theme, Hyundai started selling inexpensive economy cars here and that seems to be the reputation they've gained. You'd be hard pressed to find a traditional BMW or Cadillac shopper to consider the new Genesis no matter how good it may be. Hyundai's ads are constantly telling people to look at it differently as they try to turn their image around.

[DPaulson]

This is an excellent post. I site your Packard example in my blog where I note, Apparently, Packard executives forgot to “Ask the man who owns one.”

http://beyondfocusgroups.blogspot.com/2009/07/testing-brand-extensions.html

As a solution, I suggest that pictographic research may be an excellent way to test brand extensions. Simply picture the purchasing situation, place the brand on the proposed extension, and listen to potential consumers. You won’t have to ask leading questions and you will get some very unexpected, but relevant, information.

Thanks,

Dale