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By the beginning of the twenty-first century, the Nivea umbrella brand
offered over 300 products in 14 separate segments of the health and beauty
market (see Table 5 and Figure 2 for information on Nivea’s brand extensions).
Commenting on Beiersdoft’s belief in umbrella branding, Schmiedebach said,
‘Focusing your energy and investment on one umbrella brand has strong
synergetic effects and helps build leading market positions across categories.’
A noteworthy aspect of the brand extension strategy was the company’s ability
to successfully translate the ‘skin care’ attributes of the original Nivea
cream to the entire gamut of products.
The company ensured that each of its products addressed a specific need
of consumers. Products in all the 14 categories were developed after being
evaluated on two parameters with respect to the Nivea mother brand. First, the
new product had to be based on the qualities that the mother brand stood for
and, second, it ha to offer benefits that were consistent with those that the
mother brand offered. Once a new product cleared the above test, it was
evaluated for its ability to meet consumer needs and its scope for proving
itself to be a leader in the future. For instance, a Nivea shampoo not only had
to clean hair, it also had to be milder and gentler than other shampoos in the
same range.
Beiersdoft developed a ‘Nivea Universe’ framework for streamlining and
executing its brand extension efforts. This framework consisted of a central
point, an inner circle of brands and an
outer circle of brands (see Figure 2)
The centre of the model housed the ‘mother brand’, which represented
the core values of trustworthiness, honesty and reliability. While the brands
in the inner circle were closely related to the core values of the Nivea brand,
the brands in the outer circle were seen as extensions of these core values.
The inner-circle brands strengthened the existing beliefs and values associated
with the Nivea brand. The outer circle brands, however, sought to add new
dimensions to the brand’s personality, thereby opening up avenues, for future
growth.
The ‘global-local’ strategy
The Nivea brand retained its strong German heritage and was treated as
a global brand for many decades. In the early days, local managers believed
that the needs of customers from their countries were significantly different
from those of customers in other countries. As a result, Beiersdoft was forced
to offer different product formulations an packaging, and different types of
advertising support. Consequently, it incurred high costs.
It was only in the 1980s that Beiersdoft took a conscious decision to
globalize the appeal of Nivea. The aim to achieve a common platform for the
brand on a global scale and offer customers from different parts of the world a
wider variety of product choices. This was radical departure from its earlier
approach, in which product development and marketing efforts were largely
focused on the German market. The new decision was not only expected to solve
the problems of high costs, it was also expected to further build the core
values of the brand.
To globalize the brand, the company formulated strategies with the help
of a team of ‘international’ experts with ‘local expertise’. This team
developed new products for all the markets. Their responsibilities included,
among others, deciding about the way in which international advertising
campaigns should be adapted at the local level. The idea was to leave the
execution of strategic decisions to local partners. However, Beiersdoft
monitored the execution to ensure that it remained in line with the global
strategic plan.
This way, Beiersdoft ensured that the nuances of consumer behaviour at
the local level understood and that their needs were addressed. Company sources
claimed that by following the above approach, it was easy to transfer know-how
between headquarters and the local offices. In addition, the motivation level
of the local partners also remained on the higher side.
The company established a set of guidelines that regulated how the
marketing mix of a new product/brand was to be developed. These guidelines
stipulated norms with respect to product, pricing, promotion, packaging and
other related issues. For instance, a guideline regarding advertising read,
‘Nivea advertising is about skin care. It should be present visually and
verbally. Nivea advertising is simple, it is unpretentious and human.’
Thus all advertisements for any Nivea product depicted images related
to ‘skin care’ and ‘unpretentious human life’ in one way or the other. The
company consciously decided not to use supermodels to promote its products. The
predominant colours in all campaigns remained blue and white. However, local
issues were also kept in mind. For instance, in the Middle East, Nivea relied
more on outdoor media as it worked out to be much more cost-effective. And
since showing skin in the advertisements went against the region’s culture, the
company devised ways of advertising skin without showing skin.
Many brand management experts have spoken of the perils of umbrella
management, such as brand dilution and the lack of ‘change’ for consumers.
However, the umbrella branding strategy worked for Beiersdoft. In fact, the
company’s growth was the most dynamic since its inception during 1990s—the
decade when the brand extension move picked up momentum. The strong yearly
growth during the 1990s and the quadrupling of sales were attributed by company
sources to the thrust on brand extension.
Questions
1.
Discuss
the reasons for the success of the Nivea range of products across the world.
Why did Beiersdoft decide to extend the brand to different product categories?
In the light of Beiersdoft’s brand extension of Nivea, critically comment on
the pros and cons of adopting an umbrella branding strategy. Compare the use of
such a strategy with the use of an independent branding strategy.
2.
According
to you, what are the core values of the Nivea brand? What type of brand
extension framework did Beiersdoft develop to ensure that these core values id
not get diluted? Do you think the company was able to protect these core
values? Why/why not?
3.
What
were the essential components of Beiersdoft’s global expansion strategy for
Nivea? Under what circumstances would a ‘global-strategy-local execution’
approach be beneficial for a company? When and why should this approach be
avoided?
CASE: IV Pret a Manger: passionate about food
Introduction
Pret a Manger (French for ‘ready to eat’) is a chain of coffee shops
that sells a range of upmarket, healthy sandwiches and desserts as well as a
variety o coffees to an increasingly discerning set of lunchtime customers.
Started in London, England, in 1986 by two university graduates, Pret a Manger
has more than 120 stores across the UK. In 2002 it sold 25 million sandwiches
and 14 million cups of coffee, and had a turnover of over £100 million.
Buckingham Palace reportedly orders more than £1000 worth of sandwiches a week
and British Prime Minister Tony Blair has had Pret sandwiches delivered to number 10 Downing Street for working
lunches. The company also has ambitious plans to expand further—it already has
stores in New York, Hong Kong and Tokyo,
and has set its sights on further international growth.
Background and company history
In 1986, Pret a Manger was founded with one shop, in central London,
and a £17,000 loan, by two property law graduates, Julian Metcalf and Sinclair Beecham,
who had been students together at the University of Westminster in the early
1980s. At that time the choice of lunchtime eating in London and other British
cities was more limited than it is today. Traditionally, some ate in
restaurants while many favoured that well-known British institution, the pub,
as a choice for lunchtime eating and drinking. There was, however, a growing
awareness among many people of the benefits of healthy eating and a healthy
lifestyle, and lunchtime habits were changing. There was a general trend
towards taking shorter lunch brakes and, among office workers, to take lunch at
their desks. For those who wanted food to take away, the choice in fast food
was dominated by the large chains such as McDonald’s, Burger King and Kentucky
Fried Chicken (now KFC) while other types of carry-out food, such as pizzas,
were also available.
Sandwiches also played an important part in British lunchtime eating.
Named after its eighteenth-century inventor, the Earl of Sandwich, the humble
sandwich had long been a popular British lunch choice, especially for those
with little time to spare. Prior to Pret’s arrival on the scene, sandwiches
were sold mainly either pre-packed in supermarkets and high-street variety
chain stores such as Marks and Spencer and Boots, or in the many small sandwich
bars that were to be found in the business districts of large cities like
London, Sandwich bars were usually small, independently owned or family run
shops that made sandwiches to order for customers who waited in a queue, often
out on to the pavement outside.
Dissatisfied with the quality of both the food and service from
traditional sandwich bars, Metcalf and Beecham decided that Pret a Manger
should offer something different. They wanted Pret’s food to be high quality
and healthy, and preservative and additive free. In the beginning, they shopped
for the food themselves at local markets and returned to the store where they
made the sandwiches each morning. Pret’s offering was based around
premium-quality sandwiches and other health-orientated lunches including
salads, sushi and a range of desserts, priced higher than at traditional
sandwich bars, and sold pre-packed in attractive and convenient packaging ready
to go. There was also a choice of different coffees, as well as some healthy
alternatives. Service aimed to be fast and friendly go give customers a minimum
of queuing time.
Pret a Manger: ‘Passionate
about What We do’
Pret a Manger strongly emphasizes the quality of its products. Its
promotional material and website claims that it is:
‘passionate about food, rejecting the use of obscure chemicals,
additives and preservatives common in so much of the prepared and fast food on
the market today…it there’s a secret to our success so far we like to think its
determination to focus continually on quality—not just our food, but in every
aspect of what we do’.
Great importance is also placed on freshness. Unlike those sold in
high-street shops or supermarkets, Pret’s sandwiches are all hand-made by staff
in each shop starting at 6.30 every morning, rather than being prepared and
delivered by a supplier or from a central location. Metcalf and Beecham believe
this gives their sandwiches a freshness and distinctiveness. All food that
hasn’t been sold in the shops by the end of the day is given away free to local
charities.
Careful sourcing of supplies for quality has also always been
important. Genetically modified ingredients are banned and the tuna Pret buys,
for example, must be ‘dolphin friendly’. There is also a drive for constant
product improvement and innovation—the company claims that its chocolate
brownie dessert has been improved 33 times over the last few years—and, on
average, a new product is tried out in the stores every four days. Aware that
some of its customers are increasingly health conscious, Pret’s website menu
carefully lists not only what is available, but also the ingredients and
nutritional values in terms of energy, protein, fats and dietary fibre for each
item.
The level and quality of service from staff in the shop is a critical
factor. The stores are self-service, with customers helping themselves to
sandwiches and other products form the supermarket-style refrigerated cabinets.
Staff at the counter at the back of the store then serve customers coffee and
take payment. Service is friendly, smiling and efficient, in contrast to many
retail and restaurant outlets in Britain where, historically, service quality
has not always been high. Prêt puts an emphasis on human resource management issues
such as effective recruitment and training so as to have frontline staff who
can show the necessary enthusiasm and also remain fast and courteous under the
pressure of a busy lunchtime sales period. These staff are usually young and
enthusiastic, some are students, many are international. The pay they receive
is above the fast-food industry average and staff turnover is 98 per cent a
year, which sounds high—however, this is against an industry norm of around 150
per cent. In 2001, Pret had 55,000 applications for 1500 advertised vacancies.
Recently, Fortune magazine
voted Pret one of the top 10 companies to work for in Europe. According to its
own promotional recruitment material, Pret is an attractive and fun place to
work: ‘We don’t work nights, we wear jeans, we party!’ Service quality is
checked regularly by the use of mystery shoppers: if a shop receives a good
report, then the staff there receive a 75p an hour bonus in the week of the
visit. Head office managers also visit stores on a regular basis and every
three or four months every one of these managers works as a ‘buddy’, where they
spend a day making sandwiches and working on the floor in one of the shops to
help them keep in touch with what is going on. Store employees work in teams
and are briefed daily, often on the basis of customer responses that come in
from in-store reply cards, telephone calls and the company website. The
website, which, lists the names and phone numbers of its senior executives,
actively invites customers to comment or complain about their experience with
Pret, and encourages them to contact the company. Great importance is placed on
this customer feed-back, both positive and negative, which is discussed at
weekly management meetings.
The design of the stores is also distinctive. Prominently featuring the
company logo, they are fitted out in a high-tech with metal cladding and
interiors in Pret’s own corporate dark red colour. Each store plays music,
helping to create a stylish and lively atmosphere. Although the shops mainly
sell carry out food and coffee in the morning and through the lunchtime period,
many also have tables and seating where customers can drink coffee and eat
inside the store or, weather permitting, on the pavement outside.
Growth and competition
Three years after the first Pret shop was launched another was opened
and, after that, the chain began to grow so that, by 1998, there were 65
throughout London. In the late 1990s stores were also opened in other British
cities such as Bristol, Cambridge and Manchester. Although growth in the UK has
been rapid—between 2000 and 2002 the company opened 40 new outlets and there
are over 120 throughout Britain—Pret’s policy has always been to own and manage
all its own stores and not to franchise to other operators. In 2002, £1 million
was spent in launching an Internet service that enables customers to order
sandwiches online.
Plans for international growth have been more cautious. In 2000 the
company made its first move overseas when it opened a shop near Wall Street in
New York. However, there were problems on several fronts in moving into the
USA. Metcalf is quoted saying, ‘As a private company its very difficult to set
up abroad. We didn’t know where to begin in New York—we ended up having all the
equipment for the shop made here and shipped over.’ There were also staffing
and service quality difficulties—Pret reportedly found it difficult to recruit
people in New York who had the required friendliness to serve in the stores and
had to import British staff. Despite these problems, several other shops in New
York have followed and, in 2001, Pret opened its first outlet in Hong Kong.
During the 1990s, coffee shops boomed as the British developed a
growing taste for drinking coffee in pavement cafes, and competition for Pret
grew as other chains entered the fray. Rivals like Coffee Republic, Caffè Nero,
Costa Coffee (now owned by leisure group Whitbread) Aroma (owned by McDonald’s)
and American worldwide operator Starbucks all came into the market, as well as a
number of smaller independents. All these chains offer a wide range of coffees
but with varying product offerings in terms of food, pricing and style
(Starbucks, for example, offers comfortable arm-chairs around tables, which
encourage people to linger or work in a laptop in the store). In a London
shopping street it is not uncommon to see three or four rival outlets next door
to or within a few yards of each other. However, it quickly became clear that
the sector was overcrowded and, apart from Starbucks, some of the other chains
reportedly struggled to make a profit. In 2002 Coffee Republic was taken over
by Caffè Nero, which also eventually acquired the ailing Aroma chain from
McDonald’s. Costa Coffee was the largest chain overall with over 300 shops throughout
Britain, while Starbucks was expanding aggressively and aimed to have an
eventual 4000 stores worldwide.
The future
As work and lifestyles get busier, the demand for convenience and fast
foods continues to grow. In 2000, some estimates put the total value of the
fast-food market in Britain, excluding sandwiches, at over £6 billion and
growing about £200-£300 million a year. While the growth in sales of some types
of fast food, like burgers, was showing signs of slowing down, sandwiches
continued to increase in popularity so that by 2002 sales wee an estimated £3
billion. Customers are also getting more health conscious and choosy about what
they eat and, increasingly, want nutritional information about food from
labelling and packaging.
In January 2001, in a surprise move, Pret’s two founders sold a 33 per
cent stake in the company to fast-food giant McDonald’s for an estimated £25
million. They claim that McDonald’s will not have any influence over what Pret
does or the products it sells, but that the investment by McDonald’s will help
their plan for future development. According to Metcalf:
‘We’ll still be in charge—we’ll have the majority of shares. Pret will
continue as it does… The deal wasn’t about money—we could have sold the shares
for much more to other buyers but they wouldn’t have provided the support we
need.’
After a long run of success, Pret has ambitious plans for the future.
It hopes to open at least 20 new stores a year in the UK. In late 2002 it
opened its first store in Tokyo, Japan, in partnership with McDonald’s. The
menu there is described as being 75 per cent ‘classic Pret’ with the remaining
25 per cent designed more to please local tastes. In other international
markets, the plan is to move cautiously—Pret’s first move will be to open more
stores in New York and Hong Kong, where it has already been successful.
Questions
1.
How has
Pret a Manger positioned its brand?
2.
Explain
how the different elements of the services marketing mix support and contribute
to the positioning of Pret a Manger.
Case V ‘Fast Fashion’: exploring how retailers get
affordable fashion on to the high street
The term ‘fast fashion’ has become very much de rigueur within the
fashion retailing industry. Retailers have to react quickly to changes in the
market, possess lean manufacturing operations, and utilize responsive supply
chains in order to get the latest fashions to the mass market. Stores such as
H&M, Zara, Mango, Top Shop and Benetton have been tremendously successful
in being responsive to the fashion needs of the market. Excellent logistical
and marketing information systems are seen as key to the implementation of the
‘fast fashion’ concept. ‘Fast fashion’ is the emphasis of putting fashionable
and affordable design concepts, which match consumer demand, on to the high
street as quickly as possible. These retailers get sought-after fashions into
stores in a matter of weeks, rather than the previous industry norm, which
relied on production lead times ranging from six months to a year. The concept
of ‘fast fashion’ relies of a number of central components: excellent marketing
information systems, flexible production and logistics operations, excellent
communications within the supply chain, and leveraging advanced IT systems.
These components allow stores to track consumer demand, and deliver a rapid
response to changes in the marketplace. The results are invigorating for
fashion retailers, with ‘fast fashion’ retailers’ sales growing by 11 per cent,
compared with the industry norm of 2 per cent.
Within the fashion industry a number of different levels exist, the
exclusive haute couture ranges (made to measure), the designer ready-to-wear
collections, and then copycat designs by mass-market retailers. Fashion has now
gone to the high street, becoming more democratic for the mass market.
