Avoiding the risk of dilution

In our many brand extension consulting missions, the recurring question concerns the risk of diluting the image capital. Could the business extension harm the brand’s assets: its reputation, and the traits that comprise its value in the eyes of the market? For example, what will be the long-term effect on Danone’s image if it starts selling Danone water too? What will be the long-term effect on Mercedes’ image when it produces its A-Class range? What will be the long-term effect of Chanel’s decision to start selling glasses at Afflelou, a discount franchise chain of opticians?

What will be the long-term effect on the image of a brand that has sold only to professionals, but now starts selling to the general public too? What will be the longterm effect of an extension towards lower prices? What will be the long-term effect of selling not only pens but also cigarette lighters and razors under the Bic brand?

As these typical questions show, the problem lies in estimating the long-term effects. No study can predict the future. Second, the answer will depend to a large extent on the ability to perform the extension successfully and well. After all, an extension is more than just a brand extension: more importantly, it is a departure from the brand’s tried and tested sphere of competence.

Some learning will be necessary, and this may take time. For example, the little A-Class car revealed that Mercedes had not sufficiently mastered the engines and stability issues for this chassis type, thus reneging on the brand’s traditional basic contract and its three essential attributes: reliability, safety and standing.

Extensions also entail taking risks other than just image-related ones. A brand extension generally brings about changes in target markets, distributors (and perhaps even buyers, from a mass retail perspective), prices, manufacturing and logistics. These changes may be a source of annoyance to the brand’s historical distribution channel, opinion leaders or existing customers. There is thus a genuine business risk – and this may affect sales of the current flagship product which constitutes the main sales platform.

An example of brand dilution: Vichy

Vichy is an example of a brand whose changes over its history have led to a loss of identity and value. It started out as a cosmetics brand that promoted itself as the dermatologists’ brand. However, in an attempt to increase sales, it dropped this label and began developing products with a strong cosmetics base.

Freed of its dermatology tag, the brand was able to advertise on television and develop products which, in accordance with women’s wishes, had a much more cosmetics-based slant – as well as bigger margins. The brand was able to launch more new products every year, as the whole clinical tests process was no longer necessary. In just a few years, it became just another run-of-the-mill pharmacy product.

Vichy’s sales increased very rapidly, as did its margins. However, at the same time its image was being eroded. This policy, although a winner in the short term, had caused a loss of identity in the eyes of consumers who could no longer perceive the brand’s distinctiveness or added value. It was no longer what chemists wanted either, at a time when the pharmacies channel as a whole was attempting to re-establish its legitimacy against new distribution channels also seeking the right to sell so-called ‘parapharmacy’ products.

It was back to the drawing board for Vichy’s business model and brand mission. Vichy, the dedicated chemist’s brand, needed to bolster its distribution channel. The brand was repositioned around the theme of health, and thus the brand slogan became La santé passe aussi par la peau (‘Health is vital. Start with your skin’). Most importantly, all items and products that did not fit this philosophy were axed.

Such losses of identity are common: large groups often seek to make a profit out of their acquisitions and force small brands with a strong identity to move quickly into other distribution channels and categories. Neutrogena, for example, is facing this threat: it is expanding its presence in the worldwide food channel, but at the risk of losing the key values that make the brand truly distinctive.

Is the consumer bookkeeping or subtyping?

Academic research furnishes important information on the risk of image dilution. Unfortunately, however, it focuses exclusively on the misfit with the brand image: it does not consider risks arising from the fact that an extension is usually also accompanied by strategic changes in distribution and targets.

The foremost paradigm in research on dilution is a failure to honour the basic contract. What happens when the expectations created by the brand’s name are dashed by the brand extension? Apart from this failure in itself, is there not a risk to the brand’s image, or even to the sales of existing products? Basic research (Loken and Roedder John, 1993) has shown that any failure to honour the basic contract has a negative impact on the brand and its image for each image aspect that is ignored.

A brand is constructed out of the sum of all of the impressions accumulated in consumers’ memories. The only exception to this is if customers find themselves asking the question, is the unsatisfactory extension typical or atypical of the brand? If the extension is perceived as being atypical, the brand’s image is safe.

However, extensions that are fairly typical of the brand are the ones that dilute its image the most if they disappoint with regard to the brand contract. The problem is that there is no guarantee consumers will ask themselves whether the extension is typical or not. In the aforementioned study, researchers put the question to half the sampled group.

