After months of back and forth, Kraft Foods has now reached a firm agreement to buy Cadbury. This may be a good thing for Kraft. Warren Buffett demurs due to the price. The jury is out. However, this merger may not be good for some of the other competitors in the industry. (See the Symptom & Implication, “The industry is consolidating through mergers and acquisitions” on StrategyStreet.com.) In particular, some industry observers are pointing to the precarious position of Hershey. They note that Hershey will be a very small competitor in the global confectionary business. That may be, but I would not be so fast to write off Hershey’s chances of survival. Often the smaller firms are more profitable than the largest firms in the industry.
A few years ago, we analyzed 240 industries that had five or more competitors reporting line of business sales of at least $50 million. (See the Perspective, “Is Bigger Really Better” on StrategyStreet.com.) In each of these industries, we studied the top four competitors measured in sales. We evaluated their market shares and their returns, looking for the benefits of natural economies of scale.
We calculated the percentage of time that a company ranked first in market share was also the leader in pre-tax return on assets. Pure chance would have seen the industry’s market share leader lead in returns 25% of the time. We found some economies of scale at work. In all of the 240 industries, we saw that the industry market share leader led the industry in returns on assets 29% of the time, only 4% more than random chance.
Surprisingly, the distant followers can sometimes be powerful competitors. In our study, the competitor ranking fourth in market share led its industry in returns 23% of the time, only 2% less than the 25% random chance.
So, Hershey is far from dead on arrival. This is not to argue that Hershey has an easy time of it. Quite the contrary. But it can survive, and even thrive, even in a more competitive confectionary market. (See the Perspective, “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets” on StrategyStreet.com.) To do so, though, it will have to be quite astute in its choice of product benefits and in its management of its smaller-than-average cost structure.
Showing posts with label Kraft Foods. Show all posts
Showing posts with label Kraft Foods. Show all posts
Thursday, February 4, 2010
Monday, May 18, 2009
Future Trouble for the Branded Foods Industry
Kraft Foods, Hershey Company, Kellogg and Campbell Soup Company reported higher profits recently. The key driver of these profit improvements was higher prices. For example, Kraft Foods’ profit in the first quarter of 2009 grew 10%, while its organic revenue grew 2.3%. Investors cheered because they had feared broad-based price rollbacks in the face of a tough economy.
One analyst noted that the market share improvement for private label products has gone down sequentially. Why don’t we put that analyst’s explanation in different words? How about “private label brands continue to gain share” or, even more accurately, “branded food companies lose more market share to private labels.” These are more realistic assessments of what is happening in the food business. Private labels are gaining share (see the Symptom and Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com), plain and simple. Private labels are gaining share under the price umbrella set by the branded food companies.
The branded food companies are subsidizing the growth and long-term health of the private label suppliers. These private label suppliers are not going to be satisfied with market share gained on the backs of their current products. They will improve their products in quality and distribution. These improvements will cause more consumers to find these private label products a good alternative to the branded products.
To illustrate the point, Safeway recently announced that it was expanding its private label brands O Organics and Eating Right, to other supermarket chains in the U.S. and elsewhere. If branded food companies’ pricing would be more aggressive in this market place, Safeway would not be able to expand its private label business. Other private label suppliers would also see thin margins and turn to self-defeating cost reductions in order to keep their profits at an acceptable level.
In the last year, industry-wide private label grocery sales grew by 9%. At the same time, national brands rose less than 2%. Private label products now make up nearly 17% of grocery sales. They will get better as they get bigger. (See the Perspective, “Is your Industry Ripe for Hostility” on StrategyStreet.com.)
One analyst noted that the market share improvement for private label products has gone down sequentially. Why don’t we put that analyst’s explanation in different words? How about “private label brands continue to gain share” or, even more accurately, “branded food companies lose more market share to private labels.” These are more realistic assessments of what is happening in the food business. Private labels are gaining share (see the Symptom and Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com), plain and simple. Private labels are gaining share under the price umbrella set by the branded food companies.
The branded food companies are subsidizing the growth and long-term health of the private label suppliers. These private label suppliers are not going to be satisfied with market share gained on the backs of their current products. They will improve their products in quality and distribution. These improvements will cause more consumers to find these private label products a good alternative to the branded products.
To illustrate the point, Safeway recently announced that it was expanding its private label brands O Organics and Eating Right, to other supermarket chains in the U.S. and elsewhere. If branded food companies’ pricing would be more aggressive in this market place, Safeway would not be able to expand its private label business. Other private label suppliers would also see thin margins and turn to self-defeating cost reductions in order to keep their profits at an acceptable level.
In the last year, industry-wide private label grocery sales grew by 9%. At the same time, national brands rose less than 2%. Private label products now make up nearly 17% of grocery sales. They will get better as they get bigger. (See the Perspective, “Is your Industry Ripe for Hostility” on StrategyStreet.com.)