The traditional fashion- retailing model was seasonal, whereby
retailers would typically launch two seasons: spring and autumn collections.
Fashion retailers would buy for these collections from their supplier network a
year in advance, and allow for between 20-30 per cent of their purchasing
budgets open to specific fashion changes in the market. Typically, retailers
would have perennial offerings that rarely change as well as catering to the
whims of fashion, such as basic T-shirts and jeans.
Now, through the ‘fast fashion’ philosophy, new items are being stocked
in stores more frequently. These newer product ranges stimulate shoppers into
frequenting these stores on a more regular basis, in some cases weekly to see
new fashion items. Savvy brand-loyal shoppers know when new stock is being
delivered to their favourite store. Through increased stock replenishment of
new, fashionable items, consumers are increasing their footfall to these
stores, and furthermore these stores are developing brand images as cutting
edge, trendy, and fashionable. This increased footfall, where shoppers
regularly visit a store, eliminates the need for major expenditure on advertising
and promotion. Also the concept of ‘fast fashion’ is helping to improve sales,
conversion ratios within these stores. Due to the limited supply of designs
available, this creates an aura of exclusivity for these garments, further
enhancing the brands of these ‘fast fashion retailers’ as leading fashion
brands.
Famous for ABBA, Volvos and IKEA, now Sweden has another international
success story: H&M. The basic business premise behind H&M is ‘fashion
and quality at the best price’. The company now has over 1068 stores in 21
countries. H&M sources 50 per cent of its goods in Europe and the remainder
in low-cost Asian countries. Sourcing decisions are dependent on cost, quality,
lead times and export regulations. The lead times for items can vary from a
minuscule two weeks to six months, dependent on the item itself. H&M
believes that having very short lead times can be beneficial in terms of stock
control, however it is not the most important criteria for all items. Basic
clothing garments can have lead times running into months, due to consistent
demand. However, items that are more trend- and fashion-conscious require very
short lead times, to match demand. H&M is now also in the process of
teaming up with prestigious designers like Karl Lagerfeld to create affordable
fashion ranges.
The firm utilizes close relationships with its network of production
offices and 700 suppliers. Unlike some other clothing retailers, H&M
outsources all of its production to independent suppliers. The dyeing of
garments is postponed until as late as possible in the production process to
allow greater flexibility and adaptation to the whims of the fashion buyer.
Items from around the world are shipped to a centralized transit warehouse in
Hamburg, Germany, where quality checks are undertaken, and the items are
allocated to individual stores or placed in centralized storage. Items that are
placed in this ‘call-off warehouse’ are allocated to stores where there is more
demand for the particular item. For example, if pairs of a particular style of
jeans are selling well in London, more jeans are shipped from Hamburg to
H&M’s London stores.
The concept of ‘postponement’ is a key strategy used within the fashion
retailing industry. It is the delayed configuration of a garment’s final design
until the final market destination and/or customer requirement is known and,
once this is known, the garment is assembled or customized. The material and
styles are kept generic for a long as possible, before final customization. A
classic illustration of the concept of postponement is its usage by Benetton.
Colours can come in and out of fashion.
Benetton delays when its garments are finally product differentiated, so
that this matches what is selling. For example, a Benetton sweater would be
stitched and assembled from its original grey yarn and then, based on feedback
from Benetton’s distribution network as to what colours were selling, the
sweater would be dyed at the very final stage of production. The concept of
postponement allows greater inventory cost saving, and increased flexibility in
matching actual demand.
The production and logistics facilities for these ‘fast fashion’
retailers are colossal in that each design may have several colour variants,
and the retailer needs to produce an array of garments in a number of different
sizes. The number of stock keeping units (SKUs) is therefore staggering. As a
result, companies require a very reliable and sophisticated information
system—for example, Zara has to deal with over 300,000 new SKUs every year.
Benetton has a fully automated sorting and shipping system, managing over 110 million
items a year, with a staff of only 24 employees in its centralized distribution
centres. Mango, another successful Spanish fashion chain, also utilizes a
high-tech distribution system, which can sort and pack 12,000 folded items an
hour and 7000 hanging garments an hour.
Many in the industry see Zara as the classic illustration of the
concept of ‘fast fashion’ in operation. The company can get a garment from
design, through production and ultimately on to the shelf in a mere 15 days.
The norm for the industry has typically run to several months. The group’s
basic business philosophy is to seduce customers with the latest fashion at
attractive prices. It has grown rapidly as a fashion retail powerhouse by
adopting four central strategies: creativity and innovation; having an
international presence; utilizing a multi-format strategy; and through
vertically integrating its entire supply chain. For the ‘fast fashion’ concept
to be successful, it requires close relationships between suppliers and retailers,
information sharing and utilization of technology. Information is utilized
along the entire supply chain, according to the demand. It controls design,
production and the logistics elements of the business. Real-time demand feeds
the production systems.
Zara is part of the Inditex group of fashion retail brands. This group
adopts a multi-format strategy with different store brands targeting different
types of customers. Zara is its key fashion-retailing brand. Zara opened its
first store in 1975 in Spain and has now become a fashion powerhouse, operating
in four continents, with 729 stores, located in over 54 countries. It has
become very hip all over the world, for its value for money and stylish
designs. The chain is building large numbers of brand devotees because of its
fashionable designs, which are in tune with the very latest trends, and a very
convincing price-quality offering. Each of the different store brands (outlined
in Table- 7) needs to be strongly differentiated in order for the strategy to work
effectively.
Zara does not undertake any conventional advertising, except as a
vehicle for announcing a new store opening, the start of sales of seasons. The
company uses the stores themselves as its main promotional strategy, to convey
its image. Zara tries to locate its stores in prime commercial areas. Deep
inside the lairs of its corporate headquarters, 25 full-scale store windows are
set up, whereby Zara window designers can experiment with design layouts and
lighting. The approved design layouts are shipped out to all Zara’s stores, so
that a Zara shop front in London will be the same as in Lisbon and throughout
the entire chain. The store itself is the company’s main promotional vehicle.
One of Zara’s key philosophies was the realization that fashion, much
like food, has a ‘best before’ date: that fashion trends change rapidly. What
style consumers want this month may not be same in two months’ time. Fashion
retailers have to adapt to what the marketplace wants for the here and now. The
company is guilty of under-stocking garments, as it does not want to be left
with obsolete or out-of-fashion items. The key driving force behind its success
is to minimize inventory levels, getting product out on to the retail floor
space, and by being responsive to the needs of the market. Zara uses its stores
to find out what consumers really want, designs are selling, what colours are
in demand, which items are hot sellers and which are complete flops. It uses a
sophisticated marketing information system to provide feedback to headquarters
and allow it to respond to what the marketplace wants. Similarly, Mango uses a
computerized logistical system that allows the matching of clothes designs to
particular stores based on personality traits and even climate variances (i.e.
‘It this garment suitable for the Mediterranean Summer?). This sophisticated IT
infrastructure allows for more responsive market-led retailing, matching
suitable clothing lines to compatible stores.
At the end of each day, Zara sales assistants report to the store
manager using wireless headsets, to communicate inventory levels. The stores
then report back to Zara’s design and distribution departments on what
consumers are buying, asking for or avoiding. Both hard sales data and soft
data (i.e. customer feedback on the latest designs) are communicated directly
back to the company’s headquarters, through open channels of communication.
Zara’s 250 designers use market feedback for their next creations. Designers
work hand in hand with market analyst, in cross-functional teams, to pick up on
the latest trends. Garments are produced in comparatively small production
runs, so as not to be over-exposed if a particular item is a very poor seller.
If a product is a poor seller, it is removed after as little as two weeks.
Roughly 10 per cent of stock falls into this unsold category, in direct
contrast to industry norms of between 17 and 20 per cent. Zara produces nearly
11,000 designs a year. Stock items are seen as assets that are extremely perishable
and, if they are sitting on shelves or racks in a warehouse, they are simply
not making money for the organization.
In the course of one year alone, Zara has been able to launch 24
different collections into its network of stores. After designs have been
approved, fabrics are dyed and cut by highly automated production lines. These
pre-cut pieces are then sent out of nearly 350 workshops in northern Spain and
Portugal. These workshops employ nearly 11,000 ‘grey economy’ workers mainly
women, who may want to supplement their income. Seamstresses stitch the pre-cut
pieces into garments using easy-to-follow instructions supplied by Zara. The
typical seamstress’s wage in Zara’s workshop network is extremely competitive
when compared with those in ‘third world’ countries where other fashion
retailers mainly outsource their production. Furthermore, the proximity of
these workshops allows for greater flexibility and control, Zara achieves
greater control over its supply chain through having a high degree of
integration within the supply chain. By owning suppliers, Zara has greater
control production capacities, quality and scheduling. This is in stark
contrast to Benetton, which is close to being a virtual organization,
outsourcing production to third-party suppliers and directly owning only a
handful of its stores, the majority being franchises or partner stores.
The finished garments are then sent back to Zara’s colossal
state-of-the-art logistics centre. Here they are electronically tagged, quality
control double-checks them, and then they are sorted into distribution lots,
ensuring the items arrive at their ultimate destinations. Each item is tagged
with pricing information. There is no pan-European pricing for Zara’s products:
prices are different in each national market. Zara believes each national
market has its own particular nuances, such as higher salaries or higher
taxation, therefore it has to adjust the price of each garment to make it
suitable in each country and to reflect these differences. Shipments leave La
Coruňa bound for every one of the Zara stores in over 54 countries twice a
week, every week. The company’s average turnaround time from designing to
delivery of a new garment takes on average 10 to 15 days, and delivery of goods
takes a maximum of 21 days, which is unparalleled in an industry where lead
times are usually months, not days. Zara’s business model tries to fulfil
real-time fashion retailing and not second-guessing what consumers’ needs are
for next season, which may be six months away. As a result of Zara utilizing
this ultra-responsive supply chain, 85 per cent of its entire product range
obtains full ticket price, whereas the industry norm is between 60 and 70 per
cent.
The successful adoption of the ‘fast fashion’ concept by these
international retailers has drastically altered the competitive landscape in
apparel retailing. Consumers’ expectations are also rising with these improved
retail offerings. Clothes shoppers are seeking out the latest fashions at
value-for-money prices in enticing store environments. Now other
well-established high-street fashion retailers have to adapt to these
challenges, by being more responsive, cost efficient, speedy and flexible in
their operations. The rag trade is churning out the latest value-for-money
fashions at breakneck speed. ‘Fast fashion’ is what the marketplace is
demanding.
Questions
1.
Discuss
how supply chain management can contribute to the marketing success of these
retailers.
2.
Discuss
the central components necessary for the fast fashion concept to work
effectively.
3.
Critically
evaluate the concept of ‘market-driven supply’, discussing the merits and
pitfalls of its implementation in fashion retailing.
Note: Solve any 4 Cases Study’s
CASE: I Enterprise Builds On People
When most people think of car-rental firms, the names of Hertz and Avis
usually come to mind. But in the last few years, Enterprise Rent-A-Car has
overtaken both of these industry giants, and today it stands as both the
largest and the most profitable business in the car-rental industry. In 2001,
for instance, the firm had sales in excess of $6.3 billion and employed over
50,000 people.
Jack Taylor started Enterprise in St. Louis
in 1957. Taylor had a unique strategy in mind for Enterprise, and that strategy
played a key role in the firm’s initial success. Most car-rental firms like
Hertz and Avis base most of their locations in or near airports, train
stations, and other transportation hubs. These firms see their customers as
business travellers and people who fly for vacation and then need
transportation at the end of their flight. But Enterprise went after a
different customer. It sought to rent cars to individuals whose own cars are
being repaired or who are taking a driving vacation.
The firm got its start by working with
insurance companies. A standard feature in many automobile insurance policies
is the provision of a rental car when one’s personal car has been in an
accident or has been stolen. Firms like Hertz and Avis charge relatively high
daily rates because their customers need the convenience of being near an
airport and/or they are having their expenses paid by their employer. These
rates are often higher than insurance companies are willing to pay, so
customers who these firms end up paying part of the rental bills themselves. In
addition, their locations are also often inconvenient for people seeking a
replacement car while theirs is in the shop.
But Enterprise located stores in downtown and
suburban areas, where local residents actually live. The firm also provides
local pickup and delivery service in most areas. It also negotiates exclusive
contract arrangements with local insurance agents. They get the agent’s referral
business while guaranteeing lower rates that are more in line with what
insurance covers.
In recent years, Enterprise has started to
expand its market base by pursuing a two-pronged growth strategy. First, the
firm has started opening airport
locations to compete with Hertz and Avis more directly. But their target is
still the occasional renter than the frequent business traveller. Second, the
firm also began to expand into international markets and today has rental
offices in the United Kingdom, Ireland and Germany.
Another key to Enterprise’s success has been
its human resource strategy. The firm targets a certain kind of individual to
hire; its preferred new employee is a college graduate from bottom half of
graduating class, and preferably one who was an athlete or who was otherwise
actively involved in campus social activities. The rationale for this unusual
academic standard is actually quite simple. Enterprise managers do not believe
that especially high levels of achievements are necessary to perform well in
the car-rental industry, but having a college degree nevertheless demonstrates
intelligence and motivation. In addition, since interpersonal relations are
important to its business, Enterprise wants people who were social directors or
high-ranking officers of social organisations such as fraternities or
sororities. Athletes are also desirable because of their competitiveness.
Once hired, new employees at Enterprise are
often shocked at the performance expectations placed on them by the firm. They
generally work long, grueling hours for relatively low pay.
And all Enterprise managers are expected to
jump in and help wash or vacuum cars when a rental agency gets backed up. All
Enterprise managers must wear coordinated dress shirts and ties and can have
facial hair only when “medically necessary”. And women must wear skirts no
shorter than two inches above their knees or creased pants.
So what are the incentives for working at
Enterprise? For one thing, it’s an unfortunate fact of life that college
graduates with low grades often struggle to find work. Thus, a job at
Enterprise is still better than no job at all. The firm does not hire
outsiders—every position is filled by promoting someone already inside the
company. Thus, Enterprise employees know that if they work hard and do their
best, they may very well succeed in moving higher up the corporate ladder at a
growing and successful firm.
Question:
1.
Would
Enterprise’s approach human resource management work in other industries?
2.
Does
Enterprise face any risks from its human resource strategy?
3.
Would
you want to work for Enterprise? Why or why not?
CASE: II Doing The Dirty Work
Business magazines and newspapers regularly publish articles about the
changing nature of work in the United States and about how many jobs are being
changed. Indeed, because so much has been made of the shift toward
service-sector and professional jobs, many people assumed that the number of
unpleasant an undesirable jobs has declined.
In fact, nothing could be further from the
truth. Millions of Americans work in gleaming air-conditioned facilities, but
many others work in dirty, grimy, and unsafe settings. For example, many jobs
in the recycling industry require workers to sort through moving conveyors of
trash, pulling out those items that can be recycled. Other relatively
unattractive jobs include cleaning hospital restrooms, washing dishes in a
restaurant, and handling toxic waste.
Consider the jobs in a chicken-processing
facility. Much like a manufacturing assembly line, a chicken-processing
facility is organised around a moving conveyor system. Workers call it the
chain. In reality, it’s a steel cable with large clips that carries dead
chickens down what might be called a “disassembly line.” Standing along this
line are dozens of workers who do, in fact, take the birds apart as they pass.
Even the titles of the jobs are unsavory.
Among the first set of jobs along the chain is the skinner. Skinners use sharp
instruments to cut and pull the skin off the dead chicken. Towards the middle
of the line are the gut pullers. These workers reach inside the chicken
carcasses and remove the intestines and other organs. At the end of the line
are the gizzard cutters, who tackle the more difficult organs attached to the
inside of the chicken’s carcass. These organs have to be individually cut and
removed for disposal.
The work is obviously distasteful, and the
pace of the work is unrelenting. On a good day the chain moves an average of
ninety chickens a minute for nine hours. And the workers are essentially held
captive by the moving chain. For example, no one can vacate a post to use the
bathroom or for other reasons without the permission of the supervisor. In some
plants, taking an unauthorised bathroom break can result in suspension without
pay. But the noise in a typical chicken-processing plant is so loud that the
supervisor can’t hear someone calling for relief unless the person happens to
be standing close by.