The question did not spontaneously occur to the other half. It would therefore seem that consumers adopt a ‘bookkeeping’ approach in which the brand is responsible for everything it does, whether good or bad.

A second, more recent piece of research considered the question of the effect of breaking the brand contract during an extension on sales of the current flagship product (Roedder John, Loken, Joiner, 1998). Disappointment with the performance of a Johnson & Johnson brand extension did indeed impair the brand image with regard to the attribute that constituted its differentiating value: gentleness.

However the sales of the prototype, or flagship product, was not affected. This suggests an ‘experience effect’. Consumers who have already used the product are confident about qualities. They might view a brand extension negatively but this will not alter this confidence about the flagship product.

However, J&J’s flagship product (baby shampoo) was affected when the disappointment stemmed from a line extension (a simple modification to the basic product). Such very closely linked extensions are the ones that cause the most collateral damage to sales of the flagship product.

The risk of downward stretch

It is a well-known fact that price is an indication of quality, and can on its own create the image of a product with a high standing. In their extensions, some top-of-the-range prestige brands have been prompted to sell cheaper products in the search for a client base that is more numerous but less willing to pay a high price. This is the approach taken by brands such as Mercedes with its A-Class and Cartier with its Must de Cartier range. What effects do such acts have on the brand’s existing clients?

Given that an expensive brand derives its value in part from the fact that it indicates the buyer has the financial means to afford expensive products (consumers’ reflected image), it is hardly surprising that there is a negative reaction: their status has to be spread more thinly, and thus reduced. This has been confirmed by a study on ‘The ownership effect in consumer response to brand stretches (Kirmani, Sood and Bridges, 1999).

People who do not buy the prestige brand (BMW in this study) are pleased by its more accessible price extension; existing buyers are much less impressed. Current buyers, however, appreciate price-increasing ‘upward-stretch’ extensions far more than non-buyers do. With brands that are not of high standing (for example, Accura cars), there is no effect of this kind.

This study also confirms that the act of using a sub-brand protects the top-of-therange brand from image dilution in the event of a price-lowering ‘downward-stretch’ extension. This is what Cartier did with Must de Cartier, selling pens, cigarette lighters and leather goods in large retail stores to reach a wider clientele and increase its recognition, which until then had been restricted to a welloff elite.

Another interesting piece of research (Buchanan, Simmons and Bickart, 1999) analysed the risk of devaluation if a prestige brand adopts a less selective channel when entering a non-prestige market. For example, the luxury hairdresser J Dessange granted a licence to l’Oréal to use its name on a shampoo to be sold in supermarkets.

The findings of this study were that it all depends on merchandising, and – in this case – on three factors. What is the brand’s relative visibility, price gap and distance from one or more lesser known or lower prestige brands? If its relative visibility, distance from the competition and price gap tally with the consumer’s impression of the brand’s standing, the risk is reduced.

If they do not, the consumer mentally lowers the brand’s standing. For example, it is crucially important for a brand of standing to have a clearly separated display which is distinct from competitors’. If it does not, and the display is mixed, the consumer interprets this as a signal from the (supposedly expert) retailer that the brand of lower standing placed alongside the brand of high standing is just as good.

What can we draw from this research on the risk of dilution? First, we can conclude that customers of prestige brands are happy where they are: they form a conservative lobby. In so doing, they demonstrate a lack of awareness of the economic conundrum faced by the brand or company. As Jürgen Schremp, the CEO of Daimler-Benz, observed in 1998, Mercedes could either stay where it was and – like Rolls-Royce – go bankrupt; or it could change, and sell over a million cars. Conscious of the risk of losing the attachment of its existing customers, the brand has to take precautions:

  • Even in its lower cost extensions, the brand contract must be honoured – and the first consideration is quality.
  • The brand should manage its downward extension while at the same time continuing to nourish the legend that ensures its high standing. After the A-Class, Mercedes relaunched the S-Class – voted by experts as the best car in the world – and announced Maytag, an even more luxurious model.
  • The brand can use a sub-brand for its downward stretch.
  • It can also split its distribution into segments. Chanel boutiques concentrate on products with a minimum price of s1,000, while Chanel sunglasses and cosmetics are intended for wider channels.
  • Current buyers benefit from a greater level of attention and distinctive signs of recognition, following the model established by credit cards. There is a basic card for everyone, but also far more exclusive Gold and Platinum cards which provide a way of re-establishing the differentiation from other cardholders.

