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The Challenge Of Growth In Mature Markets/Line Extensions: Necessity And Limits

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Line extensions: necessity and limits

Today, most new product launches are range or line extensions. Shelves are replete with line extensions. As the examples we have given have demonstrated, extending the range is a necessary step in the evolution of a brand through time. Just as living species only survive if they adapt through evolution to their environment and seek to extend their ecological realm, the brand, which historically is designated by a single product (like Coca-Cola or McCain French fries) breaks up into sub-species.

The extension of the line or range (we will address the difference between the two concepts later) typically takes on the following shapes:

Multiplication of formats and sizes (typical in cars but also in soft drinks).Multiplication of the variety of tastes and flavours.Multiplication of the type of ingredients (for example Coca-Cola with or without sugar, with or without caffeine, types of motors in the Ford Escort).Multiplication of generic forms for medicine.Multiplication of physical forms such as Ariel in powder, liquid or micro formula.Multiplication of product add-ons under the same name, corresponding to a same consumer need in what is called line extension. Thus, Basic Homme by Vichy comprises a line of toiletries including shaving foam, soothing and energizing balm, deodorant, and shower gel.Multiplication of versions having a specific application.

For example, the Johnson company transformed its successful spray polish, Pliz, which was a mono-product brand for a long time, into a range called Pliz ‘Classic’, which offered products specialised for the type of surface. In doing so it also seized the opportunity to reduce its brand portfolio. Favor, a weak brand, became Pliz with beeswax especially for wood. Shampoo brands multiply endlessly, with varieties suited to different types of hair and scalp condition.

Line or range extension must be distinguished from brand extension, which is a real diversification towards different product categories and different clients. It is a highly sensitive and strategic choice that will be addressed separately. Why does Yamaha brand both motorcycles and pianos? Line and range extensions represent 85 per cent of new product launches in consumer goods. It is the most common form of innovation in these markets.

Range extension naturally follows the logic of marketing and of even finer segmentation to better adapt the offer to the specific needs of consumers, needs that never stop evolving. At its beginning, we may recall, each brand was a unique product, in both meanings of the word: it is different and there is only one form of it. This was, for example, the case with the famous Ford: everyone could have it in the colour of their choice, as long as it was black.

It was the same with the Coca-Cola and the Orangina bottle. With time, the brand becomes less narrow-minded, and acknowledging differentiated expectations, decides to respond to them. As the American advertising for Burger King, the competitor of McDonald’s, says, ‘Have it your way’ (whatever way you like it, with or without sauce, onions, etc).

Again, taking the example of Coca-Cola, while retaining its identity (the dark colour, cola taste, and other physical and symbolic attributes of the brand), the company was able to extend the power of attraction of its brand by allowing people who up until then were reluctant to try the product to indulge in Coke.

The multiplication of versions (with or without sugar, with or without caffeine) increased the number of potential consumers. We therefore see that range extension can reinforce the brand by widening its market and its customer base. A variety of formats has the same effect. In the world of soft drinks, the launch of a new format may be considered the same as launching a new soft drink. Indeed, each new format allows the brand to enter a new usage mode.

In so doing, the brand proves itself to be full of energy and sensitivity. It recognises the different expectations of the public and responds to them. It follows the evolution of consumers and changes with them. Club Med was thus able to widen its offer beyond the simple Robinson Crusoe lodge to keep or attract families, then people in their forties seeking more comfort, and finally older people, children of the baby boom.

The range extension is a token of the brand’s attentive and caring character. Extending the brand range thus makes the brand interesting and friendly and maintains through these successive mini-launchings a strong visibility. From this point of view, instead of trying to force New Coke on Americans and make them give up the original flavour, the Coca-Cola Company would have done better to have launched the New Coke as an extension alongside the classic Coke!

Range extension is a way of revitalizing many failing brands, by making sure they move closely to meet the expectations of today’s customers. What saved Campari was the launching onto the market of a ‘flanker’ product: Campari Soda. Martini would have fallen by the wayside if it had not been for the launching of Martini Bianco, more in touch with the new modes of alcohol consumption. Smirnoff made a step towards customers who were not used to the strong taste of vodka by launching Smirnoff Mule and Smirnoff Ice in small individual bottles.

These motives may be worthy of praise, but the current proliferation of range extensions to be observed in all consumer goods markets results from frantic competition and from the new psychology of organisations.

In these markets there is a strong relationship between market share and the number of facings, ie the share of shelf space taken up. This is not surprising: the customer involvement in these products is average if not low and the number of impulse buyers (when the choice of brand is done on-site) never stops growing.

