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Why are brand extensions necessary?


Why are brand extensions necessary?

Brand extensions are necessary. They are a direct consequence of competition in mature markets and of the fragmentation of media. The only justification for brand extension is growth and profitability.

Brand extension is not new: it is the core of the business model of luxury brands. It can increase the power of the brand and its profitability. Typical margins in the readyto- wear premium market are 53 per cent, but the average is 71 per cent for bags and 80 per cent for watches. This is why fashion brands extend so quickly to these categories.

As to perfumes, sold under licence by l’Oréal, Procter & Gamble or Unilever, they provide royalties, and a considerable boost in international visibility to the extended brand. This is why extensions are strategic in the fashion and luxury sector. No name can survive without them. The first thing a capital investment fund does after having bought a name is to extend the brand. What would Armani, Ralph Lauren or Calvin Klein be without their licences and extensions?

Often, perfumes become the most visible part of the fashion brand, because of the high advertising budgets involved. In addition the perfume increases the brand awareness and dream value, a prerequisite before other extensions. In fact, without a perfume, can a designer brand succeed and be profitable? Success in modern competition means the ability to access a critical size and visibility.

Although not always successful, launching a perfume under one’s name is a classic, if not the only, way to build the brand and business. Interestingly, this is the argument used by an as yet little-known designer brand that sued P&G for damages when the latter decided to stop its plans of launching a perfume under its brand name. Without this expected boost, would the brand meet its growth and profitability objectives?

As long as growth and profitability can be achieved through the present customers and products, or through minor variations in these products and their benefits (also called line extensions) there is no need to extend. Globalisation in search for the new areas of consumption in the world is also a natural route, but this does not solve the problem of growth in domestic markets, which are often saturated.

Brand extensions allow brands to compete in less saturated markets, with a perspective of growth and profitability, as long as the brand’s assets are assets in these markets. That is to say, the brand image must be able to act as a driver of purchase in the other market.

Brand extension relies on the ability to create a competitive advantage by leveraging the reputation attached to the brand name in a growth category, different from the brand’s present categories. This bold move, which often surprises the competition in the category of extension, makes five crucial assumptions:

The brand has strong equities (strong assets): it is strongly associated with a number of customer benefits (tangible or intangible) and it inspires a high level of trust.These assets are ‘transferable’ to the new and attractive destination category, that of the extension. Its buyers will still believe and acknowledge that the new products (that is, the extension) are endowed with the benefits associated with the brand.These benefits and brand values are very relevant to that new category (extension). In fact, they should segment it in a previously unforeseen way, and leave the competition unable to react rapidly.The products and services (extension) named by the parent brand will deliver a real perceived advantage over the competition, both consumers and the trade.The brand and company behind it will be able to sustain competition in this new category over the long run. This refers to the question of resources needed to acquire leadership in the market in order to remain in it profitably.

As a consequence the most important part in the brand extension process is the selection of the destination category. This requires the company to assess various strategic parameters:  the intrinsic attractiveness of the new category, the company’s ability to acquire leadership in this category, and its ability to segment it profitably. These factors are to be found in the brand image, but also in the company’s more general abilities and resources.

A second set of reasons that has pushed corporations to extend their brands is more defensive, or tied to efficiency and productivity factors:

Facing higher media costs, companies have felt the limits of their former brand architecture and wish to create more encompassing brands, so called mega-brands, in which a larger product portfolio can be nested. Most companies that started with a product brand architecture have realized the impossibility of sustaining growing advertising allowances behind each product or brand. They have transferred some of these formerly independent products or lines to a single mega-brand, which acts either as an endorser (Kraft or Nestlé) or like a source brand (l’Oréal Paris), as a quasi-branded house. This is why brand transfers have become so frequent. The goal is to capitalise on a single name and to nurture it by a constant flow of innovations.The fight against distributors’ brands that themselves are mega-brands and are practicing extension (as is, for example, President’s Choice) has called for the reorganization of products and innovations under a small number of banner brands.In 1995 Nestlé decided to extend its name into the yogurt market. Until then the group had been present in this market through a regional brand, which was Chambourcy in Europe. However, the competition with Danone was leading to rising marketing and advertising investment. As a result it was decided to leverage the Nestlé name, thus enabling the products to benefit from all the trust and equity attached to this name, and from the advertising investment in other product categories where the group was already competing under its house brand. All products were transferred from Chambourcy to Nestlé. In the meantime this extension provided the opportunity to nurture the brand image, by adding important facets that had been lacking up to then. Born in the larder, in the realm of dry goods, Nestlé as a brand was not associated with modern chilled and fresh products. These represent the future of modern food. It was necessary to reassociate the brand with these values, in order to avoid losing some relevance and equity.Some brands are in declining product categories. To avoid disappearing with their product they must move to another category. Why did Porsche enter the 4 × 4 market in 2003? As we shall see later, there is a danger in resting always on the same product, even if it is continually face-lifted, revamped and renewed. All over the world, data show that the share of the coupé in the overall car market is decreasing. If Porsche stayed in that niche without reacting to this trend, it would be competing in a shrinking market. In addition, the 911, Porsche’s keynote product, was coming to look at odds with the trend in values among elite and niche car buyers worldwide. Some of their newer values are captured by the 4 × 4 category. It remained to Porsche to build a 4 × 4 which would be a ‘real’ Porsche at an acceptable price. The only way of producing one at a realistic cost was to capitalise on the platform of the Volkswagen 4 × 4.

