Vijay Mallya, the liquor king, who wanted to run an airline, recently told the staff at Kingfisher Airlines that he had no money to clear their salary dues. Mallya, like many businessmen before him, also became a victim of the line extension trap. “The line-extension trap is using the same brand name on two different categories of products. Kingfisher beer and Kingfisher Airlines. We have studied hundreds of categories and thousands of companies and we find that line extension generally doesn’t work, although there are some exceptions,” says marketing guru Laura Ries, who has most recently authored Visual Hammer.
Along with her father, the legendary marketing guru Al Ries, she has also authored, several other bestsellers like The Origin of Brands, The Fall of Advertising & the Rise of PR and the War in the Boardroom.
But does such a rigid line against line extensions make sense in this day and age, when it is very expensive to build a brand. “We have never said that a company should not line extend a brand. What we have said is that line extension “weakens” a brand,” says Ries. And there are always exceptions to the rule she concedes. “Sometimes, a brand is so strong it can easily withstand some weakening. Early on, for example, the Microsoft brand was exceptionally strong so the company could use it on other software products and services.”
There is also the recent case of Tide, the leading detergent in America, opening a line of dry-cleaning establishments using the Tide brand name. And it might just work, feels Ries. As she explains “Because there are no strong brands or national chains in the category, this can possibly work, although we believe Procter & Gamble, the owners of Tide, would be better off with a new brand name.”
These exceptions notwithstanding there are way too many examples of companies which haven’t fallen for the line extension mistake and are doing very well in the process. Toyota is one such example. And one of the reasons for its success is the launch of three new brands in addition to Toyota. Scion, a brand for younger drivers. Prius, a hybrid brand. And Lexus, a luxury brand.
“Initially, Prius was a sub-brand of Toyota, but the company recently decided to create a totally separate brand. Prius has some 50 percent of the hybrid market in America and is a phenomenal success. The separate brand name will assure its success for decades to come,” says Ries.
What about Apple we ask her? How does she view the brand, everyone loves to love? Hasn’t it also made the line extension mistake by launching the Apple iPod, the Apple iPhone and the Apple iPad? “Apple is not a product brand. Apple is a company brand. Nobody says, I bought an Apple unless they have just visited a grocery store. They say I bought an iPod or an iPhone or an iPad, three brands that made Apple one of the most-profitable companies in the world,” explains Ries.
So in that sense Apple did not really make a line extension mistake. For every new product it created a new brand. And the success of this strategy reflects in the numbers. Apple’s competitors, Hewlett-Packard and Dell, line extended their brands into many of the same products. Both are in trouble. Last year, Apple made $41.7 billion in net profits. Dell made $2.4 billion. And Hewlett-Packard lost $12.7 billion.
But what about Samsung, which has been giving Apple a really tough time in almost all product categories that they compete in. “Currently, Samsung is an exception to the principle that line extension can weaken a brand. But that’s only in the short term. We predict that sometime in the future Samsung will suffer for its marketing mistake,” states Ries. “What keeps Samsung profitable is the principle that in every category there’s always room for a No.2 brand. Coca-Cola and Pepsi-Cola, for example,” she adds.
And Samsung is clearly not as profitable as Apple. Last year, Apple made almost twice as much in net profits as Samsung even though Apple’s revenues were smaller. Apple’s net profit margin was 26.7 percent compared to Samsung’s 11.5 percent.
The other two big companies in the mobile phone market have been Nokia and Blackberry. Nokia recently launched a smartphone under the new ‘Lumia’ brand name. On the face of it this is exactly what Ries would have recommended. The company launched a Lumia smartphone, and did not fall for the line extension trap. Given this, why is Nokia losing out in the smartphone business, we ask Ries.
“What’s a brand name? What’s a model name? What’s a sub-brand name?” she asks. “Many companies like Nokia think they can decide what is a brand name and what is a model or a sub-brand name. So Nokia considers “Lumia” to be its smartphone brand name. Not so. It’s consumers that make that decision. Consumers use iPhone as a brand name and not Apple. Consumers also use Nokia as the brand name and not Lumia. To consumers, Lumia is a model or sub-brand name.”