It is, therefore, in the brand manager’s interest to take up the most shelf space possible because it will attract even more attention from the customer, especially if a shelf is not extendible and competitors get pushed out. In many markets, demand is no longer growing and DOBs also occupy a share of the shelf, so the brand manager tries to position his product as ‘captain of the category’ by presenting a unique offer and so dominating the shelf reserved for national brands.

Distributors have an ambivalent attitude towards range extensions. On the one hand they oppose what is now considered hyper segmentation, the proliferation of range extension. But as each brand tends to offer the same extensions, this creates bottlenecks because of the obsession each brand has to gain access to maximum distribution. This fight for ever-reducing shelf space strengthens the power of distributors and puts them in a position to ask for increasing amounts of money as a listing fee (Chinardet, 1994).

The problem is that the turnover of extensions, because of their novelty and their price premium, is often lower than that of the original product. When the distributor realises this (if he ever does), he withdraws the extension and awaits the offer of other brands, along with any kind of listing fee that might come with it.

Criticised by, but at the same time popular with distributors, range extensions are appreciated by product and brand managers. First of all, the amount of time needed for development is shorter than that needed for the launching of a new brand. The costs are less than those for the launching of a new brand (they are estimated to be one-fifth), and sales forecasts are more reliable.

In the short term at least, it seems an almost automatic way of gaining market share and thus creating observable results that can be attributed to the actions of the manager in a relatively short time span. This counts for quick promotion within the company, or on another brand in another country. Few managers are willing to take the risk of launching a new brand, but would rather extend the range.

The proliferation of product extensions produces insidious negative effects that are not immediately measurable or measured. First of all, because of small production runs and the increased complexity of production, logistics and management, extensions are more expensive to produce, the cost of which puts up the higher wholesale and retail price.

According to Quelch and Kenny (1994), compared to an index of 100 for the cost of production of a mono-product, the corresponding production cost index of differentiated products in a range is, for example, 145 in the car industry, 135 for hosiery and 132 in the food industry.

Moreover, in companies which do not take into account direct costs (eg raw materials, advertising), many costs are considered as common to the entire range and are allocated to different products within it according to sales. The bestsellers therefore attract more of the costs than range extensions, which makes the profitability of the latter rather illusory.

Second, non-controlled extension weakens the range logic. The first to find problems with this are the salespeople: the sales force of Ariel or Dash, used to promoting the brand against Skip, had to undertake within a few months a complete cultural revolution. They had to promote Ariel in powder, in liquid and in micro formula formats all together and without ever explaining that one was superior to the other, or what advantages one format has in comparison to the others.

The more extensions multiply, the more the specific positioning of each extension becomes subtle. This is accentuated by the fact that extensions are added without withdrawing the existing versions. Organisations always have a good reason for not cancelling this or that version. The thought of losing the odd customer here and there rules the notion out. This thinking overlooks the fact that product withdrawals should also be managed to gently propel customers towards newer, better versions.

The range logic is also lost on the shelf: indeed, the distributor is reluctant to take on the whole range. He will shop around and take only part of a range, which undermines the consistency of the range on the shelf.

Finally, brand loyalty might be undermined by a proliferation of extensions. The hyper segmentation of shampoos according to new hair needs, leads the customer to take into account more needs in his/her choosing process. The brand is but a feature in an ever longer list of criteria. This result was verified empirically by Rubinson (1992).

In reaction to the proliferation of extensions, Procter & Gamble eliminated within 18 months 15 to 25 per cent of the product extensions that were not achieving a sufficient turnover. In the sector for cleaning products, the growth of new multi-usage products (all-in-one) is on the same principle of simplification.

Economies of scale apply all the more since the product is designed for the worldwide market. The extreme strategy of counter-segmentation is applied by harddiscounters: there is absolutely no choice and products are generally only available in a single version with no variety. Thus, there will only be one type of diaper, whatever the weight or the gender of the baby, in contrast to Phases (boy or girl) by Pampers. On the other hand, because of this it will be 40 per cent cheaper than, say, Pampers.

Quelch and Kenny (1994) recommend four immediate actions for better management of range extensions:

Improve the cost accounting system to be able to catch the additional costs incurred by a new variety all along the value chain. This enables the real profitability of each one to be assessed.Allocate resources more to high-margin products than to extensions that only appeal to occasional buyers.Make sure that each salesperson can sum up in a few words the role of each product within the range.Implement a new philosophy where product withdrawals are not only accepted but encouraged. Some companies only launch an extension after having cancelled another with a low turnover. This withdrawal does not have to be brutal, but can be done gradually so that clients turn to other products within the range.