Jobs such as these on the chicken-processing
line are actually becoming increasingly common. Fuelled by Americans’ growing
appetites for lean, easy-to-cook meat, the number of poultry workers has almost
doubled since 1980, and today they constitute a work force of around a quarter
of a million people. Indeed, the chicken-processing industry has become a major
component of the state economies of Georgia, North Carolina, Mississippi,
Arkansas, and Alabama.
Besides being unpleasant and dirty, many jobs
in a chicken-processing plant are dangerous and unhealthy. Some workers, for
example, have to fight the live birds when they are first hung on the chains.
These workers are routinely scratched and pecked by the chickens. And the air
inside a typical chicken-processing plant is difficult to breathe. Workers are
usually supplied with paper masks, but most don’t use them because they are hot
and confining.
And the work space itself is so tight that
the workers often cut themselves—and sometimes their coworkers—with the knives,
scissors, and other instruments they use to perform their jobs. Indeed, poultry
processing ranks third among industries in the United States for cumulative
trauma injuries such as carpet tunnel syndrome. The inevitable chicken
feathers, faeces, and blood also contribute to the hazardous and unpleasant
work environment.
Question:
1.
How
relevant are the concepts of competencies to the jobs in a chicken-processing
plant?
2.
How
might you try to improve the jobs in a chicken-processing plant?
3.
Are
dirty, dangerous, and unpleasant jobs an inevitable part of any economy?
CASE: III On Pegging Pay to Performance
“As you are aware, the Government of India has removed the capping on
salaries of directors and has left the matter of their compensation to be
decided by shareholders. This is indeed a welcome step,” said Samuel Menezes,
president Abhayankar, Ltd., opening the meeting of the managing committee
convened to discuss the elements of the company’s new plan for middle managers.
Abhayankar was am engineering firm with a
turnover of Rs 600 crore last year and an employee strength of 18,00. Two years
ago, as a sequel to liberalisation at the macroeconomic level, the company had
restructured its operations from functional teams to product teams. The change
had helped speed up transactional times and reduce systemic inefficiencies,
leading to a healthy drive towards performance.
“I think it is only logical that performance
should hereafter be linked to pay,” continued Menezes. “A scheme in which over
40 per cent of salary will be related to annual profits has been evolved for
executives above the vice-president’s level and it will be implemented after
getting shareholders approval. As far as the shopfloor staff is concerned, a
system of incentive-linked monthly productivity bonus has been in place for
years and it serves the purpose of rewarding good work at the assembly line. In
any case, a bulk of its salary will have to continue to be governed by good old
values like hierarchy, rank, seniority and attendance. But it is the middle
management which poses a real dilemma. How does one evaluate its performance?
More importantly, how can one ensure that managers are not shortchanged but get
what they truly deserve?”
“Our vice-president (HRD), Ravi Narayanan,
has now a plan ready in this regard. He has had personal discussions with all
the 125 middle managers individually over the last few weeks and the plan is
based on their feedback. If there are no major disagreements on the plan, we
can put it into effect from next month. Ravi, may I now ask you to take the
floor and make your presentation?”
The lights in the conference room dimmed and
the screen on the podium lit up. “The plan I am going to unfold,” said
Narayanan, pointing to the data that surfaced on the screen, “is designed to
enhance team-work and provide incentives for constant improvement and
excellence among middle-level managers. Briefly, the pay will be split into two
components. The first consists of 75 per cent of the original salary and will
be determined, as before, by factors of internal equity comprising what Sam
referred to as good old values. It will be a fixed component.”
“The second component of 25 per cent,” he
went on, “will be flexible. It will depend on the ability of each product team
as a whole to show a minimum of 5 per cent improvement in five areas every
month—product quality, cost control, speed of delivery, financial performance
of the division to which the product belongs and, finally, compliance with
safety and environmental norms. The five areas will have rating of 30, 25, 20,
15, and 10 per cent respectively.
“This, gentlemen, is the broad premise. The
rest is a matter of detail which will be worked out after some finetuning. Any
questions?”
As the lights reappeared, Gautam Ghosh,
vice-president (R&D), said, “I don’t like it. And I will tell you why.
Teamwork as a criterion is okay but it also has its pitfalls. The people I take
on and develop are good at what they do. Their research skills are
individualistic. Why should their pay depend on the performance of other members
of the product team? The new pay plan makes them team players first and
scientists next. It does not seem right.”
“That is a good one, Gautam,” said Narayanan.
“Any other questions? I think I will take them all together.”
“I have no problems with the scheme and I
think it is fine. But just for the sake of argument, let me take Gautam’s point
further without meaning to pick holes in the plan,” said Avinash Sarin,
vice-president (sales). “Look at my dispatch division. My people there have
reduced the shipping time from four hours to one over the last six months. But
what have they got? Nothing. Why? Because the other members of the team are not
measuring up.”
“I think that is a situation which is bound
to prevail until everyone falls in line,” intervened Vipul Desai, vice
president (finance). “There would always be temporary problems in implementing
anything new. The question is whether our long term objectives is right. To the
extend that we are trying to promote teamwork, I think we are on the right track.
However, I wish to raise a point. There are many external factors which impinge
on both individual and collective performance. For instance, the cost of a raw
material may suddenly go up in the market affecting product profitability. Why
should the concerned product team be penalised for something beyond its
control?”
“I have an observation to make too, Ravi,”
said Menezes, “You would recall the survey conducted by a business fortnightly
on ‘The ten companies Indian managers fancy most as a working place’.
Abhayankar got top billings there. We have been the trendsetters in executive
compensation in Indian industry. We have been paying the best. Will your plan
ensure that it remains that way?”
As he took the floor again, the dominant
thought in Narayanan’s mind was that if his plan were to be put into place,
Abhayankar would set another new trend in executive compensation.
Question:
But how should he see it through?
CASE: IV Crisis Blown Over
November 30, 1997 goes down in the history of a Bangalore-based
electric company as the day nobody wanting it to recur but everyone
recollecting it with sense of pride.
It was a festive day for all the 700-plus
employees. Festoons were strung all
over, banners were put up; banana trunks and leaves adorned the factory gate,
instead of the usual red flags; and loud speakers were blaring Kannada songs.
It was day the employees chose to celebrate Kannada Rajyothsava, annual feature
of all Karnataka-based organisations. The function was to start at 4 p.m. and
everybody was eagerly waiting for the big event to take place.
But the event, budgeted at Rs 1,00,000 did
not take place. At around 2 p.m., there was a ghastly accident in the machine
shop. Murthy was caught in the vertical turret lathe and was wounded fatally.
His end came in the ambulance on the way to hospital.
The management sought union help, and the
union leaders did respond with a positive attitude. They did not want to fish
in troubled waters.
Series of meetings were held between the
union leaders and the management. The discussions centred around two major
issues—(i) restoring normalcy, and (ii) determining the amount of compensation
to be paid to the dependants of Murthy.
Luckily for the management, the accident took
place on a Saturday. The next day was a weekly holiday and this helped the
tension to diffuse to a large extent. The funeral of the deceased took place on
Sunday without any hitch. The management hoped that things would be normal on
Monday morning.
But the hope was belied. The workers refused
to resume work. Again the management approached the union for help. Union
leaders advised the workers to resume work in al departments except in the
machine shop, and the suggestions was accepted by all.
Two weeks went by, nobody entered the machine
shop, though work in other places resumed. Union leaders came with a new idea
to the management—to perform a pooja to ward off any evil that had befallen on
the lathe. The management accepted the idea and homa was performed in the machine
shop for about five hours commencing early in the morning. This helped to some
extent. The workers started operations on all other machines in the machine
shop except on the fateful lathe. It took two full months and a lot of
persuasion from the union leaders for the workers to switch on the lathe.
The crisis was blown over, thanks to the
responsible role played by the union leaders and their fellow workers. Neither
the management nor the workers wish that such an incident should recur.
As the wages of the deceased grossed Rs 6,500
per month, Murthy was not covered under the ESI Act. Management had to pay
compensation. Age and experience of the victim were taken into account to
arrive at Rs 1,87,000 which was the
amount to be payable to the wife of the deceased. To this was added Rs 2,50,000
at the intervention of the union leaders. In addition, the widow was paid a
gratuity and a monthly pension of Rs 4,300. And nobody’s wages were cut for the
days not worked.
Murthy’s death witnessed an unusual behavior
on the part of the workers and their leaders, and magnanimous gesture from the
management. It is a pride moment in the life of the factory.
Question:
1.
Do you
think that the Bangalore-based company had practised participative management?
2.
If your
answer is yes, with what method of participation (you have read in this
chapter) do you relate the above case?
3.
If you
were the union leader, would your behaviour have been different? If yes, what
would it be?
CASE: V A Case of Burnout
When Mahesh joined XYZ Bank (private sector) in 1985, he had one clear
goal—to prove his mettle. He did prove himself and has been promoted five times
since his entry into the bank. Compared to others, his progress has been
fastest. Currently, his job demands that Mahesh should work 10 hours a day with
practically no holidays. At least two day in a week, Mahesh is required to
travel.
Peers and subordinates at the bank have
appreciation for Mahesh. They don’t grudge the ascension achieved by Mahesh,
though there are some who wish they too had been promoted as well.
The post of General Manager fell vacant. One
should work as GM for a couple of years if he were to climb up to the top of
the ladder, Mahesh applied for the post along with others in the bank. The
Chairman assured Mahesh that the post would be his.
A sudden development took place which almost
wrecked Mahesh’s chances. The bank has the practice of subjecting all its
executives to medical check-up once in a year. The medical reports go straight
to the Chairman who would initiate remedials where necessary. Though Mahesh was
only 35, he too, was required to undergo the test.
The Chairman of the bank received a copy of
Mahesh’s physical examination results, along with a note from the doctor. The
note explained that Mahesh was seriously overworked, and recommended that he be
given an immediate four-week vacation. The doctor also recommended that
Mahesh’s workload must be reduced and he must take physical exercise every day.
The note warned that if Mahesh did not care for advice, he would be in for
heart trouble in another six months.
After reading the doctor’s note, the Chairman sat back in his chair,
and started brooding over. Three issues were uppermost in his mind—(i) How
would Mahesh take this news? (ii) How many others do have similar fitness
problems? (iii) Since the environment in the bank helps create the problem,
what could he do to alleviate it? The idea of holding a stress-management
programme flashed in his mind and suddenly he instructed his secretary to set
up a meeting with the doctor and some key staff members, at the earliest.
Question:
1.
If the
news is broken to Mahesh, how would he react?
2.
If you
were giving advice to the Chairman on this matter, what would you recommend?
CASE: VI “Whose Side are you on, Anyway?”
It was past 4 pm and Purushottam Mahesh was still at his shopfloor
office. The small but elegant office was a perk he was entitled to after he had
been nominated to the board of Horizon Industries (P) Ltd., as workman-director
six months ago. His shift generally ended at 3 pm and he would be home by late
evening. But that day, he still had long hours ahead of him.
Kshirsagar had been with Horizon for over
twenty years. Starting off as a substitute mill-hand in the paint shop at one
of the company’s manufacturing facilities, he had been made permanent on the
job five years later. He had no formal education. He felt this was a handicap,
but he made up for it with a willingness to learn and a certain enthusiasm on
the job. He was soon marked by the works manager as someone to watch out for.
Simultaneously, Kshirsagar also came to the attention of the president of the
Horizon Employees’ Union who drafted him into union activities.
Even while he got promoted twice during the
period to become the head colour mixer last year, Kshirsagar had gradually
moved up the union hierarchy and had been thrice elected secretary of the
union. Labour-management relations at Horizon were not always cordial. This was
largely because the company had not been recording a consistently good
performance. There were frequent cuts in production every year because of
go-slows and strikes by workmen—most of them related to wage hikes and bonus
payments. With a view to ensuring a better understanding on the part of labour,
the problems of company management, the Horizon board, led by chairman and
managing director Aninash Chaturvedi, began to toy with idea of taking on a
workman on the board. What started off as a hesitant move snowballed, after a
series of brainstorming sessions with executives and meetings with the union
leaders, into a situation in which Kshirsagar found himself catapulted to the
Horizon board as work-man-director.
It was an untested ground for the company.
But the novelty of it all excited both the management and the labour force. The
board members—all functional heads went out of their way to make Kshirsagar
comfortable and the latter also responded quite well. He got used to the
ambience of the boardroom and the sense of power it conveyed. Significantly, he
was soon at home with the perspectives of top management and began to see each
issue from both sides.
It was smooth going until the union presented
a week before the monthly board meeting, its charter of demands, one of which
was a 30 per cent across-the board hike in wages. The matter was taken up at
the board meeting as part of a special agenda.
“Look at what your people are asking for,”
said Chaturvedi, addressing Kshirsagar with a sarcasm that no one in the board
missed. “You know the precarious finances of the company. How could you be a
party to a demand that can’t be met? You better explain to them how ridiculous
the demands are,” he said.
“I don’t think they can all be dismissed as
ridiculous,” said Kshirsagar. “And the board can surely consider the
alternatives. We owe at least that much to the union.” But Chaturvedi adjourned
the meeting in a huff, mentioning, once to Kshirsagar that he should “advise
the union properly”.
When Kshirsagar told the executive committee
members of the union that the board was simply not prepared to even consider
the demands, he immediately sensed the hostility in the room. “You are a sell
out,” one of them said. “Who do you really represent—us or them?” asked
another.
“Here comes the crunch,” thought Kshirsagar.
And however hard he tried to explain, he felt he was talking to a wall.
A victim of divided loyalities, he himself
was unable to understand whose side he was on. Perhaps the best course would be
to resign from the board. Perhaps he should resign both from the board and the
union. Or may be resign from Horizon itself and seek a job elsewhere. But, he
felt, sitting in his office a little later, “none of it could solve the
problem.”
Question:
1.
What
should he do?
BUSINESS MANAGEMENT
CASE – 1: Where Do We
Go from Here?
As one of the many seminars held to discuss the corporate
response of family-owned business to liberalisation and globalisation, the
keynote Mr Gurcharan Das concluded his speech by saying, “In the end, I would
say that the success of Indian economy would depend on how the Indian industry
and business respond to the reform process.”
As the proceedings of the seminar
progressed it became clear that there was a difference of opinion in the
perception of participants. Those who were supporting the case for letting the
family-owned businesses face competition opined that such businesses in India
The participants critical of the
role of family business had this is to say: “There has been a tendency to mix
up family’s intent with that of businesses managed by them. There is a lack of
focus and business strategy. Family businesses have generally adopted a
short-term approach to business causing less purposeful investments in
specially critical areas such as employee development and product development.
Customers and development of marketing skills have been neglected.”
The valedictory session of the
Seminar attempted to bring out the issues clearly. It culminated in an agenda
for reform by the family businesses. The points highlighted in the agenda are:
- Indian family-owned business organisations need to professionalise management,
- they need to curtail the diversified of their business groups and impart a sharper focus to their business activities, and
- they need to pay greater attention to the development of human capital.
Question
Suppose you were an observer at the seminar. During tea and
lunch breaks you had an occasion to meet several people who were skeptical and
felt that the reform process was having only a superficial impact on the
corporates. Express your opinion that you form about the issues at the seminar.
CASE – 2 A Healthy Dose of Success
Muhammad Majeed represents a typical Indian who has created
success out of sheer hard work and commitment through his education and
expertise. At the age of 23 years, Majeed, after graduating in pharmacy from Kerala University ,
went to pursue higher studies in the US
SLL has over three dozen
products, and seven US
SLL thinks of its business as
“manufacturing and selling traditional standardized extracts and nutritional
and pharmaceutical fine chemicals”. Sabinsa, its US-based company, secures
contracts from the US
companies to manufacture certain chemicals in India
SLL looks forward to being a Rs
500-crore company by 2005 when the World Trade Organisation’s patenting regimes
comes into force.
Question
How will you define the business of SLL? Comment on the
business of SLL and your opinion on the likelihood of its success.
CASE – 3 No Chain, No Gain
Textile industry is one of the oldest industries in India India
RSWM is the flagship company of
the LNJ Bhilwara group. It has been the largest producer and trader of yarn in
the country and caters to the large demands for blended yarns and grey cloth
fabric used for children’s school uniform. In 1994, the yarn business faced a
severe crunch owing to overcapacity. From 1995 onward, RSWM became a late
follower of the industry trend as other competitors already moved up the value
chain.
Textile manufacturing is
basically constituted of the processes of spinning, weaving, processing, and
marketing. More than 50 per cent of the value is concentrated in weaving and
processing. Moving up the value chain from spinning involves large investments
in machinery and labour. Graduating to marketing requires getting closer to the
customers. This is the challenge that a traditional spinning mill like RSWM had
to face if it was to sustain itself in a highly competitive market.