And there several reasons behind consumers not considering Lumia to be a brandname. “Look at a Lumia smartphone and you’ll see the word “Nokia” in big type. Look at an iPhone and you won’t see the word “Apple.” You’ll see the word “iPhone” in big type and just an Apple trademark,” says Ries.
And on top of that Lumia doesn’t even have a website of its own (www.lumia.com is a website of a British IT company). “Lumia” doesn’t sound like a brand name and it doesn’t even have a website. That makes it very difficult to create the impression that Lumia is a brand. This isn’t the first line-extension mistake Nokia has made. Nokia was its brand name for a line of inexpensive cellphones. And today, Nokia is also using the Nokia name for its expensive smartphone products,” says Ries.
The Blackberry story goes along similar line. On the face of it, the company doesn’t seem to have made a line extension mistake. But Ries clearly does not buy that. “What’s a BlackBerry? Is it a smartphone with a physical keyboard? Or a smartphone with a touchscreen? It’s both, of course, and that’s exactly why BlackBerry has fallen into the line extension trap. To compete with the touchscreen iPhone, the BlackBerry company (formerly called Research In Motion) needed to introduce a new brand of touchscreen smartphone. It’s very difficult to build a brand that it has lost its identity.”
And given the lost focus its very difficult for these companies to go back to the days when they were immensely successful. As Ries puts it “It depends upon whether either company (i.e. Nokia and Blackberry) can do two things: (1) Develop an innovative new idea for smartphones, and (2) Introduce that innovative new idea with a new brand name. It’s hard for us to tell whether it’s possible to come up with a new idea for a smartphone. It could be too late.”
And this could work in favour of Samsung, feels Ries. “Every category ultimately has a leader brand and a strong No.2 brand. Since all three smartphone brands (Samsung, Nokia and BlackBerry) are line extensions, one line extension has to win the battle to become the No.2 brand to the iPhone. Samsung made massive investments in product design and development plus massive marketing investments,” says Ries.
So it’s logical that Samsung would become a strong No.2 brand. Furthermore, they priced their smartphones as less expensive than iPhones, another strategy that increased its market share although not its profitability. This has worked particularly well in Asia, feels Ries.
This success of Apple over Samsung comes with a caveat. As Ries explains it “Long-term, every category has two major brands. But they are normally quite different. Long-term, we see Apple as the leader in the high-end smartphone category and Samsung the leader in the “basic” smartphone category. Apple would make a mistake in introducing less-expensive smartphones. That would undermine its position at the high end.” And that is mistake that Apple needs to avoid.
Another massively successful company that has fallen prey to the line extension trap has been Google. The company has introduced a number of products under the Google brand name, but none of them have been massive money spinners like the Google search engine.
As Ries puts it “Currently, I can’t think of any Google product that is very successful. Google +, the company’s social media competitor, is nowhere near as big or as profitable as Facebook. Google’s most successful introduction has been Android, which now is being use by 75 percent of all smartphones.” Google bought the Android company, one of the reasons it probably didn’t use the Google name on the software.
What all the examples given above tell us is that line extensions have had a sketchy track record. So why do companies fall for it, over and over again? Ries has an answer for it. “As one CEO told us, We have a great company and great products. Why can’t we use our great company name on our great products?,” she points out. “Most chief executives believe that the only thing that really matters is the quality of their products and services their prices. Deep down inside, they don’t believe that the name or the marketing makes much of a difference.”
Then there is the pressure to keep increasing earnings. Chief executives are under pressure to increase sales and profits and they see product expansion (including line extensions) as the best way to achieve these goals. “The more important strategic decision is the question of “focus.” It’s our opinion that the best way into the mind is with a narrow focus. That’s not, however, the majority opinion, at least among top management people. Most companies are moving in exactly the opposite direction. They are line extending their brands,” says Ries.
Given this, CEOs don’t believe a new brand is worth the cost and effort required. It’s true, too, that many management people equate new brands with expensive advertising programs, feels Ries.
But that again is a perception that they have. Most big brands in the last ten years were not built because they advertised left, right and centre. Ries questions the assertion that it’s expensive to create a new brand. “It’s only expensive if a company uses advertising to launch the new brand. In our book, The Fall of Advertising & the Rise of PR, we recommend launching new brands with no advertising at all. Just PR or public relations. Advertising doesn’t have the credibility you need to launch a new brand.”
