Brands are on the wane. For the many consumer-goods companies struggling against this trend, it’s tempting to blame the big-box discount retailers. Plenty of anecdotes support their point of view. Recall what happened to Vlasic, for 50 years a beloved brand in America’s kitchen cupboards, when it started discounting its pickles by offering them in gallon-size jars in the late 1990s. Wal-Mart began selling the product for an unheard-of $2.99—a price so low that Wal-Mart soon made up 30% of Vlasic’s business. The supercheap gallon jar cannibalized Vlasic’s other channels and shrank its margins by 25%. When Vlasic asked for pricing relief, Wal-Mart responded by refusing an immediate price increase and reviewing its commitments to the line. By 2001, Vlasic had filed for bankruptcy.
Wal-Mart and other powerful retailers have undoubtedly weakened some brands, but a number of consumer-product companies have done a better job than Vlasic at managing both their relationships with retailers and their brands. For example, when Foot Locker cut Nike orders by about $200 million to protest the terms Nike had placed on prices and selection, Nike cut its allocation of shoes to Foot Locker by $400 million. Consumers, frustrated because they couldn’t find the shoes they wanted, stopped shopping at Foot Locker. Sales at a competitor, Finish Line, increased. In the end, Foot Locker acceded to Nike’s terms.
At the core of the differences in how Vlasic and Nike managed their brands is a crucial disparity in strategic perspective. Vlasic used a short-term sales strategy, focusing on a single, large channel partner and discounting its product to attract consumers. In addition, the company reduced advertising by 40% between 1995 and 1998. Nike, on the other hand, positioned itself for the long term. It maintained strong relationships with a variety of retailers and invested in brand equity, allocating $1.2 billion annually to its advertising budget. By setting its sights on a distant horizon, Nike continued to own its customers—and its brand—while Vlasic ceded both to the channel.
Companies routinely overinvest in promotions and underinvest in advertising, product development, and new forms of distribution. As a result, powerhouse brands have been weakened, often beyond recovery.
Our research into the role of marketing strategy in brand performance indicates that companies are paying too much attention to short-term data and not enough to the long-term health of their brands. They routinely overinvest in price promotions and underinvest in advertising, new-product development, and new forms of distribution. As a result of these shortsighted approaches, powerhouse brands have been weakened, often beyond recovery. It’s time for changes in how companies measure brand performance, how they communicate about their brands to the markets, and how they oversee brand managers. Those changes won’t happen without a major shift in thinking at the senior-management level. Corporate managers have the ability to make these sweeping changes. Do they have the will?
The Genesis of the Short-Term View
One wonders how manufacturers became so myopic about their brands. We suggest three factors: an abundance of real-time sales data that make short-term promotional effects more apparent, thus pushing manufacturers to overdiscount; a corresponding dearth of usable information to help assess the effect of long-term investments in brand equity, new products, and distribution; and the short tenure of brand managers. We’ll discuss each in turn.
Data are proliferating.
Before the 1980s, brand managers had to wait up to two months to get sales numbers. Matching weekly discounts to changes in sales was a difficult and error-prone task. That all changed with the advent of store scanners, which gave managers real-time sales data. These figures made it possible to attribute a spike in sales to a price promotion. (See the exhibit “Scanner Data Reveal the Immediate Effect of Price Promotions.”)
Scanner Data Reveal the Immediate Effect of Price Promotions
Before real-time sales data became widely available, managers had a hard time knowing if price promotions …
Although scanner data showed brand managers the clear link between discounting and sales, the numbers didn’t necessarily tell them much about whether a given promotion was profitable. For that assessment, they needed to compare sales at the discounted price with those that probably would have occurred without the promotion. To help brand managers predict the level of sales in the absence of a discount, and thus to assess the immediate profitability of promotions, baseline sales models were developed—in part by Leonard Lodish. (It’s important to note that, contrary to the belief of many brand managers, baseline sales are estimates—albeit very good ones—not measures of actual sales. Baseline sales are estimated by extrapolating from periods when there are no price reductions or other kinds of promotions.) This new metric further highlighted the short-term effects of trade promotions.
The profusion of data has had major consequences…