At another level, for RSWM, it
was a matter of cultural transformation of the organisation long used to a
conservative, trader mentality. Imagine a company whose main driving force,
Shekhar Agarwal, Vice-Chairman and Managing Director having little interest in
watching Hindi movies signing up Sharukh Khan at a considerable price for
celebrity advertising. From the market side, it has long been troubled with its
commitment to the loyal middle-class customers as it had to simultaneously pay
attention to the upwardly mobile upper middle class customers. Then there was
the dilemma of being too many things to a wide range of audience. RSWM wanted
to have a stake in the export markets as well as keep its share in the rural
markets. It perceived itself as an efficient producer and wished to become a
flamboyant retailer. It excelled in basic textile processing yet dreamt of
attaining sophistication in in-house production of readymade garments. And all
this while it has been a late mover, losing out to early movers such as
Raymonds. No wonder it virtually landed up on the fringes of the industry, far
behind formidable competitors like Reliance, Grasim, and S.
Kumar .
Question
Suggest how should RSWM manage its value chain effectively.
Should it try to imitate the market leaders? If yes, why? If no, why not? What
alternatives routes to success do you propose?
CASE – 4 A
Very Intriguing Package
It is not quite often that a positive product feature
becomes an albatross around the neck of a company. VIP Industries had held sway
for over two decades in the organised Indian luggage market on the basis of the
durability of its moulded suitcases. Obviously, the customer perceives
value-for-money in the long-lasting, reasonably-priced Alfa brand of VIP
suitcases which sells 1.5 lakh pieces a month. But this means that having
bought one suitcase the customer can do with it for several years. Market
research by the company shows that an average Indian family pulls out the
suitcase merely for outstation travel a few times a year. Hence, there is no
pressing need for continual replacement of the old luggage.
The VIP products are made of
virgin polymer as compared to the recycled grade I and II polymers used by the
unorganised sector. They are subjected to stringent stress tests for quality
control.
VIP has a presence in a wide
range of the market segments within a price spectrum of Rs 295 to Rs 6,000
apiece. It is her that the competition from the unorganised sector hurts the
company most. VIP’s economically-priced brand, Alfa is widely imitated and sold
at much lower prices. This enables the unorganised sector to typically sell 20
times more than VIP can. The lower price threshold seems to be Rs 225 which in
nearly impossible for VIP to achieve given its cost structure. In the Rs 1500
plus premium range, VIP has to contend with Samsonite which is a formidable competitor.
The obvious tactic for VIP has
been to cut costs. Distribution and logistics is one area where valiant efforts
have been made at cost reduction. VIP has four factories located in heart of India
Severe pressure on sales has
resulted in VIP Industries offering discounts and unwittingly entering into a
disastrous price war. Promotion of a high visibility product suffered and
advertising expenditure has been ruthlessly curtailed from the earlier Rs 11
crore to Rs 2 crore now. Its lead advertising agency is HTA. Action on the
promotion front has seen reorganisation of the brand portfolio. Incidentally,
earlier its successful and popular Kal
bhi aaj bhi campaign served to reinforce its durability theme.
There are several roadblocks that
the company has to negotiate. Increase in population, rising propensity of
Indian to travel, and the insatiable thirst of customers for state-of-the-art
technological products with newer designs and innovation, all at an affordable
price are the opportunities and challenges before the company. Introduction of
new brands, Mantra and Skybags, product range of diversification to include
children’s bags and ladies’ bags, strategic alliance with Europe’s leading
luggage-maker—Delsey—are some of the steps taken by the company.
Yet, caught in its self spun web
of past successes, VIP is today faced with an uncertain future.
Question
How should the VIP Industries get out of the bind that it
finds itself in? Outline the contours of the marketing plans and policies that
VIP needs to formulate and implement?
CASE – 5 Let There be Light
Traditionally, power plants, being capital-intensive, have
been set up by the public sector and state electricity boards (SEBs) in India
The Madhya Pradesh State
Electricity Board (MPSEB) is not much different from its counterparts in other
states. It faces similar problems and is opting for identical solutions. The
common elements in the power sector reforms are: corporatisation by breaking
the SEB into generation, transmission, and distribution; financial
restructuring including debt and interest payment rescheduling; reduction of
manpower; and improvements in operational efficiency.
Public utilities, like SEBS, have
to be commercially viable in order to survive. Yet historically, this aspect of
SEB as an organisation has been sacrificed at the altar of political
expediency. The ruling party, irrespective of whether it is the Congress at
present or the Bharatiya Janata Party earlier, have made pre-election promises
of supplying free or heavily-subsidised power. Digvijay Singh, the present
chief minister of Madhya Pradesh, a populist politician earlier, on longer sees
electoral benefit in providing free electricity. “It pays to pay” is his
refrain today, whether it is healthcare or electricity.
Bold steps—bold, as they still
carry the risk of a political fallout with fiery BJP leader Uma Bharti
breathing down Digvijay’s neck or the silent schemers of his own party working
overtime behind the scenes—have been initiated to reform the energy sector in
Madhya Pradesh. MPSEB is to be divided into generation, transmission, and
distribution (T&D), and supply companies. Financial management and cash
flow management is to be improved. The retirement age of MPSEB employees has
been reduced from 60 to 58 years. Effective operational control is sought to be
exercised by metering power supply at division / district level to fix
responsibility for T & D losses and power thefts. A sustained drive is on
to identify non-paying consumers, install meters, and make them pay their bills
regularly.
MPSEB’s annual losses are to the
tune of a massive Rs 1,600 crore; total liabilities are estimated to be Rs
20,000 crore. Undeniably, are parameters indicating the rot that has corroded
the system.
At one level, the reform of the
energy sector is a political action but at another, and perhaps, a more
fundamental level, it is a question of managing an organisation strategically
through strategic actions designed to turn around a vital public utility.
Question
Analyse the problems of the MPSEB from the strategic
management perspective. Do you feel that the actions taken or being
contemplated are strategic in nature? Propose what else needs to be done to
make the MPSEB a viable organisation.
Case 1:
Scripto, Inc. (B)1
At one time, Scripto, Inc., utilized the services of
Audits and Surveys, a national marketing research firm, but, owing to budgetary
restraints, Scripto eliminated marketing research and channeled its financial
resources in other directions. As a result, the company had little of the data
it required for important marketing decisions. For example, the company
experienced great difficulty in securing comparative data for sales of its
products and competitive products in retails outlets.
Determined
not to let the void of data affect the 19¢er, Scripto management decided again
to consider using marketing research. While management was in general agreement
that marketing research was an essential ingredient in marketing orientation
and sales strategy, there were two viewpoints as to the type of marketing
research needed. One group believed that market studies and data were most
crucial to the success of the ¢er; hence, they favored using the services of
marketing-research companies, such as Audits and Surveys or A.C. Nielsen
Company. Both Audits and Surveys and Nielsen prepared bimonthly reports
measuring sales and movements of products through stores (the former was used
by Papermate). The major differences between the two research companies were
(1) cost and (2) type of retail outlet sampled. It would cost Scripto $20,000
to use Audits and Surveys and $25,000 to use Nielsen. Audits and Surveys
recorded sales and products movement primarily of mass merchandisers (variety stores)
and a relatively small sample of drugstores and grocery stores, while Nielsen
sampled more drugstores and grocery stores than A and S but a smaller sample of
variety stores.
Another group, however, preferred a different course of
action – the use of a marketing research firm that specialized in consumer
buying patterns rather than market studies per se. This group contended that
consumer research was more instrumental in the future of the 19¢er. Such
research was typified by the data generated by the National Consumer Panel of
Market Research Corporation of America.
Decisions were required on (1) whether or not to again
use marketing research; (2) if so, the type of marketing research most
important for Scripto’s 19¢er, market studies and/or consumer buying patterns;
and (3) the relationship between sales and marketing research. Management was
especially concerned about the relationship between sales and marketing
research.
Case 1
Questions:
What is your position on the
three problems that had to be solved by Scripto? Defend your arguments.
CASE 2:
Holden Electrical Supplies Company
Holden Electrical Supplies
Company, Cincinnati, Ohio, manufactured a wide line of electrical equipment
used in both home and industry. The sales force called on both electrical
wholesalers and industrial buyers with the greater part of their efforts
concentrated on industry buyers. The industrial products required considerable
technical expertise upon the part of salespeople. Sales offices situated in
twenty cities spread over the country had two hundred sales personnel operating
out of them. In the past eight years sales volume increased by more than 50
percent, to a level of nearly $150,000,000. The fast rise in sales volume and
the accompanying plant expansion created a problem in that more sales personnel
were needed to keep up with the new accounts and to make sure the additional
plant capacity was used profitably.
In addition, Holden’s sales recruiting problem was
compounded by a noticeable decline in the number of college seniors wanting a
selling career. Holden recruiters had observed this at colleges and
universities where they went searching for prospective salespeople. Another
indication of the increased difficulty in attracting good young people into
selling was aggressive recruiting by more and more companies. These factors
combined to make the personnel recruiting problem serious for Holden;
consequently, management ordered an evaluation of recruiting methods.
Virtually all
Holden salespeople were recruited from twenty-five engineering colleges by
district sales managers. Typically, Holden recruiters screened two hundred
college seniors to hire ten qualified sales engineers. It was estimated to cost
Holden $600 to recruit a candidate. Management believed the college recruiting
program was deficient in light of the high cost and the fact that only 5
percent of the candidates interviewed accepted employment with Holden.
Evaluation of the college recruiting program began with
the College Recruiting Division of the company asking district sales managers
for their appraisals. Some district managers felt that Holden should
discontinue college recruiting for various reasons, including the time required
for recruiting, the intense competition, and the candidates’ lack of
experience. Other district managers, however, felt the program should continue
with a few modifications, such as recruiting college juniors for the summer
employment more or less on a trial basis, concentrating on fewer schools, and
getting on friendly terms with placement directors and professors.
Holden’s general sales managers favored abandoning the
college recruiting program and believed the company should adopt an active
recruiting program utilizing other sources. He reasoned that, while engineering
graduates had a fine technical background, their lack of maturity, inability to
cope with business-type problems, and their lack of experience precluded an
effective contribution to the Holden selling operation.
The general sales managers felt that the two hundred
sales engineers currently working for Holden were an excellent source of new
recruits. They knew the requirements for selling the Holden line and were in
continual contact with other salespeople. By enlisting the support of the sales
force, the general manager foresaw an end to Holden’s difficulty in obtaining
sales engineers.
The president preferred internal recruiting from the
nonselling divisions, such as engineering, design, and manufacturing. He
claimed that their familiarity with Holden and their proven abilities were
important indicators of potential success as sales engineers.
A complete analysis of Holden’s entire personnel
recruiting program was in order, and, regardless of the approach finally
decided upon, it was paramount that the company have a continuous program to
attract satisfactory people to the sales organization.
Case 2
Questions:
Evaluate Holden’s recruiting
program, suggesting whether or not the company should have continued in college
recruiting of sales engineers.
CASE
3: Marquette Frozen Foods Company
The Marquette Frozen Foods
Company manufactured a wide line of frozen foods sold directly to all types of
food stores. The company’s 100 salespeople worked out of thirty-five district
sales offices located throughout the United States. Annual sales were nearly
$50 million. Although the sales picture was quite favorable, certain recent
developments indicated a possible need for redesign of sales territories.
Sales territories were established using population as
the base and were composed of one or more counties, depending on each county’s
population. The aim was to assign each salesperson to a territory containing
about 1 percent of the country’s total population. Since the total population was
approximately 205 million (exclusive of Alaska and Hawaii), an attempt was made
to assign each person a territory consisting of about 2,050,000 people.
Population statistics were obtained from the U.S. Bureau of the Census and were
modified according to local area statistics.
The method of territory design was illustrated by the
Northeast I sales territory, including Maine, New Hampshire, and part of
Massachusetts. The Northeast I territory included the following Maine counties,
along with their populations; Aroostook,
95,000; Piscataquis, 16,000; Penobscot,
125,000; Androscoggin, 91,000;
Cumberland, 193,000; Franklin,
22,000; Hancock, 35,000;
Kennebec, 95,000; Knox, 29,000;
Lincoln, 21,000; Oxford,
43,000; Sagadahoc, 23,000;
Somerset, 41,000; Waldo, 23,000;
Washington, 30,000; and York, 112,000. Maine population: 994,000.
The following New Hampshire counties and their population
were included: Belknap, 32,000;
Carroll, 19,000; Cheshire, 52,000; Coos,
34,000; Grafton, 55,000; Hillsborough,
224,000; Merrimack, 81,000; Rockingham,
139,000; Stratford, 70,000; and Sullivan,
31,000. New Hampshire population: 737,000.
Finally, the following Massachusetts towns were included
to increase the sales territory population to the desired figure (the first six
towns listed were in Essex County, while the last two were in Middlesex
County); Amesbury, 13,000;
Newburyport, 18,000; Haverhill,
46,000; Lawrence, 67,000; Salem,
41,000; Marblehead, 21,000; Tewksbury, 23,000; and Lowell, 95,000.
Massachusetts population: 321,000. Total population in Maine, New
Hampshire, and parts of Essex and Middlesex counties in Massachusetts:
2,055,000.
Analyses of population statistics were made every three
years. When warranted by population changes, sales territories were redesigned:
however, most changes were minor. The company supplied each salesperson with a
detailed map showing the counties in his or her territory, the cities and
towns, population, and the exact territorial assignments and to ensure a
salesperson’s exclusive rights to a given territory.
The Marquette sales manager had proposed and received
acceptance of this method of determining sales territories several years ago.
He favored this procedure because it guaranteed equal territories and similar
sales opportunities for all company sales personnel and therefore eliminated an
important cause for poor morale. With total population divided evenly, it was
easy to compare relative performances of the sales force. Total population divided
was an accurate estimate of potential demand, according to the sales manager,
because everyone was a potential customer for frozen foods. In addition, he
said that the simplicity and economy of this approach made it even more
desirable.
Careful analysis of a number of call reports, however,
confirmed the sales manager’s suspicions that many salespeople were “skimming the cream” or
concentrating on the larger and easier-to-sell accounts, neglecting altogether a
substantial number of prospects. Consequently, he concluded that territorial
coverage was unsatisfactory. He believed that this situation could be remedied
by reducing the size of the territories, permitting more intensive coverage.
The sales managers was aware that there were many reasons
why reduction of the size of sales territories was difficult to implement.
First, the sales personnel would feel that something was being taken away from
them; in some cases they would lose accounts they had cultivated over a long
period. The result was a possible morale problem. Second, high costs were
involved in redesigning sales territories. Third, there would be a need to hire
additional salespeople to cover the new sales territories. Fourth, someone
would have to convince the sales force that the changes were in the best
interests of the sales staff, the company, and the customers. It would be
essential to secure the sales force’s acceptance of the new plan.
Since substantial problems were associated with reducing
the sizes of the sales territories, the Marquette sales manager was still
undecided whether to redesign the present sales territories.
Case 3
Questions: Evaluate
Marquette’s method of designing the sales territories – strengths and
weaknesses. Should the company reduce the size of its territories?
CASE
4:
Alderson
Product, Inc.
Alderson Products Inc., a
$15 million company, had recently become a wholly owned subsidiary of National
Beverage Corp. of Baltimore, Maryland. National had purchased 100 percent of
Alderson stock. The acquisition brought with it a number of problems common to
such ventures, with the most pressing problems centering around the control of
the sales effort.
Alderson Products, Inc., produced and sold packaging
equipment exclusively to the soft drink industry. The company, located in
Detroit, was established in 1951 by the
Alderson brothers, Jim and
Frank, both of whom had worked for General Motors for several years but who
wanted to be in business for themselves. After a five-year search while they
were still working at GM, they decided to enter the packaging equipment
industry when an opportunity came up to buy out a small bottle capping machine
producer. For the first year of operation, Alderson produced only a limited
line of bottle capping machinery. However, gradually at first and then more
rapidly, the Alderson product line was expanded to include capping machines,
decapping machines, bottle lifters, case painters, case rebanding equipment,
parts, lubricants, blenders, fillers, water-coolers, carbonators, saturators, packers,
decasers, washers, water treatment systems, conveyors, rinser load tables,
warmers, water chillers, and refrigeration units. Most of the equipment bearing
the Alderson name was manufactured by the company itself. Some equipment was
purchased from other makers: the cappers and decappers came from the Zalkin
Corp. (France), the bottle washers from Firton Manufacturing (Pennsylvania),
rinser and warmers from Southern Tool (Louisiana), water chillers from Dunham
Bush (Georgia), and the refrigeration units came from Vilter Manufacturing
Company (Wisconsin).