This is because when a consumer sees an advertisement for a new brand, his or her first reaction is, this can’t be very important because I’ve never heard of the brand. And that’s why some of the biggest brands in recent years like Amazon, Twitter and Google, used almost no advertising. They did, however, benefit from extensive media coverage, feels Ries.
In order to succeed in the years to come, companies will have to create multiple brands. “The future belongs to multiple-brand companies. But with one reservation. A company needs to be successful with its first brand before launching a second brand. You can’t build a successful company with two losing brands,” concludes Ries.
The article originally appeared in Forbes India edition dated July 12, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
The Congress led United Progressive Alliance (UPA) government finally acted hoping to halt the fall of the falling rupee, by raising petrol prices by Rs 6.28 per litre, before taxes. Let us try and understand what will be the implications of this move.
Some relief for oil companies:
The oil companies like Indian Oil Company (IOC), Bharat Petroleum (BP) and Hindustan Petroleum(HP) had been selling oil at a loss of Rs 6.28 per litre since the last hike in December. That loss will now be eliminated with this increase in prices. The oil companies have lost $830million on selling petrol at below its cost since the prices were last hiked in December last year. If the increase in price stays and is not withdrawn the oil companies will not face any further losses on selling petrol, unless the price of oil goes up and the increase is not passed on to the consumers.
No impact on fiscal deficit:
The government compensates the oil marketing companies like Indian Oil, BP and HP, for selling diesel, LPG gas and kerosene at a loss. Petrol losses are not reimbursed by the government. Hence the move will have no impact on the projected fiscal deficit of Rs 5,13,590 crore. The losses on selling diesel, LPG and kerosene at below cost are much higher at Rs 512 crore a day. For this the companies are compensated for by the government. The companies had lost Rs 138,541 crore during the last financial year i.e.2011-2012 (Between April 1,2011 and March 31,2012).
Of this the government had borne around Rs 83,000 crore and the remaining Rs 55,000 crore came from government owned oil and gas producing companies like ONGC, Oil India Ltd and GAIL.
When the finance minister Pranab Mukherjee presented the budget in March, the oil subsidies for the year 2011-2012 had been expected to be at Rs Rs 68,481 crore. The final bill has turned out to be at around Rs 83,000 crore, this after the oil producing companies owned by the government, were forced to pick up around 40% of the bill.
For the current year the expected losses of the oil companies on selling kerosene, LPG and diesel at below cost is expected to be around Rs 190,000 crore. In the budget, the oil subsidy for the year 2012-2013, has been assumed to be at Rs 43,580 crore. If the government picks up 60% of this bill like it did in the last financial year, it works out to around Rs 114,000 crore. This is around Rs 70,000 crore more than the oil subsidy that the government has budgeted for.
Interest rates will continue to remain high
The difference between what the government earns and what it spends is referred to as the fiscal deficit. The government finances this difference by borrowing. As stated above, the fiscal deficit for the year 2012-2013 is expected to be at Rs 5,13,590 crore. This, when we assume Rs 43,580crore as oil subsidy. But the way things currently are, the government might end up paying Rs 70,000 crore more for oil subsidy, unless the oil prices crash. The amount of Rs 70,000 crore will have to be borrowed from financial markets. This extra borrowing will “crowd-out” the private borrowers in the market even further leading to higher interest rates. At the retail level, this means two things. One EMIs will keep going up. And two, with interest rates being high, investors will prefer to invest in fixed income instruments like fixed deposits, corporate bonds and fixed maturity plans from mutual funds. This in other terms will mean that the money will stay away from the stock market.
The trade deficit
One dollar is worth around Rs 56 now, the reason being that India imports more than it exports. When the difference between exports and imports is negative, the situation is referred to as a trade deficit. This trade deficit is largely on two accounts. We import 80% of our oil requirements and at the same time we have a great fascination for gold. During the last financial year India imported $150billion worth of oil and $60billion worth of gold. This meant that India ran up a huge trade deficit of $185billion during the course of the last financial year. The trend has continued in this financial year. The imports for the month of April 2012 were at $37.9billion, nearly 54.7% more than the exports which stood at $24.5billion.
