To Buy Or Launch A Brand?

In the last 20 years, Procter & Gamble, the world’s most magnificent marketing machine, has launched many magnificent brands.

They include: Vicks, Oil of Olay, Pantene, Cover Girl, Noxzema, Clarion, Old Spice, Max Factor, Giorgio, Baby Fresh, Tampax, Iams, Spinbrush, Clairol, Wella and Glide.

Wait a minute, you might be thinking. Didn’t P&G buy Glide from W.L. Gore and Wella from that German company?

That’s right. They did. As a matter of fact, Procter & Gamble bought all of these 16 brands and relaunched them as P&G brands.

That’s what most big companies do. Instead of launching their own brands, they buy them from other companies, sometimes for a lot of money. The Wella deal was worth a reported 6.5 billion euros.

I have a lot of respect for the marketing savvy of the people at P&G. In books and articles, I have commented favorably on the strategies developed for many of their brands. The launch of Crest toothpaste and Scope mouthwash in particular.

But in the last few decades, I’ve had this nagging thought in the back of my mind. With all of Procter’s marketing smarts and financial muscle, why don’t they launch their own brands rather than buy them?

This is not an indictment of P&G. Most big companies do the same. They buy rather than launch. PepsiCo bought Mountain Dew and Gatorade, for example, instead of launching their own caffeinated citrus and sports drinks.

(Actually PepsiCo did launch a sports drink, All Sport, which went nowhere. So they spent $13 billion to buy the real thing (Gatorade along with its corporate parent Quaker Oats.)

Then there’s Coca-Cola, the Procter & Gamble of soft drinks. But Coke is no better in launching new brands than P&G.

Coca-Cola missed the caffeinated citrus category (pioneered by Mountain Dew), so they tried to get into the game with Mello Yello. That didn’t work, so they tried Surge which didn’t work either.

Coca-Cola missed the spicy cola category (pioneered by Dr Pepper), so they tried to get into the game with Mr. Pibb. That didn’t work either.

Coca-Cola missed the all-natural category (pioneered by Snapple), so they tried to get into the game with Fruitopia. That didn’t work either.

Coca-Cola missed the sports drink category (pioneered by Gatorade), so they tried to get into the game with PowerAde which hangs in there as a weak No.2 brand.

Coca-Cola missed the energy drink category (pioneered by Red Bull), so they tried to get into the game with KMX. That didn’t work.

Why do companies like Procter & Gamble and Coca-Cola miss the boat when it comes to launching new brands? There are three reasons.

1. An advertising-driven launch.

Most big companies will not launch a new brand without the backing of a substantial advertising budget. Yet a successful new brand is usually built around a new category which can take years to develop.

That’s why many successful new brands start slowly using primarily PR techniques. Starbucks, Gatorade, Google, Red Bull, to name a few. These brands and many others were introduced by entrepreneurs who have the patience to hang in there while the market develops.

Red Bull, for example, took four years to reach $10 million in annual sales and another five years to reach $100 million. Any big company that took a look at Red Bull in its early days would have said, ‘There’s no market there. We can’t afford a big ad budget to launch an energy drink brand.’

By the time the market develops, it’s too late for a me-too brand.

2. A research-driven name.

You can’t create a new category with a line-extension name. Invariably, new categories are dominated by new names created especially for the category. Red Bull, not AriZona Extreme Energy. PowerBar, not Gatorade Energy Bar. Amazon.com, not BarnesandNoble.com. Dell, not IBM personal computers. Nickelodeon, not the Disney Channel.

With marketing history clearly in favor of new names rather than ‘stretched’ names, why do companies continue to take the line-extension path.

They do research.

When asked which brand name he or she prefers, the average consumer invariably chooses the familiar name.

Toyota Super or Lexus? Invariable the answer is ‘Toyota Super’. ‘Who’s ever heard of a Lexus? (Either Toyota neglected to research the Lexus name or they chose to ignore their own research.)

Mercedes-Benz Ultra or Maybach? Would your average multi-millionaire prefer to drive a car that he or she has never heard of than a Mercedes? Yet in the long run, Mayback is the clearly superior name.

3. A broad distribution plan.

With a substantial advertising launch, a new product needs broad distribution to make the economics work. So companies pressure the distribution with discounts, two-for-ones, free merchandise and sometimes the payment of slotting fees.

The odds are stacked against such a plan. New brands take off slowly and with little selling at point of sale, most new product launches are bound to fail. A recent Nielsen BASES and Ernst & Young study put the failure rate of new U.S. consumer products at 95 percent and new European consumer products at 90 percent.