The products offered by Alderson came in several
different sizes to match the various different applications in the soft drink
industry. In addition to the new products manufactured or purchased by Alderson,
the company sold used equipment and machinery. The company got into used
equipment after finding that a large number of its customers were too small to
afford new equipment and could not perform extensive maintenance and repairs on
their present equipment.
The market for used equipment grew to the point where it
contributed 30 percent of v Alderson’s net sales. Most of the used sales were
from rebuilt machinery. Alderson bought the used machinery from bottlers,
brought it to Detroit, reconditioned it, and sold it. Other used machinery was
sold “as is.” This was machinery that was bought in acceptable operation
conditions and required minor modifications or repairs. Usually, the “as is”
machinery was transported top the buyer directly from its original location.
The “rebuilt” phase of the business called for the
customer to make a 25 percent of deposit on the order before the particular
unit went through the shop. Once in the shop, the equipment was dismantled to
its basic components and parts were added as required. The customer ended up
with a “like new” machine or piece of equipment. Savings to the customers were
typically about 30 percent with a new unit. Alderson’s rebuilt equipment
carried a warranty. As an additional service, Alderson tried to maintain an
adequate stock of spare parts for older units, even if the original
manufacturer no longer made them available. There was some concern among
management as to the future of the rebuilt equipment part of the business.
About two years ago, the company began experiencing difficulty in acquiring
used equipment that could be rebuilt. The supply of older units was dwindling,
and competition for the used equipment was forcing prices up considerably.
Alderson also found that more and more bottlers were reconditioning their own
units. Although it constituted a profitable segment of the overall operation,
there was some thought that it might be best for Alderson to get out of the
used equipment business and concentrate on its growing business for new machinery
and equipment.
Alderson served only the soft drink industry, despite the
suitability of the company’s products and services for other industries, such
as the beer or fruit juice producers. No attempt had been made to branch out
into the other markets, largely because the Alderson brothers felt they knew
the soft drink industry best. The company served primarily local and regional
bottlers; however, plans were underway to increase coverage to national and,
possibly, international markets. Future expansion plans did not include markets
outside the soft drink industry.
Distribution of Alderson products was through two company
salespersons and six manufacturers’ representatives. Both salespersons were
paid straight salaries. One salesperson spent about one-fourth of his time
appraising and procuring used equipment. The other salesperson spent about one
quarter of his time piloting the company airplane. The representatives received
a commission for their services, according to the following schedule: 5 percent
for the first $50,000, 2.5 percent for the next $50,000 (up to $100,000) and 1
percent for anything over $100,000. This was bases on individual sales. The
representatives received a sales commission on any sale in their territory,
regardless of whether the company (Alderson) or the representative closed the
sale.
In addition to using the personal selling, Alderson
promoted its products through advertising, trade conventions, and direct mail.
Alderson advertised in six trade publications, averaging one insertion every
two months in each of the journals. The direct mail consisted of a newsletter,
“Alderson’s News,” mailed to current and potential customers.
With the takeover complete, National sent its auditors to
Alderson Products for a routine evaluation. Among other things, it soon became
apparent that Alderson had been very lax in its sales control efforts. In
particular, there was no evidence that a sales budget was used and there had
been no attempt at a sales analysis. The sales manager, who had been in his
position for two years after four years as a salesperson with Alderson, said
there had been no sales budgeting or sales analysis effort for three years
prior to his becoming sales manager. He did mention that a sales budget was
used for a time before that, but he was unaware of its details. When questioned
by the National auditor as to why he had not instituted sales control
procedures, the sales manager said he had discussed it with Frank Alderson and
they came to the conclusion that the company was moving along very well and
there really was no need for tight control. He was, though, on the alert that,
should sales results taper off, it might be necessary to have some controls at
a future date. The sales manager also pointed out that he was so busy working
on a personal basis with the company sales personnel and the sales
representatives that he just didn’t have the time for budgets, quotas, sales
analysis and “things like that.”
Case 4
Questions:
Was there a need for sales
control at Alderson Products, Inc.? Why or why not?
What would have been the
components of a good sales control program for Alderson products? Be specific
and give your reasons for each element of sales control.
MARKETING MANAGEMENT
Note: Solve any 4 Cases Study’s
CASE: I Managing the Guinness brand in the face of
consumers’ changing tastes
1997 saw the US$19 billion merger of Guinness and GrandMet to form Diageo, the world’s largest drinks company.
Guinness was the group’s top-selling beverage after Smirnoff vodka, and the
group’s third most profitable brand, with an estimated global value of US$1.2
billion. More than 10 million glasses of the popular stout were sold every day,
predominantly in Guinness’s top markets: respectively, the UK, Ireland,
Nigeria, the USA and Cameroon.
However, the famous dark stout with the white, creamy head was causing
some strategic concerns for Diageo. In 1999, for the first time in the 241-year
of Guinness, sales fell. In early 2002 Diageo CEO Paul Walsh announced to the
group’s concerned shareholders that global volume growth of Guinness was down 4
per cent in the last six months of 2001 and, more alarmingly, sales were also
down 4 per cent in its home market, Ireland. How should Diageo address falling
sales in the centuries-old brand shrouded in Irish mystique and tradition?
The changing face of the Irish
beer market
The Irish were very fond of beer and even fonder of Guinness. With
close to 200 litres per capita drunk each year—the equivalent of one pint per
person per day—Ireland ranked top in worldwide per capita beer consumption,
ahead of the Czech Republic and Germany.
Beer accounted for two-thirds of all alcohol bought in Ireland in 2001.
Stout led the way in volume sales and accounted for 40 per cent of all beer
value sales. Guinness, first brewed in 1759 in Dublin by Arthur Guinness,
enjoyed legendary status in Ireland, a national symbol as respected as the
green, white and gold flag. It was by far the most popular alcoholic drink in
Ireland, accounting for nearly one of every two pints of beer sold. Its nearest
competitors were Budweiser and Heineken, which held 13 per cent and 12 per cent
of the market respectively.
However, the spectacular economic growth of the Irish economy since the
mid-1990s had opened up the traditional drinking market to new cultures and
influences, and encouraged the travel-friendly Irish to try other drinks. Beer
and in particular stout were losing popularity compared with wine or the
recently launched RTDs (ready-to-drinks) or FABs (flavoured alcoholic
beverages), which the younger generation of drinkers considered trendier and
‘healthier’. As a Euromonitor report explained: Younger consumers consider dark
beers and stout to be old fashioned drinks, with the perceived stout or ale
drinker being an old, slightly overweight man and thus not in tune with image
conscious youth culture.
Beer sales, which once accounted for 75 per cent of all alcohol bought
in Ireland, were expected to drop to close to 50 per cent by 2006, while stout
sales were forecast to decrease by 12 per cent between 2002 and 2006.
Giving Guinness a boost in its
home market
With Guinness alone accounting for 37 per cent of Diageo’s volume in
the market, Guinness/UDV Ireland was one of the first to feel the pain caused
by the declining popularity of beer and in particular stout. A Euromonitor
report in February 2002 explained how the profile of the Guinness drinker,
typically men aged 21-plus, was affected: The average age of Guinness drinkers
is rising and this is bringing about the worrying fact that the size of the
Guinness target audience is falling. The rate of decline is likely to quicken
as the number of less brand loyal, non-stout drinking younger consumers
increases.
The report continued:
In Ireland, in particular, the consumer base for Guinness is shrinking
as the majority of 18 to 24 year olds consistently reject stout as a product
relevant to their generation, opting instead to consume lager or spirits.
Effectively, one-third of young Irish men and half of young Irish women
had reportedly never tried Guinness. A Guinness employee provided another
explanation. Guinness is similar to coffee in that when you’re young you drink
it [coffee] with sugar, but when you’re older you drink it without. It’s got a
similar acquired taste and once you’re over the initial hurdle, you’ll fall in
love with it.
In an attempt to lure young drinkers to the somewhat ‘acquired’
Guinness taste (40 per cent of the Irish population was under the age of 24)
Diageo had invested millions in developing product innovations and brand
building in Ireland’s 10,000 pubs, clubs and supermarkets.
Product innovation
Until the mid-1990s most Guinness in Ireland was drunk in a pint glass
in the local pub. The launch of product innovations in the form of a new
cooling mechanism for draft Guinness and the ‘widget’ technology applied to
cans and bottles attempted to modernize the brand’s image and respond to
increasing competition from other local and imported stouts and lagers.
‘A perfect head’ for canned Guinness
In 1989, and at a cost of more than £10 million, Guinness developed an
ingenious ‘widget’ device for its canned draft stout sold in ‘off-trade’
outlets such as supermarkets and off-licences. The widget, placed in the bottom
of the can, released a gas that replicated the draft effect.
Although over 90 per cent of beer in Ireland was sold in ‘on-trade’
pubs and bars, sale of beer in the cheaper ‘off-trade’ channel were slowly
gaining in importance. The Guinness brand manager at the time, John O’Keeffe,
explained how home drinkers could now enjoy a smoother, creamier head similar
to the one obtained in a pub thanks to the new widget technology:
When the can is opened, the pressure causes the nitrogen to be released
as the widget moves through the beer, creating the classic draft Guinness
surge.
Nearly 10 years later, in 1997, the ‘floating widget’ was introduced,
which improved the effectiveness of the device.
A colder pint
In 1997 Guinness Draft Extra Cold was launched in Ireland. An
additional chilled tap system could be added to the standard barrel in pubs,
allowing the Guinness to be served at 4ºC rather than the normal 6ºC. By
serving Guinness at a cooler temperature, Guinness/UDV hoped to mute the bitter
taste of the stout and make it more palatable for younger adults, who were
increasingly accustomed to drinking chilled lager, particularly in the summer
A cooler image for Guinness
In October 1999 the widget technology was applied to long-stemmed
bottles of Guinness. The launch was supported by a US$2 million TV and outdoor
board campaign. The packaging—with a clear, shiny plastic wrap, designed to
look like a pint complete with creamy head—was quite a departure from the
traditional Guinness look.
The objective was to reposition Guinness alongside certain similarly
packaged lagers and RTDs and offer younger adults a more fashionable way to
drink Guinness: straight from the bottle. It also gave Guinness easier access
to the growing number of clubs and bars that were less likely to serve
traditional draft Guinness easier access to the growing number of clubs and
bars that were less likely to serve traditional draft Guinness, which could be
kept for only six to eight weeks and took two minutes to pour. The RTDs, by
contrast, had a shelf-life of more than a year and were drunk straight from the
bottle.
However, financial analyst
remained sceptical about the Guinness product innovations, which had no
significant positive impact on sales or profitability:
The last news about the success of the recently introduced innovations
suggests that they have not had a notably material impact on Guinness brand
performance.
Brand building
Euromonitor estimates that, in 2000, Diageo invested between US$230 and
US$250 million worldwide in Guinness advertising and promotions. However, with
a cost-cutting objective, the company reduced marketing expenses in both
Ireland and the UK up to 10 per cent in 2001 and the number of global Guinness
agencies from six to two.
Nevertheless, Guinness remained one of the most advertised brands in
Ireland. It was the leading cinema advertiser and, in terms of advertising, was
second only to the national telecoms provider, Eircom. Guinness was also
heavily promoted at leading sporting and music events, in particular those that
were popular with the younger age groups.
The ultimate tribute to the brand was the opening of the new Guinness
Storehouse in Dublin in late 2000, a sort of Mecca for all Guinness fans. The
Storehouse was also a fashionable visitor centre with an art gallery and
restaurants, and regularly hosted evening events. The company’s design brief
highlighted another key objective:
To use an ultramodern facility to breathe life into an ageing brand, to
reconnect an old company with young (sceptical) customers.
As the Storehouse’s design firm’s director, Ralph Ardill, explained:
Guinness Storehouse had become the top tourist destination in Ireland,
attracting more than half a million people and hosting 45,000 people for
special events and training.
The Storehouse also had training facilities for Guinness’s bartenders
and 3000 Irish employees. The quality of the Guinness pint remained a high
priority for the company, which not only developed pub-like classrooms at the
Storehouse but also employed teams of draft technicians to teach barmen how to
pour a proper pint. The process involved two steps—the pour and the top-up—and
took a total of 119.5 seconds. Barmen also needed to learn how to check that
the pressure gauges were properly set and that the proportion of nitrogen to
carbon dioxide in the gas was correct.
The uncertain future of the
Guinness brand in Ireland
Despite Guinness/DUV’s attempt to appeal to the younger generation of
drinkers and boost its fading image, rumours persisted in Ireland about the
brand future. The country’s leading and respected newspaper, the Irish times,
reported in an article in July 2001:
The uncertainty over its future all adds to the air of crisis that is
building around Guinness Ireland Group four months ago…The review is not
complete and the assumption is that there is more bad news to come.
In the pubs across Ireland, the traditional Guinness drinkers looked on
anxiously as the younger generation drank Bacardi Breezers, Smirnoff Ices or
Californian wines. Could the goliath Guinness survive another two centuries?
Was the preference for these new drinks just a fad or fashion, or did Diageo
need to seriously reconsider how it marketed Guinness?
A quick solution?
In late February 2002, Diageo CEO Paul Walsh revealed that the company
was testing technology to cut the waiting time for a pint of Guinness from 1
minute 59 seconds to 15-25 seconds. Ultrasound could release bubbles in the
stout and form the head instantly, making a pint of Guinness that would be
indistinguishable from one produced by the slower, traditional method.
‘A two-minute pour is not relevant to our customers today,’ Walsh said.
A Guinness spokeswoman continued, ‘We have got to move with the times and the
brand must evolve. We must take all the opportunities that we can. In outlets
where it is really busy, if you walk in after nine o’clock in the evening there
will be a cloth over the Guinness pump because it takes longer to pour than
other drinks. Aware that some consumers might not be attracted by the
innovation, she added ‘It wouldn’t be put everywhere—only where people want a
quick pint with no effect on the quality.’
Although still being tested, the ‘quick-pour pint’ was a popular topic
of conversation in Dublin pubs, among barmen and customers alike. There were
rumours that it would be introduced in Britain only; others thought it would be
released worldwide.
Some market commentators viewed the quick-pour pint as an innovative
way to appeal to the younger, less patient segment in which Guinness had
under-performed. Others feared that the young would be unconvinced by the
introduction, and loyal customers would be turned off by what they
characterized as a ‘marketing u-turn’.
Question:
1.
From a
marketing perspective, what has Guinness done to ensure its longevity?
2.
How
would you characterize the Guinness brand?
3.
What
could Guinness do to attract younger drinkers? And to retain its older loyal
customer base? Can both be done at the same time?
CASE: II The grey market
Introduction
The over-50s market has long been ignored by advertising and marketing
firms in favour of the market. The complexity of how to appeal to today’s
mature customers, without targeting their age, has proved just too challenging
for many companies. But this preoccupation with youth runs counter to
demo-graphic changes. The over-50s represent the largest segment of the
population, across western developed countries, due largely to the post-Second
World War baby boom. The sheer size of this grey market, which will continue to
grow as birth and mortality rates fall, coupled with its phenomenal spending
power, presents enormous opportunities for business. However, successfully
unleashing its potential will depend on companies truly understanding the
attitudes, lifestyles and purchasing interests of this post-war generation.
Demographic forces
Following the Second World War many countries experienced a baby boom
phenomenon as returning soldiers began families. This, coupled with a more
positive outlook on the future, resulted in the baby boom generation, born
between 1946 and 1964. Now beginning to enter retirement, this affluent group
globally numbers approximately 532 million. In Western Europe they account for
the largest proportion of the total population at 14.9%, followed closely by
14.2% in North America and 13.5 % in Australia.
Baby boomers are also tend to be very wealthy. Many are property owners
and may have gained an inheritance from parents or other relatives. They have
higher than average incomes or have retired with private pension plans. With
their children having flown the nest they have greater financial freedom and
more time to indulge themselves. Having worked all their lives, and educated
their children, many baby boomers do not believe it is their responsibility to
safeguard the financial future of their children by carefully protecting their
children’s inheritance. They are instead liquidating their assets, intent on
enjoying their later life to full, often through conspicuous consumption.