The brand is extended to grow through changing its scope of influence. It is not possible to grow while at the same time keeping everything intact and unchanged.

With regard to non-prestige brands, the risk of dilution can often be exaggerated internally. For example, all spirit brands have asked themselves what the impact would be if they were to enter the ready-to-drink (RTD) pre-mix/ alcopop market. Would this not have an effect on their image among the buyers of their basic products – Smirnoff, Ricard, Johnnie Walker, Bacardi and so on? In fact, company studies reveal that this is far from the case.

Buyers of established but somewhat elderly brands are delighted to see that the brands are consumed even by today’s young people, albeit in a very different way, a fact that is flattering to their parents. This is not to suggest that such extensions are entirely without risk, but the risks are business-related. The first of these is that the new product launch will fail. The second is that older buyers with a high volume potential will be replaced by younger buyers who – at least initially – will consume less.

The trick will be to encourage them to migrate at a later date from an RTD-type product to the far more profitable ‘real’ product. Even if Bacardi Breezer is a genuine worldwide success – like Smirnoff Mule or Ice before it – and even if the products are high-margin on account of their low actual alcohol content (5 per cent), it is still a fact that Bacardi-Martini is a spirits group that expects the high profits commensurate with the spirits sector, not the lower profits of the RTD sector.

The challenge is therefore to migrate current RTD customers in future to the proper Smirnoff and Bacardi products. We should add that the real risk would have been to do nothing and watch as young people deserted the brand as a result of its failure to adapt its products, consumption methods, sales and consumption locations and prices to new consumers. Extension is a necessity.

The traditional problem faced by professional brands is their desire also to address a less professional audience. Modern management techniques advocate talking to the customer’s customer. By communicating with the general public to publicise the merits of aluminium verandahs, Technal – at that time a subsidiary of Alcan – increased demand from its actual clients (craftspeople and businesses that make aluminium verandahs for their customers).

Somfy, the worldwide manufacturer of tubular motors for household automation products, did something similar: it produced advertising for automated blinds, even though its actual customers were the blind manufacturers themselves. Will such a strategy tread on professionals’ toes? Such questions overlook the main issue: these extensions are strategic because they seek to maintain the domination of the channel, ensuring that the company does not become a mere OEM, parts manufacturer and subcontractor.

Not to take such an extension risk is to take a much more serious medium-term risk instead. This is certainly one way for a leader to increase its recognition, and thus its brand’s status. More importantly, it is the way to increase the size of the market, by directly influencing downstream demand from its own clients – who have a natural inclination to go on selling whatever sold well last year, and not to promote innovations. However, only innovations can make the market grow: this is why they must be ‘pushed’ by the distribution channel. If they are not, demand has to be ‘pulled’ instead.

Business-to-business brands start out as specialists, and grow via integration. The delicate phase comes when they stop being single-product specialists and expand their range to include another speciality. For example, could a company that has made its reputation in high-voltage switching gear also manufacture medium-voltage or low-voltage switching gear? More importantly, could it also distribute electricity distribution hardware (plugs, cables, conduits and so on) without losing its status? After all, switching gear is a key component of any industrial installation:

safety comes first, especially in high-voltage equipment. The same cannot be said for electrical distribution hardware. But it also seems obvious that while we continue to look at the problem from the sole angle of brand extension, we are viewing things the wrong way around. The real question is one of leadership. Clients and distributors want more integration, because it makes their business life simpler. Furthermore, in emerging countries, the pursuit of critical size is vitally important. Can this be achieved with a single line of products? No.

However, it is important to maintain the image capital, which can be achieved in two interlinked ways. The first is by entering the new market (electrical distribution) with a differentiated range based on the attributes for success in this market, with an additional ‘plus’ as insurance (even if this is not a determining expectation for this new market), in the interests of brand identity and commercial success. The second is the pursuit of innovation and communication in the switchgear market to reinforce the brand’s leadership in this sector.

By way of conclusion on the risk of dilution, let us remember that all extensions are a form of change whose aim is to ensure growth and profitability. It is impossible to expect both growth and a lack of change at the same time. Of course, the basic values and attributes of the brand’s kernel of identity must be preserved. However, the extension is certain to add new attributes, which start out as being peripheral but may one day become part of the kernel themselves.

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