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:
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:
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.
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.
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