April 2, 2009

Consumer Brands as Competitive Advantage

Brands names have been considered as a competitive advantage for companies. Companies like Kraft, Heinz, P & G, Coke, Pepsi...etc all own the who's who in consumer brands. But do all brands count as a competitive advantage? The answer is no.

Case Study: Packaged Foods Brands

Packaged or consumer food products have limited value or competitive advantage on its own. In order for brands to be a competitive advantage it must be coupled with any of the following (see my earlier post here):

  • low cost producer or economies of scale,
  • high switching costs, or
  • consumption habits.

However with the exception of soft drinks, the brand is coupled with consumption habit, most consumer branded food items lack any competitive advantages. Most brands are higher in price because companies want to bill the quality in the minds of the consumer, it is expensive then it must be better mentality. But that is not the case and consumer are better informed and can't afford not to be.

P&G products, for example, are about 40% more than the store brand, but perform the same. If you shop compare, for example, laundry detergents Tide is nearly $20 for 96 loads(used to be $14), Costco's store brand, Kirkland, was $12 for ~120 loads with similar quality.

The Kirkland Butter is $1.44 per pound and as good as Land O Lakes that goes for $3.24 at the supermarket. The Kroger, Meijer and Spartan brand butter is gross and still over $2 per pound, all three come from the same plant, 324 is I remember the label correctly where Kirkland comes out of 55-307.

The proof is in market share and consumer buying habits.

  • Kroger  has had significant success with its private-label program, with 27 % of its grocery sales and 35% of unit volume coming from its store brands in the fourth quarter, up from 26% and 32%, respectively, in the prior year.
  • Safeway  intends to drive corporate brands harder if packaged food companies do not lower their prices.
  • Wal-Mart is revamping its Great Value brand by introducing new products and reformulating 750 other products. Great Value is the country’s largest food brand in both sales and volume.
  • ConAgra's consumer-foods segment, sales volume -- the amount of food sold -- fell 4ConAgra Foods had to cut the prices of its Pam cooking sprays, Wesson cooking oils, Egg Beaters and some other products to compete.
  • Kraft Foods Inc. lost about 2.5% of its sales volume in the fourth quarter because people bought fewer of its products. Since then, the Northfield, Ill., company has lowered prices on some nuts, cheeses and coffee.
  • Sales volume at H.J. Heinz Co. declined 6% in its most recent quarter as consumers and retailers bought fewer Heinz products.
  • Nielsen data from the Private Label Manufacturers Association ahsows that private-label sales of food and other grocery products in the U.S. grew 10.3% to $82.9 billion in the twelve months ended in November.

Moreover, packaged foods are at a disadvantage as...
All the major packaged food companies make at least 10% of their sales to Wal-Mart, so it is a concern that as Wal-Mart increases shelf space for its own products, it is likely to reduce space for national brands from packaged food companies.
Packaged foods companies need a shift in their product strategies. There has to be a revamp in their marketing and operations to  address the following:
  • Rethink their pricing strategies. A clear question need to be answered is what is their value to consumers, a brand is not value that can command a premium; it must be combined with something.
  • Infinite customer segmentation that drives costs higher and leads to lower sales. Store brands are generic and one size fits all and they seem to be taking share from branded foods.
  • How to deal with excess capacity? Brand companies make private label goods to fill in excess capacity at factories; even at a loss. The problem is that this is very low margin business and sales go to retailers who go bankrupt with regular frequency. Message to branded firms: use capacity to lower the costs of your products.
________________________________________
Sources:
http://www.researchrecap.com/index.php/2009/03/31/store-brands-squeezing-us-packaged-goods-companies/
http://online.wsj.com/article/SB123807261203947597.html?mod=wsjcrmain
http://myvalueidea.blogspot.com/2007/12/brands-and-competitive-advantages.html

4 comments:

Jae Jun said...

I've never really believed that consumer brands had much of a competitive advantage. Unless it's a product ingrained into our brains (Cola, Nike) I've never paid the extra $ for the same thing.

$1 shampoo and $5 shampoo do the same thing and smell just as nice.

Sami said...

Jae,

and the funny thing is they are probably made by the same company.

sandy said...

i dont think brands are a source of competitve advantage, they are just an important asset to the company. Even in case of coca cola its economies of scale and repeat purchase behaviour i.e high customer captivity which are the sources of competitive advantage and not brands.
i believe over long periods of time low cost and high customer captivity create brands. but brands alone simply cant help one generate above average returns.

Sami said...

Sandy,

I read your article on brands being an asset and not competitive advantage and I could not agree with you more. low cost or forms of customer captivity is a sure way to ensure higher ROI.