A better distribution plan is to start ‘narrow,’ often with a single chain. Charles Shaw (Two-Buck Chuck) started with a single chain (Trader Joe’s) in a single state (California) and became the fastest-growing table wine ever.

Newman’s Own salad dressing was launched in a single supermarket (Stew Leonard’s in Norwalk, Connecticut). The store sold 10,000 bottles in the first two weeks.

With narrow distribution, you can often arrange special displays and promotions which increase your brand’s chance for success.

Sponsored By: The Brand Positioning Workshop

Comments

[Iain Maclean]

As ever, the facts you marshal and your analysis are outstanding.

However, I was puzzled by your conclusions as to why companies like Procter & Gamble and Coca-Cola miss the boat when it comes to launching new brands.

Both companies miss the boat long before it ever comes to advertising. You actually alluded to it in your concluding paragraph within that section, "By the time the market develops, it's too late for a me-too brand."

Once ensconced as a brand/category leader, a number of things happen to ensure that they react too slowly:

Once organisations get to a particular size and age (however that's determined), seige mentality sets in. Supposedly safe in their castles their primary aim is consolidation. They make alliances, not conquests. Unlike the young Napoleon, or Alexander before he became great and even Atilla, they're not lean and hungry enough to risk leaving their castles to conquer more lands.

Unlike young conquerors, they have nothing to prove but a great deal to lose. Everything is determined by committee and consequently, decisions are delayed and delayed by endless discussions.

Perhaps it's inevitable. Perhaps, like people, organisations become more cautious, wary and weary as they get older.

What's the answer? You're right, it certainly isn't developing me-too's too late and then trying to rush them to battle after they've already lost the element of surprise and the enemy have the high ground.

OK, this analogy is beginning to strain, so let's end it here.

Perhaps one answer is to develop a new approach to NPD; one that isn't led by production or research.

Maybe it should be led by a maverick. A Patton, Slim, Orson Wells, Stirling and Saladin.

In order to succeed, they should be given a high degree of autonomy.

Unless large and well-established companies can react more quickly to change they may go the way of the Aztecs an Incas...

Yours somewhat bemusedly,

Iain Maclean

[Kristian Andersen]

"With all of Procter’s marketing smarts and financial muscle, why don’t they launch their own brands rather than buy them?"

Well it's not laziness. It's an intentional strategy laid out verbatim by former P&G CEO A.G. Lafley. Their goal is to acquire at least 50% of their innovations from outside the company.

Here's an excerpt from an interview with A.G. from an article posted on the Harvard Business School blog "Working Knowledge":

"We knew that most of P&G's best innovations had come from connecting ideas across internal businesses. And after studying the performance of a small number of products we'd acquired beyond our own labs, we knew that external connections could produce highly profitable innovations, too. Betting that these connections were the key to future growth, Lafley made it our goal to acquire 50 percent of our innovations outside the company. The strategy wasn't to replace the capabilities of our 7,500 researchers and support staff, but to better leverage them. Half of our new products, Lafley said, would come from our own labs, and half would come through them."

What some would refer to as buying existing products, P&G would call external innovation sourcing. Going outside of the four walls of the organization to find great ideas. Sometimes its established brands, but just as often they purchase "start-up" brand/products – like the Crest Spinbrush (which they later sold to Arm & Hammer). They then leveraged that innovation in other product lines, such as the Tide Stainbrush.

Kristian Andersen

[Martin Bishop]

Like Iain, I think that the reason that companies often miss the boat when it comes to launching new brands comes from a structural, organizational challenge.

My take is that large companies have an environment that is hostile towards businesses that need time to develop. The kind of loving attention and patience required for a quirky idea that might amount to something in a few years time is incompatible with a company that is geared to be efficient dealing with billion dollar brands in national distribution. It's the difference between batch and continuous, line process in manufacturing.

That's why these companies often try and mold new brands to fit their system. Since they need a business to jump more or less immediately to the $100 million plus range to work with their sales, manufacturing and marketing systems, they look for big advertising, broad distribution, mass appeal launches that often don't work for truly innovative ideas.

I think that the major CPG companies are very aware of this problem and have tried/are trying different solutions:

1) The one you mention: Buy brands once they reach the volume thresholds that are compatible with the organization.
2) The one that Kristian mentions: Source innovation outside the company
3) The one that Iain suggests: Setting up an autonomous structure to focus on such businesses (although these structures often don’t, for long, get the independence that they really need)

Unlike Iain, I don't think that big companies are likely to go the way of the Aztecs and Incas because they can always plunder like the conquistadors. But the models with the greatest potential for building value are those that adopt a more enterprising approach to exploring strange new worlds to seek out new life.