Based on research conducted by Euromonitor, the main areas of
expenditure in the baby boomer market are financial services, tourism, food and
drink, luxury cars, electrical/electronic goods, clothing, health products, and
DIY and gardening.
Figure 1 Global Baby boomer
market: % analysis by broad sector 2002 (% value)
Note: sectors valued on the basis of estimates by senior managers in
major companies in each sector, consumer expenditure and industry sector data.
Unsurprisingly the financial sector is the largest in this market. Baby
boomers are concerned with being financially secure in their retirement. An
ageing population, coupled with a rise in human longevity, is giving rise to a
pensions crisis across Western Europe. Baby boomers are therefore right to be
preoccupied with how they will maintain their lifestyle over the long term.
They are actively engaging in financial planning, both before and after
retirement. Popular financial service products include endowments, life
insurance, personal pensions, PEPs and ISAs.
Baby boomers have adventurous attitudes with a desire to see the world.
In their retirement foreign travel is a key expenditure. Given their greater
levels of sophistication and education, baby boomers are much more demanding of
holidays that suit their lifestyles. This group is very diverse, with holiday
interests ranging from action-packed adventures to culturally rich experiences.
Baby boomers want to maintain a youthful appearance in line with their
youthful way of living. Fear of becoming invisible is a genuine concern among
older generations. This image conciousness is reflected in their spending on
clothing, cosmetics and anti-ageing products. Luxury cars also a key status
symbols for this group.
The home is another area of expenditure. Once children have flown the
nest, many baby boomers redecorate the home to suit their needs. Electrical and
electronic purchases are key indulgences among these technologically savvy
consumers. Gardening is another pastime enjoyed by older generations. Health is
also a priority. Baby boomers invest in private health insurance and
over-the-counter pharmaceutical products to maintain their healthy lives.
Business opportunities
The sheer size of the grey market, which is getting bigger in many
countries—characterized by consumers with disposable income, ample free time,
interest in travel, concern about financial security and health, awareness of
youth culture and brands and desire for aspirational living—makes this market
enormously attractive to many business sectors. Pharmaceuticals, health and
beauty, technology, travel financial services, luxury cars, lavish food and
entertainment are key growth sectors for the grey market. However, successfully
tapping into this market will depend on companies truly understanding the
attitudes, lifestyles and purchasing interests of this post-war generation.
Communicating with this group is a tricky business, but, done right, it can be
hugely rewarding.
When targeting the older consumer it is important to target their
lifestyle and not their age. Older people do not want to be reminded, in a
patronizing way, of their age or what they should be doing now they are a
certain stage in life. With an interest in maintaining a youthful way of life
these consumers are interested in similar brands to those that appeal to
younger generations. The key for the companies is to find a way of making their
brands also appeal to an older consumer without explicitly targeting their age.
One tried-and tested method of targeting this group is to use nostalgia.
Mercedes Benz used the Janis Joplin song ‘Oh Lord won’t you buy me a Mercedes
Benz’ to great effect despite the obvious irony in that the song was written to
highlight the dangers of materialism! Volkswagen’s new retro-style Beetle has
also been popular among this group. In the tourism sector Saga Holidays, the
leader in holidays for the over-50s, has changed its product offering to
reflect changing trends among this group. In line with the more adventurous
attitudes of many older consumers it now offers more action-packed adventure
holidays to far-flung destinations.
More recently, Thomas Cook has rebranded it over-50s ‘Forever Young’
programme to reflect the diverse interest of its target customers. Its new
primetime brochure targets five distinct groups with the following holiday
types: ‘Discover’, ‘Learn’, ‘Relax’, ‘Active’ and ‘Enjoy Life’.
Conclusion
The over-50s represent the largest segment of the population across
Western developed countries. This affluent market is big and getting bigger.
Having ignored it for so long marketers are finally beginning to see the
enormous opportunities presented by the grey market. But conquering this market
will not be easy. The baby boomer generation is quite unlike its predecessors.
With a youthful and adventuresome spirit these ‘younger older people’ want to
be defined by their attitude and not by their age. Only time will tell whether
today’s marketers are up to the challenge.
Questions:
1.
Why is
the grey market so attractive to business?
2.
Identify
the influences on the purchasing behaviour of the over-50s consumer.
3.
Discuss
the challenges involved in targeting the grey market.
CASE: III Nivea: managing an umbrella brand
‘In many countries consumer are convinced that Nivea is a local brand,
a mistake which Beiersdoft, the German makers, take as a compliment.’
(Quoted on leading brand consultancy Wolff-Olins’ website,
www.wolff-olins.com)
An ode to Nivea’s success
In May 2003, a survey of ‘Global Mega Brand Franchises’ revealed that
the Nivea Cosmetics brand had presence in the maximum number of product
categories and countries. The survey, conducted by US-based ACNielsen, aimed at
identifying those brands that had ‘successfully evolved beyond their original
product categories’. A key parameter was the presence of these brands in
multiple product categories as well as countries.
Nivea’s performance in this study prompted a yahoo.com news article to
name it the ‘Queen of Mega Brands’. This title was appropriate since the brand
was present in over 14 product categories and was available in more than 150
countries. Nivea was the market leader in skin creams and lotions in 28
countries, in facial cleansing in 23 countries, in facial skin care in 18
countries, and in suntan products in 15 countries. In many of those countries,
it was reportedly believed to be a brand of local origin—having been present in
them for many decades. This fact went a long way in helping the brand attain
leadership status in many categories and countries (see Table 3).
The study covered 200 consumer
packaged goods brands from over 50 global manufacturers. The brands had to be
available in at least 15 of the countries studied; the same name had to be used
in at least three product categories and meet franchise in at least three of
the five geographical regions.
In its home country Germany, too, many of Nivea’s products were the
market leaders in their segments. This market leadership status translated into
superior financial performance. Between 1991 and 2001, Nivea posted
double-digit growth rates every year. For 2001, the brand generated revenues of
€2.5 billion, amounting to 55 per cent of the parent company’s (Beiersdoft)
total revenue for the year. The 120-year-old, Hamburg-based Beiersdoft has
often been credited with meticulously building the Nivea brand into the world’s
number one personal care brand. According to a survey conducted by ACNielsen in
the late 1990s, the brand had a 15 per cent share in the global skin care
products market. While Nivea had always been the company’s star performer, the
1990s were a period of phenomenal growth for the brand. By successfully
extending what was essentially a ‘one-product wonder’ into many different
product categories, Beiersdoft had silenced many critics of its umbrella
branding decision.
The marketing game for Nivea
Millions of customers across the world have been familiar with the
Nivea brand since their childhood. The visual (colour and packaging) and
physical attributes (feel, smell) of the product stayed on in their minds.
According to analysts, this led to the formation of a complex emotional bond
between customers and the brand, a bond that had strong positive under-tones.
According to a superbrands.com. my
article, Nivea’s blue colour denoted sympathy, harmony, friendship and loyalty.
The white colour suggested external cleanliness as well as inner purity.
Together, these colours gave Nivea the aura of an honest brand.
To customers, Nivea was more than a skin care product. They associated
Nivea with good health, graceful ageing and better living. The company’s
association Nivea with many sporting events, fashion events and other
lifestyle-related events gave the brand a long-lasting appeal. In 2001,
Franziska Schmiedebach, Beiersdoft’s Corporate Vice President (Face Care and
Cosmetics), commented that Nivea’s success over the decades was built on the
following pillars: innovation, brand extension and globalization (see Table 4
for the brand’s sales growth from 1995-2002)
Innovation and brand extensions
Innovation and brand extensions went hand in hand for Nivea. Extensions
had been made back in the 1930s and had continued in the 1960s when the face
care range Nivea Visage was launched. However, the first major initiative to
extend the brand to other products came in the 1970s. Naturally, the idea was
to cash in on Nivea’s strong brand equity. The first major extension was launch
of ‘Nivea For Men’ aftershave in the 1970s. Unlike the other aftershaves
available in market, which caused the skin to burn on application, Nivea For
Men soothed the skin. As a result, the product became a runaway success.
The positive experience with the aftershave extension inspired the
company to further explore the possibilities of brand extensions. Moreover,
Beiersdoft felt that Nivea’s unique identity, the values it represented
(trustworthiness, simplicity, consistency, caring) could easily be used to make
the transition to being an umbrella brand. The decision to diversify its
product range was also believed to have influenced by intensifying competitive
pressures. L’Oreal’s Plenitude range, Procter & Gamble’s Oil of Olay range,
Unilever’s Pond’s range, and Johnson & Johnson’s Neutrogena range posed
stiff competition to Nivea.
Though Nivea was the undisputed market leader in the mass-market face
cream segment worldwide, its share was below Oil of Olay’s, Pond’s and
Plenitude’s in the US market. While most of the competing brands had a wide
product portfolio, the Nivea range was rather limited. To position Nivea as a
competitor in a larger number of segments, the decision to offer a wider range
inevitable.
Beiersdoft’s research centre—employing over 150 dermatological and
cosmetics researchers, pharmacists and chemists—supported its thrust on
innovations and brand extensions. During the 1990s, Beiersdoft launched many
extensions, including men’s care products, deodorants (1991), Nivea Body
(1995), and Nivea Soft (1997). Most of these brand extension decisions could be
credited to Rolf Kunisch, who became Beiersdoft’s CEO in the early 1990s. Rolf Kunisch firmly believed in the company’s
‘twin strategy’ of extension and globalization.
By the beginning of the twenty-first century, the Nivea umbrella brand
offered over 300 products in 14 separate segments of the health and beauty
market (see Table 5 and Figure 2 for information on Nivea’s brand extensions).
Commenting on Beiersdoft’s belief in umbrella branding, Schmiedebach said,
‘Focusing your energy and investment on one umbrella brand has strong
synergetic effects and helps build leading market positions across categories.’
A noteworthy aspect of the brand extension strategy was the company’s ability
to successfully translate the ‘skin care’ attributes of the original Nivea
cream to the entire gamut of products.
The company ensured that each of its products addressed a specific need
of consumers. Products in all the 14 categories were developed after being
evaluated on two parameters with respect to the Nivea mother brand. First, the
new product had to be based on the qualities that the mother brand stood for
and, second, it ha to offer benefits that were consistent with those that the
mother brand offered. Once a new product cleared the above test, it was
evaluated for its ability to meet consumer needs and its scope for proving
itself to be a leader in the future. For instance, a Nivea shampoo not only had
to clean hair, it also had to be milder and gentler than other shampoos in the
same range.
Beiersdoft developed a ‘Nivea Universe’ framework for streamlining and
executing its brand extension efforts. This framework consisted of a central
point, an inner circle of brands and an
outer circle of brands (see Figure 2)
The centre of the model housed the ‘mother brand’, which represented
the core values of trustworthiness, honesty and reliability. While the brands
in the inner circle were closely related to the core values of the Nivea brand,
the brands in the outer circle were seen as extensions of these core values.
The inner-circle brands strengthened the existing beliefs and values associated
with the Nivea brand. The outer circle brands, however, sought to add new
dimensions to the brand’s personality, thereby opening up avenues, for future
growth.
The ‘global-local’ strategy
The Nivea brand retained its strong German heritage and was treated as
a global brand for many decades. In the early days, local managers believed
that the needs of customers from their countries were significantly different
from those of customers in other countries. As a result, Beiersdoft was forced
to offer different product formulations an packaging, and different types of
advertising support. Consequently, it incurred high costs.
It was only in the 1980s that Beiersdoft took a conscious decision to
globalize the appeal of Nivea. The aim to achieve a common platform for the
brand on a global scale and offer customers from different parts of the world a
wider variety of product choices. This was radical departure from its earlier
approach, in which product development and marketing efforts were largely
focused on the German market. The new decision was not only expected to solve
the problems of high costs, it was also expected to further build the core
values of the brand.
To globalize the brand, the company formulated strategies with the help
of a team of ‘international’ experts with ‘local expertise’. This team
developed new products for all the markets. Their responsibilities included,
among others, deciding about the way in which international advertising
campaigns should be adapted at the local level. The idea was to leave the
execution of strategic decisions to local partners. However, Beiersdoft
monitored the execution to ensure that it remained in line with the global
strategic plan.
This way, Beiersdoft ensured that the nuances of consumer behaviour at
the local level understood and that their needs were addressed. Company sources
claimed that by following the above approach, it was easy to transfer know-how
between headquarters and the local offices. In addition, the motivation level
of the local partners also remained on the higher side.
The company established a set of guidelines that regulated how the
marketing mix of a new product/brand was to be developed. These guidelines
stipulated norms with respect to product, pricing, promotion, packaging and
other related issues. For instance, a guideline regarding advertising read,
‘Nivea advertising is about skin care. It should be present visually and
verbally. Nivea advertising is simple, it is unpretentious and human.’
Thus all advertisements for any Nivea product depicted images related
to ‘skin care’ and ‘unpretentious human life’ in one way or the other. The
company consciously decided not to use supermodels to promote its products. The
predominant colours in all campaigns remained blue and white. However, local
issues were also kept in mind. For instance, in the Middle East, Nivea relied
more on outdoor media as it worked out to be much more cost-effective. And
since showing skin in the advertisements went against the region’s culture, the
company devised ways of advertising skin without showing skin.
Many brand management experts have spoken of the perils of umbrella
management, such as brand dilution and the lack of ‘change’ for consumers.
However, the umbrella branding strategy worked for Beiersdoft. In fact, the
company’s growth was the most dynamic since its inception during 1990s—the
decade when the brand extension move picked up momentum. The strong yearly
growth during the 1990s and the quadrupling of sales were attributed by company
sources to the thrust on brand extension.
Questions
1.
Discuss
the reasons for the success of the Nivea range of products across the world.
Why did Beiersdoft decide to extend the brand to different product categories?
In the light of Beiersdoft’s brand extension of Nivea, critically comment on
the pros and cons of adopting an umbrella branding strategy. Compare the use of
such a strategy with the use of an independent branding strategy.
2.
According
to you, what are the core values of the Nivea brand? What type of brand
extension framework did Beiersdoft develop to ensure that these core values id
not get diluted? Do you think the company was able to protect these core
values? Why/why not?
3.
What
were the essential components of Beiersdoft’s global expansion strategy for
Nivea? Under what circumstances would a ‘global-strategy-local execution’
approach be beneficial for a company? When and why should this approach be
avoided?
CASE: IV Pret a Manger: passionate about food
Introduction
Pret a Manger (French for ‘ready to eat’) is a chain of coffee shops
that sells a range of upmarket, healthy sandwiches and desserts as well as a
variety o coffees to an increasingly discerning set of lunchtime customers.
Started in London, England, in 1986 by two university graduates, Pret a Manger
has more than 120 stores across the UK. In 2002 it sold 25 million sandwiches
and 14 million cups of coffee, and had a turnover of over £100 million.
Buckingham Palace reportedly orders more than £1000 worth of sandwiches a week
and British Prime Minister Tony Blair has had Pret sandwiches delivered to number 10 Downing Street for working
lunches. The company also has ambitious plans to expand further—it already has
stores in New York, Hong Kong and Tokyo,
and has set its sights on further international growth.
Background and company history
In 1986, Pret a Manger was founded with one shop, in central London,
and a £17,000 loan, by two property law graduates, Julian Metcalf and Sinclair Beecham,
who had been students together at the University of Westminster in the early
1980s. At that time the choice of lunchtime eating in London and other British
cities was more limited than it is today. Traditionally, some ate in
restaurants while many favoured that well-known British institution, the pub,
as a choice for lunchtime eating and drinking. There was, however, a growing
awareness among many people of the benefits of healthy eating and a healthy
lifestyle, and lunchtime habits were changing. There was a general trend
towards taking shorter lunch brakes and, among office workers, to take lunch at
their desks. For those who wanted food to take away, the choice in fast food
was dominated by the large chains such as McDonald’s, Burger King and Kentucky
Fried Chicken (now KFC) while other types of carry-out food, such as pizzas,
were also available.
Sandwiches also played an important part in British lunchtime eating.
Named after its eighteenth-century inventor, the Earl of Sandwich, the humble
sandwich had long been a popular British lunch choice, especially for those
with little time to spare. Prior to Pret’s arrival on the scene, sandwiches
were sold mainly either pre-packed in supermarkets and high-street variety
chain stores such as Marks and Spencer and Boots, or in the many small sandwich
bars that were to be found in the business districts of large cities like
London, Sandwich bars were usually small, independently owned or family run
shops that made sandwiches to order for customers who waited in a queue, often
out on to the pavement outside.