These imports have to be paid for in dollars. When payments are to be made importers buy dollars and sell rupees. When this happens, the foreign exchange market has an excess supply of rupees and a short fall of dollars. This leads to the rupee losing value against the dollar. In case our exports matched our imports, then exporters who brought in dollars would be converting them into rupees, and thus there would be a balance in the market. Importers would be buying dollars and selling rupees. And exporters would be selling dollars and buying rupees. But that isn’t happening in a balanced way.
What has also not helped is the fact that foreign institutional investors(FIIs) have been selling out of the stock as well as the bond market. Since April 1, the FIIs have sold around $758 million worth of stocks and bonds. When the FIIs repatriate this money they sell rupees and buy dollars, this puts further pressure on the rupee. The impact from this is marginal because $758 million over a period of more than 50 days is not a huge amount.
When it comes to foreign investors, a falling rupee feeds on itself. Lets us try and understand this through an example. When the dollar was worth Rs 50, a foreign investor wanting to repatriate Rs 50 crore would have got $10million. If he wants to repatriate the same amount now he would get only $8.33million. So the fear of the rupee falling further gets foreign investors to sell out, which in turn pushes the rupee down even further.
What could have helped is dollars coming into India through the foreign direct investment route, where multinational companies bring money into India to establish businesses here. But for that the government will have to open up sectors like retail, print media and insurance (from the current 26% cap) more. That hasn’t happened and the way the government is operating currently, it is unlikely to happen.
The Reserve Bank of India does intervene at times to stem the fall of the rupee. This it does by selling dollars and buying rupee to ensure that there is adequate supply of dollars in the market and the excess supply of rupee is sucked out. But the RBI does not have an unlimited supply of dollars and hence cannot keep intervening indefinitely.
What about the trade deficit?
The trade deficit might come down a little if the increase in price of petrol leads to people consuming less petrol. This in turn would mean lesser import of oil and hence a slightly lower trade deficit. A lower trade deficit would mean lesser pressure on the rupee. But the fact of the matter is that even if the consumption of petrol comes down, its overall impact on the import of oil would not be that much. For the trade deficit to come down the government has to increase prices of kerosene, LPG and diesel. That would have a major impact on the oil imports and thus would push down the demand for the dollar. It would also mean a lower fiscal deficit, which in turn will lead to lower interest rates. Lower interest rates might lead to businesses looking to expand and people borrowing and spending that money, leading to a better economic growth rate. It might also motivate Multi National Companies (MNCs) to increase their investments in India, bringing in more dollars and thus lightening the pressure on the rupee. In the short run an increase in the prices of diesel particularly will lead higher inflation because transportation costs will increase.
Freeing the price
The government had last increased the price of petrol in December before this. For nearly five months it did not do anything and now has gone ahead and increased the price by Rs 6.28 per litre, which after taxes works out to around Rs 7.54 per litre. It need not be said that such a stupendous increase at one go makes it very difficult for the consumers to handle. If a normal market (like it is with vegetables where prices change everyday) was allowed to operate, the price of oil would have risen gradually from December to May and the consumers would have adjusted their consumption of petrol at the same pace. By raising the price suddenly the last person on the mind of the government is the aam aadmi, a term which the UPAwallahs do not stop using time and again.
The other option of course is to continue subsidize diesel, LPG and kerosene. As a known stock bull said on television show a couple of months back, even Saudi Arabia doesn’t sell kerosene at the price at which we do. And that is why a lot of kerosene gets smuggled into neighbouring countries and is used to adulterate diesel and petrol.
If the subsidies continue it is likely that the consumption of the various oil products will not fall. And that in turn would mean oil imports would remain at their current level, meaning that the trade deficit will continue to remain high. It will also mean a higher fiscal deficit and hence high interest rates. The economic growth will remain stagnant, keeping foreign businesses looking to invest in India away.
Manmohan Singh as the finance minister started India’s reform process. On July 24, 1991, he backed his “then” revolutionary proposals of opening up India’s economy by paraphrasing Victor Hugo: “No power on Earth can stop an idea whose time has come.”
Good economics is also good politics. That is an idea whose time has come. Now only if Mr Singh were listening. Or should we say be allowed to listen..
(The article originally appeared at www.firstpost.com on May 24,2012. http://www.firstpost.com/economy/petrol-bomb-is-a-dud-if-only-dr-singh-had-listened-319594.html)
(Vivek Kaul is a writer and can be reached at [email protected])