Another example is that consumption of brown tobacco is strongly declining, a sure threat for Gauloises, the prototype of dark cigarettes. After decades of uncompromising battle against blond tobacco, the company had to make a hard choice. Should it let its banner brand die? It decided to extend it into the blond category, creating Gauloises Blondes, which now represent the largest part of its sales.

In the business-to-business market, the logic of continually increasing customer value leads in itself to brand extension. Take a service provider, say a company providing cleaning services for hospitals. How can it increase its sales to its core clients? Rooms cannot be cleaned two times or three times a day. There is no other avenue than to propose extended services, for instance supplying flowers for hospital rooms, lobbies and offices. This is another competence, an extension.

British Gas faced the same problem after the deregulation. How could it defend its business against all the new gas providers? It realised that its strength was its customer proximity: its engineers actually visited millions of households. It was time to leverage that competence and competitive advantage, and provide an extended set of home services including insurance and financial services to the customer base. This naturally entailed a change in name to facilitate consumer acceptance.

Labeyrie is a brand that originated in the ‘foie gras’ sector. This is a very cyclical market, where most sales are made in three months of the year. To be able to advertise and gain a competitive advantage, Labeyrie decided to enlarge its scope and extend to other luxury foods such as smoked salmon and caviar. The resulting increase in its sales volume made television advertising a realistic investment.Many companies make a brand extension because they do not have the resources to sustain two brands nationally and internationally. This is why in Spain Don Simon sells wine, gazpacho and orange juice under the same name. This small company invests all its resources in productivity and quality. It fights head on against Tropicana in the juice sector, and has now extended its market throughout Europe. We shall see later that although they are governed by necessity, such decisions may prove later to be a real blessing.Some sectors are under growing advertising constraints: cigarettes, spirits, beers and wine are all limited by law in their types of advertisement and sponsorship. They have to create brand extensions to circumvent these limitations. Such extensions actually act as surrogate brands. The most known and successful is Marlboro Classics, an offshoot of the cigarette brand, which has become a real outerwear fashion brand worldwide. It has a very specific design, and exclusive stores and concessions. This is a typical case of a successful licensing approach.

The Camel Trophy did not survive the introduction of laws forbidding any association of cigarette brands with sports sponsorship. Pharmaceutical laboratories are another typical case where extension makes it possible to increase competitiveness even though the core product is tightly constrained. In all countries, pharmaceutical laboratories have to make a choice: whether to produce freely available over-the-counter (OTC) products, or products that are only available on a doctor’s prescription.

OTC products are allowed to be advertised, but they are generally not prescribed and they tend to be expensive. Part of the cost of prescription drugs is usually reimbursed through the national security system or by health insurers, so they can cost less to the end-users. However, manufacturers are generally not allowed to advertise prescription drugs to consumers (although there are some exceptions: specific types of direct-to-consumer advertising are often permitted for asthma products, for instance). In France, the market leader for paracetamol is called Doliprane.

This is a prescription drug, so consumers can be reimbursed for its cost, but in addition it can be bought freely without a prescription. As a prescription drug, however, Doliprane is not allowed to advertise. To circumvent the regulations it launched two extensions, Doli’rhume and Doli’tabs (‘rhume’ means catching a cold in French). These two variants could be advertised, because they are only sold in the OTC market. The heavy advertising campaigns not only boosted the sales of the two new products, but had a positive spillover effect on the core product.

What should one think about the Caterpillar line of shoes and clothes aimed at the youth market? Was it necessary for the tractor brand to extend itself in this way? Of course not. What then was the rationale? When asked that question, the CEO answered that it was intended to increase the share value by giving more visibility to the brand name, beyond the trade circles in which it had previously been known.

Many small investors now buy shares, and familiar corporate names act as symbols of value to the lay investor. In addition, Caterpillar clothes and shoes were able to express the exact values for which the Caterpillar was known: tough work, reliability, security and so on.

Similarly, why did Michelin extend its brand from tyres to guidebooks, over a century ago? The first Red Guide was produced to tell readers where to find a garage in the event of a breakdown. Soon it came to be aimed at inducing car owners to travel more, with tips about hotels and good restaurants. It was a great example of relational marketing before the word was ever invented.

Recently, Michelin, working with a partner, The Licensing Company, has created a dedicated company, Michelin Life Style Limited, based in London. It is marketing snow chains for cars, a product with obvious marketing synergy with tyres. There are plans to extend the brand into sport equipments such as ski shoes and running shoes, areas in which the use of rubber can increase comfort and security. These are the two key benefits of Michelin tyres.

In a slightly different way, My First Sony and My First Bosch are tactical extensions, designed to create early familiarity with the brand among soon-to-be clients.

Strategic Brand Management Related Practice Tests

Strategic Management Practice Tests