Dissatisfied with the quality of both the food and service from
traditional sandwich bars, Metcalf and Beecham decided that Pret a Manger
should offer something different. They wanted Pret’s food to be high quality
and healthy, and preservative and additive free. In the beginning, they shopped
for the food themselves at local markets and returned to the store where they
made the sandwiches each morning. Pret’s offering was based around
premium-quality sandwiches and other health-orientated lunches including
salads, sushi and a range of desserts, priced higher than at traditional
sandwich bars, and sold pre-packed in attractive and convenient packaging ready
to go. There was also a choice of different coffees, as well as some healthy
alternatives. Service aimed to be fast and friendly go give customers a minimum
of queuing time.
Pret a Manger: ‘Passionate
about What We do’
Pret a Manger strongly emphasizes the quality of its products. Its
promotional material and website claims that it is:
‘passionate about food, rejecting the use of obscure chemicals,
additives and preservatives common in so much of the prepared and fast food on
the market today…it there’s a secret to our success so far we like to think its
determination to focus continually on quality—not just our food, but in every
aspect of what we do’.
Great importance is also placed on freshness. Unlike those sold in
high-street shops or supermarkets, Pret’s sandwiches are all hand-made by staff
in each shop starting at 6.30 every morning, rather than being prepared and
delivered by a supplier or from a central location. Metcalf and Beecham believe
this gives their sandwiches a freshness and distinctiveness. All food that
hasn’t been sold in the shops by the end of the day is given away free to local
charities.
Careful sourcing of supplies for quality has also always been
important. Genetically modified ingredients are banned and the tuna Pret buys,
for example, must be ‘dolphin friendly’. There is also a drive for constant
product improvement and innovation—the company claims that its chocolate
brownie dessert has been improved 33 times over the last few years—and, on
average, a new product is tried out in the stores every four days. Aware that
some of its customers are increasingly health conscious, Pret’s website menu
carefully lists not only what is available, but also the ingredients and
nutritional values in terms of energy, protein, fats and dietary fibre for each
item.
The level and quality of service from staff in the shop is a critical
factor. The stores are self-service, with customers helping themselves to
sandwiches and other products form the supermarket-style refrigerated cabinets.
Staff at the counter at the back of the store then serve customers coffee and
take payment. Service is friendly, smiling and efficient, in contrast to many
retail and restaurant outlets in Britain where, historically, service quality
has not always been high. Prêt puts an emphasis on human resource management issues
such as effective recruitment and training so as to have frontline staff who
can show the necessary enthusiasm and also remain fast and courteous under the
pressure of a busy lunchtime sales period. These staff are usually young and
enthusiastic, some are students, many are international. The pay they receive
is above the fast-food industry average and staff turnover is 98 per cent a
year, which sounds high—however, this is against an industry norm of around 150
per cent. In 2001, Pret had 55,000 applications for 1500 advertised vacancies.
Recently, Fortune magazine
voted Pret one of the top 10 companies to work for in Europe. According to its
own promotional recruitment material, Pret is an attractive and fun place to
work: ‘We don’t work nights, we wear jeans, we party!’ Service quality is
checked regularly by the use of mystery shoppers: if a shop receives a good
report, then the staff there receive a 75p an hour bonus in the week of the
visit. Head office managers also visit stores on a regular basis and every
three or four months every one of these managers works as a ‘buddy’, where they
spend a day making sandwiches and working on the floor in one of the shops to
help them keep in touch with what is going on. Store employees work in teams
and are briefed daily, often on the basis of customer responses that come in
from in-store reply cards, telephone calls and the company website. The
website, which, lists the names and phone numbers of its senior executives,
actively invites customers to comment or complain about their experience with
Pret, and encourages them to contact the company. Great importance is placed on
this customer feed-back, both positive and negative, which is discussed at
weekly management meetings.
The design of the stores is also distinctive. Prominently featuring the
company logo, they are fitted out in a high-tech with metal cladding and
interiors in Pret’s own corporate dark red colour. Each store plays music,
helping to create a stylish and lively atmosphere. Although the shops mainly
sell carry out food and coffee in the morning and through the lunchtime period,
many also have tables and seating where customers can drink coffee and eat
inside the store or, weather permitting, on the pavement outside.
Growth and competition
Three years after the first Pret shop was launched another was opened
and, after that, the chain began to grow so that, by 1998, there were 65
throughout London. In the late 1990s stores were also opened in other British
cities such as Bristol, Cambridge and Manchester. Although growth in the UK has
been rapid—between 2000 and 2002 the company opened 40 new outlets and there
are over 120 throughout Britain—Pret’s policy has always been to own and manage
all its own stores and not to franchise to other operators. In 2002, £1 million
was spent in launching an Internet service that enables customers to order
sandwiches online.
Plans for international growth have been more cautious. In 2000 the
company made its first move overseas when it opened a shop near Wall Street in
New York. However, there were problems on several fronts in moving into the
USA. Metcalf is quoted saying, ‘As a private company its very difficult to set
up abroad. We didn’t know where to begin in New York—we ended up having all the
equipment for the shop made here and shipped over.’ There were also staffing
and service quality difficulties—Pret reportedly found it difficult to recruit
people in New York who had the required friendliness to serve in the stores and
had to import British staff. Despite these problems, several other shops in New
York have followed and, in 2001, Pret opened its first outlet in Hong Kong.
During the 1990s, coffee shops boomed as the British developed a
growing taste for drinking coffee in pavement cafes, and competition for Pret
grew as other chains entered the fray. Rivals like Coffee Republic, Caffè Nero,
Costa Coffee (now owned by leisure group Whitbread) Aroma (owned by McDonald’s)
and American worldwide operator Starbucks all came into the market, as well as a
number of smaller independents. All these chains offer a wide range of coffees
but with varying product offerings in terms of food, pricing and style
(Starbucks, for example, offers comfortable arm-chairs around tables, which
encourage people to linger or work in a laptop in the store). In a London
shopping street it is not uncommon to see three or four rival outlets next door
to or within a few yards of each other. However, it quickly became clear that
the sector was overcrowded and, apart from Starbucks, some of the other chains
reportedly struggled to make a profit. In 2002 Coffee Republic was taken over
by Caffè Nero, which also eventually acquired the ailing Aroma chain from
McDonald’s. Costa Coffee was the largest chain overall with over 300 shops throughout
Britain, while Starbucks was expanding aggressively and aimed to have an
eventual 4000 stores worldwide.
The future
As work and lifestyles get busier, the demand for convenience and fast
foods continues to grow. In 2000, some estimates put the total value of the
fast-food market in Britain, excluding sandwiches, at over £6 billion and
growing about £200-£300 million a year. While the growth in sales of some types
of fast food, like burgers, was showing signs of slowing down, sandwiches
continued to increase in popularity so that by 2002 sales wee an estimated £3
billion. Customers are also getting more health conscious and choosy about what
they eat and, increasingly, want nutritional information about food from
labelling and packaging.
In January 2001, in a surprise move, Pret’s two founders sold a 33 per
cent stake in the company to fast-food giant McDonald’s for an estimated £25
million. They claim that McDonald’s will not have any influence over what Pret
does or the products it sells, but that the investment by McDonald’s will help
their plan for future development. According to Metcalf:
‘We’ll still be in charge—we’ll have the majority of shares. Pret will
continue as it does… The deal wasn’t about money—we could have sold the shares
for much more to other buyers but they wouldn’t have provided the support we
need.’
After a long run of success, Pret has ambitious plans for the future.
It hopes to open at least 20 new stores a year in the UK. In late 2002 it
opened its first store in Tokyo, Japan, in partnership with McDonald’s. The
menu there is described as being 75 per cent ‘classic Pret’ with the remaining
25 per cent designed more to please local tastes. In other international
markets, the plan is to move cautiously—Pret’s first move will be to open more
stores in New York and Hong Kong, where it has already been successful.
Questions
1.
How has
Pret a Manger positioned its brand?
2.
Explain
how the different elements of the services marketing mix support and contribute
to the positioning of Pret a Manger.
Case V ‘Fast Fashion’: exploring how retailers get
affordable fashion on to the high street
The term ‘fast fashion’ has become very much de rigueur within the
fashion retailing industry. Retailers have to react quickly to changes in the
market, possess lean manufacturing operations, and utilize responsive supply
chains in order to get the latest fashions to the mass market. Stores such as
H&M, Zara, Mango, Top Shop and Benetton have been tremendously successful
in being responsive to the fashion needs of the market. Excellent logistical
and marketing information systems are seen as key to the implementation of the
‘fast fashion’ concept. ‘Fast fashion’ is the emphasis of putting fashionable
and affordable design concepts, which match consumer demand, on to the high
street as quickly as possible. These retailers get sought-after fashions into
stores in a matter of weeks, rather than the previous industry norm, which
relied on production lead times ranging from six months to a year. The concept
of ‘fast fashion’ relies of a number of central components: excellent marketing
information systems, flexible production and logistics operations, excellent
communications within the supply chain, and leveraging advanced IT systems.
These components allow stores to track consumer demand, and deliver a rapid
response to changes in the marketplace. The results are invigorating for
fashion retailers, with ‘fast fashion’ retailers’ sales growing by 11 per cent,
compared with the industry norm of 2 per cent.
Within the fashion industry a number of different levels exist, the
exclusive haute couture ranges (made to measure), the designer ready-to-wear
collections, and then copycat designs by mass-market retailers. Fashion has now
gone to the high street, becoming more democratic for the mass market.
The traditional fashion- retailing model was seasonal, whereby
retailers would typically launch two seasons: spring and autumn collections.
Fashion retailers would buy for these collections from their supplier network a
year in advance, and allow for between 20-30 per cent of their purchasing
budgets open to specific fashion changes in the market. Typically, retailers
would have perennial offerings that rarely change as well as catering to the
whims of fashion, such as basic T-shirts and jeans.
Now, through the ‘fast fashion’ philosophy, new items are being stocked
in stores more frequently. These newer product ranges stimulate shoppers into
frequenting these stores on a more regular basis, in some cases weekly to see
new fashion items. Savvy brand-loyal shoppers know when new stock is being
delivered to their favourite store. Through increased stock replenishment of
new, fashionable items, consumers are increasing their footfall to these
stores, and furthermore these stores are developing brand images as cutting
edge, trendy, and fashionable. This increased footfall, where shoppers
regularly visit a store, eliminates the need for major expenditure on advertising
and promotion. Also the concept of ‘fast fashion’ is helping to improve sales,
conversion ratios within these stores. Due to the limited supply of designs
available, this creates an aura of exclusivity for these garments, further
enhancing the brands of these ‘fast fashion retailers’ as leading fashion
brands.
Famous for ABBA, Volvos and IKEA, now Sweden has another international
success story: H&M. The basic business premise behind H&M is ‘fashion
and quality at the best price’. The company now has over 1068 stores in 21
countries. H&M sources 50 per cent of its goods in Europe and the remainder
in low-cost Asian countries. Sourcing decisions are dependent on cost, quality,
lead times and export regulations. The lead times for items can vary from a
minuscule two weeks to six months, dependent on the item itself. H&M
believes that having very short lead times can be beneficial in terms of stock
control, however it is not the most important criteria for all items. Basic
clothing garments can have lead times running into months, due to consistent
demand. However, items that are more trend- and fashion-conscious require very
short lead times, to match demand. H&M is now also in the process of
teaming up with prestigious designers like Karl Lagerfeld to create affordable
fashion ranges.
The firm utilizes close relationships with its network of production
offices and 700 suppliers. Unlike some other clothing retailers, H&M
outsources all of its production to independent suppliers. The dyeing of
garments is postponed until as late as possible in the production process to
allow greater flexibility and adaptation to the whims of the fashion buyer.
Items from around the world are shipped to a centralized transit warehouse in
Hamburg, Germany, where quality checks are undertaken, and the items are
allocated to individual stores or placed in centralized storage. Items that are
placed in this ‘call-off warehouse’ are allocated to stores where there is more
demand for the particular item. For example, if pairs of a particular style of
jeans are selling well in London, more jeans are shipped from Hamburg to
H&M’s London stores.
The production and logistics facilities for these ‘fast fashion’
retailers are colossal in that each design may have several colour variants,
and the retailer needs to produce an array of garments in a number of different
sizes. The number of stock keeping units (SKUs) is therefore staggering. As a
result, companies require a very reliable and sophisticated information
system—for example, Zara has to deal with over 300,000 new SKUs every year.
Benetton has a fully automated sorting and shipping system, managing over 110 million
items a year, with a staff of only 24 employees in its centralized distribution
centres. Mango, another successful Spanish fashion chain, also utilizes a
high-tech distribution system, which can sort and pack 12,000 folded items an
hour and 7000 hanging garments an hour.
Many in the industry see Zara as the classic illustration of the
concept of ‘fast fashion’ in operation. The company can get a garment from
design, through production and ultimately on to the shelf in a mere 15 days.
The norm for the industry has typically run to several months. The group’s
basic business philosophy is to seduce customers with the latest fashion at
attractive prices. It has grown rapidly as a fashion retail powerhouse by
adopting four central strategies: creativity and innovation; having an
international presence; utilizing a multi-format strategy; and through
vertically integrating its entire supply chain. For the ‘fast fashion’ concept
to be successful, it requires close relationships between suppliers and retailers,
information sharing and utilization of technology. Information is utilized
along the entire supply chain, according to the demand. It controls design,
production and the logistics elements of the business. Real-time demand feeds
the production systems.
Zara is part of the Inditex group of fashion retail brands. This group
adopts a multi-format strategy with different store brands targeting different
types of customers. Zara is its key fashion-retailing brand. Zara opened its
first store in 1975 in Spain and has now become a fashion powerhouse, operating
in four continents, with 729 stores, located in over 54 countries. It has
become very hip all over the world, for its value for money and stylish
designs. The chain is building large numbers of brand devotees because of its
fashionable designs, which are in tune with the very latest trends, and a very
convincing price-quality offering. Each of the different store brands (outlined
in Table- 7) needs to be strongly differentiated in order for the strategy to work
effectively.
Zara does not undertake any conventional advertising, except as a
vehicle for announcing a new store opening, the start of sales of seasons. The
company uses the stores themselves as its main promotional strategy, to convey
its image. Zara tries to locate its stores in prime commercial areas. Deep
inside the lairs of its corporate headquarters, 25 full-scale store windows are
set up, whereby Zara window designers can experiment with design layouts and
lighting. The approved design layouts are shipped out to all Zara’s stores, so
that a Zara shop front in London will be the same as in Lisbon and throughout
the entire chain. The store itself is the company’s main promotional vehicle.
One of Zara’s key philosophies was the realization that fashion, much
like food, has a ‘best before’ date: that fashion trends change rapidly. What
style consumers want this month may not be same in two months’ time. Fashion
retailers have to adapt to what the marketplace wants for the here and now. The
company is guilty of under-stocking garments, as it does not want to be left
with obsolete or out-of-fashion items. The key driving force behind its success
is to minimize inventory levels, getting product out on to the retail floor
space, and by being responsive to the needs of the market. Zara uses its stores
to find out what consumers really want, designs are selling, what colours are
in demand, which items are hot sellers and which are complete flops. It uses a
sophisticated marketing information system to provide feedback to headquarters
and allow it to respond to what the marketplace wants. Similarly, Mango uses a
computerized logistical system that allows the matching of clothes designs to
particular stores based on personality traits and even climate variances (i.e.
‘It this garment suitable for the Mediterranean Summer?). This sophisticated IT
infrastructure allows for more responsive market-led retailing, matching
suitable clothing lines to compatible stores.
At the end of each day, Zara sales assistants report to the store
manager using wireless headsets, to communicate inventory levels. The stores
then report back to Zara’s design and distribution departments on what
consumers are buying, asking for or avoiding. Both hard sales data and soft
data (i.e. customer feedback on the latest designs) are communicated directly
back to the company’s headquarters, through open channels of communication.
Zara’s 250 designers use market feedback for their next creations. Designers
work hand in hand with market analyst, in cross-functional teams, to pick up on
the latest trends. Garments are produced in comparatively small production
runs, so as not to be over-exposed if a particular item is a very poor seller.
If a product is a poor seller, it is removed after as little as two weeks.
Roughly 10 per cent of stock falls into this unsold category, in direct
contrast to industry norms of between 17 and 20 per cent. Zara produces nearly
11,000 designs a year. Stock items are seen as assets that are extremely perishable
and, if they are sitting on shelves or racks in a warehouse, they are simply
not making money for the organization.