Monday, May 4, 2009
Product Innovation Using Twitter and Tweetups - Part 2
Kraft Foods plans to introduce its DiGiorno flatbed pizza by offering to host Tweetups for influential users of Twitter (see Part 1 of this blog). In Part 1 of this blog, we described three major types of customer segmentation by need: Physical, Emotional and Intellectual. We also described patterns that companies use to innovate products to meet those needs including: providing information, reducing resources the customer requires for the use of the product and improving the experience the customer has with the product.
In this Part 2 of the blog, we will illustrate the segments of customer needs and the product innovations that Kraft has used with this DiGiorno introduction.
Here are some segments of customer needs that Kraft is addressing with its innovations. Each of the indented concepts is a further refinement of the concept above it:
A. Segments with Intellectual needs
-----1. Knowledge of company and company's product
----------a. Segment with limited or no familiarity with the product
---------------1) Segment using a similar product
B. Segments with Emotional needs
-----1. Segment with needs for status in the community
----------a. Segment with needs for affiliation
---------------1) With a group on the cutting edge
The company addresses these segments with the following patterns of product innovation. Each of the indented concepts is a further refinement of the concept above it:
A. Provide information to the segment
-----1. Attract attention of customers to brand
----------a. Use non-traditional advertising in space available to many people
---------------1) Use an on-line event to provide sampling opportunity
B. Provide a good experience for the initial customer:
-----1. Associate the product with an image to increase customer pleasure in using the product
----------a. Suggest personal characteristics of the user of the product
---------------1) Suggest that users of the product are trend leaders
C. Provide good experience for follower customers
-----1. Increase the customer’s sense of security with the product
----------a. Assure customer that the product tastes good
---------------1) Obtain third party endorsements of the product
To gain a greater insight into the many patterns of segmentation and product innovation, please see www.strategystreet.com/improve/segments and www.strategystreet/com/improve/productsandservices. There you will find over 400 concepts of segmentation of customers by need and nearly 600 concepts of product innovation initiatives. We support these concepts with over 4500 examples. These concepts and examples are brainstorming thought-starters to help you meet the challenge of innovation in your own marketplace.
Thursday, April 30, 2009
Product Innovation Using Twitter and Tweetups - Part 1
Over the years we have gathered several thousand examples of product innovations. We have found patterns in the needs of customers and in the approaches that companies follow to develop product innovations to meet those needs. At the highest level, a customer has three basic needs, which create three major customer segments. First, there are physical needs related to the physical situation of the customer or of the location where the product is purchased or used. Second, there are emotional needs, which reflect the customer’s personal needs for comfort, status and the avoidance of anxiety. Finally, there are intellectual needs which segment customers based on their current knowledge and understanding of the company, its products and how the products are used.
To meet the needs of these customer segments, companies follow three primary approaches to product innovation. First, they may provide the customer with information, which helps the customer to recognize and recall the name of the company and its products, to explain the product’s relative benefits or to obtain directions on how the product should operate within a broader customer cost system. Second, the company may reduce the resources the customer requires for the use of the product. These resources include money, time, effort and health. Third, a company may improve the experience the customer has with the product. These experienced-based innovations add new appeal to the senses, associate the company or the product with an image to increase the customer’s pleasure in using the product, increase the customer’s sense of security with the product or entertain the customer while he waits for or uses the product.
Kraft has demonstrated some of these patterns in its recent DiGiorno flatbed pizza introduction. In one of its most innovative approaches to this introduction, the company is seeking out influential users of Twitter. Twitter is the social online media company that allows users to communicate quickly using very short, 140 character messages. For influential users of Twitter, Kraft is offering to host Tweetups. Tweetups are in-person get-togethers prearranged on Twitter. The company is recruiting these Twitter users, called Tweeters, in Chicago, New York and Los Angeles. The company is offering to provide DiGiorno flatbed pizzas to these Tweetup events in the hope that attendees will like the product and spread the word.
In the second part of this blog, we will tie these product innovations back to the customer need segments and types of product innovations we have outlined above.
To meet the needs of these customer segments, companies follow three primary approaches to product innovation. First, they may provide the customer with information, which helps the customer to recognize and recall the name of the company and its products, to explain the product’s relative benefits or to obtain directions on how the product should operate within a broader customer cost system. Second, the company may reduce the resources the customer requires for the use of the product. These resources include money, time, effort and health. Third, a company may improve the experience the customer has with the product. These experienced-based innovations add new appeal to the senses, associate the company or the product with an image to increase the customer’s pleasure in using the product, increase the customer’s sense of security with the product or entertain the customer while he waits for or uses the product.
Kraft has demonstrated some of these patterns in its recent DiGiorno flatbed pizza introduction. In one of its most innovative approaches to this introduction, the company is seeking out influential users of Twitter. Twitter is the social online media company that allows users to communicate quickly using very short, 140 character messages. For influential users of Twitter, Kraft is offering to host Tweetups. Tweetups are in-person get-togethers prearranged on Twitter. The company is recruiting these Twitter users, called Tweeters, in Chicago, New York and Los Angeles. The company is offering to provide DiGiorno flatbed pizzas to these Tweetup events in the hope that attendees will like the product and spread the word.
In the second part of this blog, we will tie these product innovations back to the customer need segments and types of product innovations we have outlined above.
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