In the course of one year alone, Zara has been able to launch 24
different collections into its network of stores. After designs have been
approved, fabrics are dyed and cut by highly automated production lines. These
pre-cut pieces are then sent out of nearly 350 workshops in northern Spain and
Portugal. These workshops employ nearly 11,000 ‘grey economy’ workers mainly
women, who may want to supplement their income. Seamstresses stitch the pre-cut
pieces into garments using easy-to-follow instructions supplied by Zara. The
typical seamstress’s wage in Zara’s workshop network is extremely competitive
when compared with those in ‘third world’ countries where other fashion
retailers mainly outsource their production. Furthermore, the proximity of
these workshops allows for greater flexibility and control, Zara achieves
greater control over its supply chain through having a high degree of
integration within the supply chain. By owning suppliers, Zara has greater
control production capacities, quality and scheduling. This is in stark
contrast to Benetton, which is close to being a virtual organization,
outsourcing production to third-party suppliers and directly owning only a
handful of its stores, the majority being franchises or partner stores.
The finished garments are then sent back to Zara’s colossal
state-of-the-art logistics centre. Here they are electronically tagged, quality
control double-checks them, and then they are sorted into distribution lots,
ensuring the items arrive at their ultimate destinations. Each item is tagged
with pricing information. There is no pan-European pricing for Zara’s products:
prices are different in each national market. Zara believes each national
market has its own particular nuances, such as higher salaries or higher
taxation, therefore it has to adjust the price of each garment to make it
suitable in each country and to reflect these differences. Shipments leave La
Coruňa bound for every one of the Zara stores in over 54 countries twice a
week, every week. The company’s average turnaround time from designing to
delivery of a new garment takes on average 10 to 15 days, and delivery of goods
takes a maximum of 21 days, which is unparalleled in an industry where lead
times are usually months, not days. Zara’s business model tries to fulfil
real-time fashion retailing and not second-guessing what consumers’ needs are
for next season, which may be six months away. As a result of Zara utilizing
this ultra-responsive supply chain, 85 per cent of its entire product range
obtains full ticket price, whereas the industry norm is between 60 and 70 per
cent.
The successful adoption of the ‘fast fashion’ concept by these
international retailers has drastically altered the competitive landscape in
apparel retailing. Consumers’ expectations are also rising with these improved
retail offerings. Clothes shoppers are seeking out the latest fashions at
value-for-money prices in enticing store environments. Now other
well-established high-street fashion retailers have to adapt to these
challenges, by being more responsive, cost efficient, speedy and flexible in
their operations. The rag trade is churning out the latest value-for-money
fashions at breakneck speed. ‘Fast fashion’ is what the marketplace is
demanding.
Questions
1.
Discuss
how supply chain management can contribute to the marketing success of these
retailers.
2.
Discuss
the central components necessary for the fast fashion concept to work
effectively.
3.
Critically
evaluate the concept of ‘market-driven supply’, discussing the merits and
pitfalls of its implementation in fashion retailing.
MARKETING MANAGEMENT
Note: Solve any 4 Cases Study’s
CASE: I Playing to a new beat:
marketing in the music industry
Good old fashioned rock ‘n’ roll
could be dead. If a mobile phone ringtone in the shape of the vocalizations of
the animated Crazy Frog dominates the billboard charts for months on end, then
it could well signal the death knell for the industry, and how it operates. If
this ubiquitous amphibian’s aurally annoying song, converted from a mobile
phone ringtone, outsold even mainstay acts such as Oasis and Coldplay, why
should music companies invest millions in cultivating fresh musical talent,
hoping for them to be the next big thing, when their efforts can be beaten by
basic synthesizer music? The industry is facing a number of challenges that it
has to address, such as strong competition, piracy, changing delivery formats,
increasing cost pressures, demanding pri-madonnas and changing customer needs.
Gone are the days when music moguls were reliant on sales from albums alone,
now the industry trawls for revenue from a variety of sources, such as
ringtones, merchandising, concerts, and music DVDs, leveraging extensive back
catalogues, and music rights from advertising, movies and TV programming.
The music industry is in a state
of flux at the moment. The cornerstone of the industry—the singles chart—has
been facing terminal decline since the mid-1990s. Some retailers are now not
even stocking singles due to this marked freefall. Some industry commentators
blame the Internet as the sole cause, while others point to value differences
between the price of an album and the price of a single as too much. Likewise,
some commentators criticize the heavy pre-release promotion of new songs, the
targeting of ever-younger markets by pop acts, and the explosion of digital television
music channels as root causes of the single’s demise. The day when the typical
record buyer browses through rows of shelves for a much sought-after band or
song on a Saturday afternoon may be thing of the past.
Long-term success stories for the
music industry are increasingly difficult to develop. The old tradition of
A&R (which stands for ‘Artists & Repertoire’) was to sign, nurture and
develop musical talent over a period of years. The industry relied on
continually feeding the system with fresh talent that could prove to be the
next big thing and capture the public imagination. Now corporate short-term
thinking has enveloped business strategies. If an act fails to be an immediate
hit, the record label drops them. The industry is now characterized by an
endless succession of one-hit wonders and videogenic artist churning out
classic cover songs, before vanishing off the celebrity radar. Four large music
labels now dominate the industry (see Table 1), and have emerged through years
of consolidation.
The ‘big four’ labels have the
marketing clout and resources to invest heavily in their acts, providing them
with expensive videos, publicity tours and PR coverage. This clout allows their
acts to get vital airplay and video rotation on dedicated TV music channels.
Major record labels have been accused of offering cash inducements of gifts to
radio stations and DJs in an effort to get their songs on playlists. This
activity is known in the industry as ‘radio payola’.
Consumer have flocked to the
Internet, to download, to stream, to ‘rip and burn’ copyrighted music material.
The digital music revolution has changed the way people listen, use and obtain
their favourite music. The very business model that has worked for decades,
buying a single or album from a high-street store, may not survive. Music
executives are left questioning whether the Internet will kill the music
business model has been fundamentally altered. According to the British Phonographic
Industry (BPI), it estimated that 8 million people in the UK are downloading
music from the Internet—92 per cent of them doing so illegally. In 2005 alone,
sales of CD singles fell by a colossal 23 per cent. To put the change into
context, the sales of digital singles increased by 746.6 per cent in 2005.
Consumers are buying their music through different channels and also listening
to their favourate songs through digital media rather than through standard CD,
cassette or vinyl. The emergence of MP3 players, particularly the immensely
popular Apple iPod, has transformed the music landscape even further. Consumers
are now downloading songs electronically from the Internet, and storing them on
these digital devices or burning them onto rewritable CDs.
Glossary of online music jargon
Streaming: Allows the user to listen to or watch a file as it is
being simultaneously downloaded. Radio channels utilize this technology to
transmit their programming on the Internet.
‘Rip n burn’: Means downloading a song or audio file from the
Internet and then burning them onto rewritable CDs or DVD.
MP3 format: MP3 is a popular digital music file format. The sound
quality is similar to that of a CD. The format reduces the size of a song to
one-tenth of its original size allowing for it to be transmitted quickly over
computer networks.
Apple iPod: The ‘digital
jukebox’ that has transformed the fortunes of the pioneer PC maker. By the end
of 2004 Apple is expected to have sold 5 million units of this ultra-hip
gadget. It was the ‘must-have item’ for 2003. The standard 20 GB iPod player
can hold around 5000 songs. Other hardware companies, such as Dell &
Creative Labs, have launched competing devices. These competing brands can retail
for less than £75.
Peer-to-peer networks (P2P): These networks allow users to share
their music libraries with other net users. There is no central server, rather
individual computers on the Internet communicating with one another. A P2P
program allows users to search for material, such as music files, on other
computers. The program lets users find their desired music files through the
use of a central computer server. The system works lime this; a user sends in a
request for a song; the system checks where on the Internet that song is located;
that song is downloaded directly onto the computer of the user who made the
request. The P2P server never actually holds the physical music files—it just
facilitates the process.
The Internet offers a number of
benefits to music shoppers, such as instant delivery, access to huge music
catalogues and provision of other rich multi-media material like concerts or
videos, access to samples of tracks, cheaper pricing (buying songs for 99p
rather than an expensive single) and, above all, convenience. On the positive
side, labels now have access to a wider global audience, possibilities of new
revenue streams and leveraging their vast back catalogues. It has diminished
the bargaining power of large retailers, it is a cheaper distribution medium
than traditional forms and labels can now create value-laden multimedia
material for consumers. However, the biggest problem is that of piracy and
copyright theft. Millions of songs are being downloaded from the Internet
illegally with no payment to the copyright holder. The Internet allows surfers
to download songs using a format called ‘MP3’, which doesn’t have inbuilt
copyright protection, thus allowing the user to copy and share with other
surfers with ease. Peer to peer (P2P) networks such as Kazaa and Grokster have emerged
and pose an even deadlier threat to the music industry—they are enemies that
are even harder to track and contain. Consumers can easily source and download
illegal copyrighted material with considerable ease using P2P networks (see
accompanying box).
A large number of legal download
sites have now been launched, where surfers can either stream their favourite
music or download it for future use in their digital libraries. This has been
due to the rapid success of small digital medial players such the Apple iPod.
The legal downloading of songs has grown exponentially. A la carte download
services and subscription-based services are the two main business models.
Independent research reveals that the Apple’s iTunes service has over 70 per
cent of the market. Highlighting this growing phenomenon of the Internet as an
official channel of distribution, new music charts are now being created, such as
the ‘Official Download Chart’. Industry sources suggest that out of a typical
99p download, the music label get 65p, while credit card companies get 4p,
leaving the online music store with 30p per song download. These services may
fundamentally eradicate the concept of an album, with customers selecting only
a handful of their favourite songs rather than entire standard 12 tracks. These
prices are having knock-on consequences for the pricing of physical formats.
Consumers are now looking for a more value-laden music product rather than
simply 12 songs with an album cover. Now they are expecting behind the scenes
access to their favourite group, live concert footage and other content-rich
material.
Big Noise Music is an example of
one of the legitimate downloading sites running the OD2 system. The site is
different in that for every £1 download, 10p of the revenue goes to the charity
Oxfam.
The music industry is ferociously
fighting back by issuing lawsuits for breach of copyright to people who are
illegally downloading songs from the Internet using P2P software. The recording
industry has started to sue thousands of people who illegally share music using
P2P. They are issuing warnings to net surfers who are P2P software that their
activities are being watched and monitored. Instant Internet messages are being
sent to those who are suspected of offering songs illegally. In addition, they
have been awarded court orders so that Internet providers must identify people
who are heavily involved in such activity. The music industry is also involved
heavily in issue advertising campaigns, by promoting anti-piracy websites such
as www.pro-music.org to educate people on the industry and the impact of piracy
on artists. These types of public awareness campaigns are designed to
illustrate the implications of illegal downloading.
Small independent music labels view P2P
networks differently, seeing them as vital in achieving publicity and
distribution for their acts. These firms simply do not have the promotional
resources or distribution clout of the ‘big four’ record labels. They see P2P
networks as an excellent viral marketing tool, creating buzz about a song or
artist that will ultimately lead to wider mainstream and commercial
appeal. The Internet is used to create communities
of fans who are interested in their music, providing them access to free videos
and other material. It allows independent acts the opportunity to distribute
their music to a wider audience, building up their fan base through word of
mouth. Savvy unsigned bands have sophisticated websites showcasing their work,
and offering free downloads as well as opportunities for audio-philes to
purchase their tunes. Alternatively major labels still see that to gain success
one has to get a video on rotation on MTV and that this in turn encourages
greater airplay on radio stations, ultimately leading to increased purchases.
The issue of online music
retailers using parallel importing, such as CDWOW (www.cdwow.co.uk) is a
concern. These retailers are taking advantage of worldwide price discrepancies
for legitimate music CDs, sourcing them in low-cost countries like Hong Kong
and exporting them into European countries. Prices for music in these markets
are considerably lower than the market that they are exporting to, and they don’t
even charge for international delivery. Yet technological improvements have led
to revenue opportunities for the industry. Development such as online radio,
digital rights management, Internet streaming, tethered downloads (locked to
PC), downloads (burnable, portable), in-store kiosks, ring-tones, mobile
message clips and games soundtracks are great potential revenue sources. In an
effort to unlock this potential the major labels have digitized their entire
back catalogues. In the wake of these dramatic environmental changes the
industry has had to radically adapt. The ‘big four’ music labels are
consolidating even further, developing a digital music strategy, and
re-evaluating their entire traditional business model. Mobile phones are seen
as the next primary channel of distribution for digital music. High penetration
levels in the market for mobile phones and the inherent mobility advantages
make this the next crucial battlefield for the music industry.
The Internet may emerge as the
primary channel of distribution for music, and the music industry is going to
have to adapt to these changes. The move towards the online distribution of
entertainment is still in its infancy, with more investment into the
telecommunications infrastructure, such as greater Internet access, increased
access to broadband technology, 3G technology and changing the way people shop
for music will undoubtedly take time. The digital revolution will fundamentally
change the way people purchase and consume their musical preferences. In
forthcoming years the digital format will become more mainstream, leading to a
proliferation of channels of distribution for music. However, as with most new
channels of technology, catalogue shopping, Internet shopping likewise, and
‘video never really killed the radio star’… but will the Internet kill the
record store?
Questions:
1.
Discuss the micro and macro forces that are affecting
the music industry.
2.
Based on this analysis, what strategic options would
you recommend for both music publishers and music retailers in the current
marketing environment?
3.
Discuss the advantages and disadvantages associated
with online distribution from a music label’s perspective.
CASE: II The Sudkurier
The Sudkurier is a regional daily newspaper in south-western
Germany. On average 310,000 people in the area read the newspaper regularly.
The great majority of those readers subscribe to its home delivery service,
which puts the paper on their doorsteps early in the morning. On the market for
the last 35 years, the Sudkurier
contains editorial sections on politics, the economy, sports, local news,
entertainment and features, as well as advertising. The newspaper is
financially independent and its staff is free of any political affiliation.
Management at the Sudkurier would
like to bring the paper into line with the current needs of its readers. For
this purpose, the management team is considering the use of market research.
Management would like to have
information about the following.
1.
What newspaper or other media are the Sudkurier’s main competitors?
2.
Do most readers read the Sudkurier for the local news, sports and classified ads, and
should these sections therefore be expanded at the expense of the sections on
politics and the economy?
3.
Should the Sudkurier’s
layout be modernized?
4.
Do mostly lower levels of society read the Sudkurier?
5.
Into what political category do readers and
non-readers the Sudkurier?
6.
Which suppliers of products and services consider
the Sudkurier especially appropriate
for their advertising?
7.
What advertising or information dot the readers
think is missing from the Sudkurier?
You are an employee of the Sudkurier who has been instructed to
obtain the requested information and to prepare your findings for the decision-makers.
You are in the fortunate position of receiving regular reports about the
people’s media use from the Arbeitsgemeinschaft Media-Analyse e.V. Relevant
excerpts from the most recent survey are shown here as Tables 3 and Table 4
Questions:
1.
Explain how you will methodically go about
compiling the requested information covered in the seven questions for
management. Include in your explanation an estimate of the expense involved in
obtaining the information.
2.
Develop a 10-question questionnaire for the purpose
of making a survey.
CASE: III Unilever in Brazil:
marketing strategies for low-income customers
After three successful years in
the Personal Care division of Unilever in Pakistan, Laercio Cardoso was
contemplating attractive leadership positioning China when he received a phone
call from Robert Davidson, head of Unilever’s Home Care division in Brazil, his
home country. Robert was looking for someone to explore growth opportunities in
the marketing of detergents to low-income consumers living in the north-east of
Brazil and felt that Laercio had the seniority and skills necessary for the
project. Though he had not been involved in the traditional Unilever approach
to marketing detergents, his experience in Pakistan had made him acutely aware
of the threat posed by local detergent brands targeted at low-income consumers.
At the start of the
project—dubbed ‘Everyman’—Laercio assembled an interdisciplinary team and began
by conducting extensive field studies to understand the lifestyle, aspirations
and shopping habits of low-income consumers. Increasing detergent use by these
consumers was crucial for Unilever given that the company already had 81 per
cent of the detergent powder market. But some in the company felt that it
should not fight in the lower cost structures struggled to break even. How
could Laercio justify diverting money from a best-selling brand like Omo to
invest in a lower-margin segment?
Consumer behavior
The 48 million people living in
the north-east (NE) of Brazil lag behind their south-eastern (SE) counterparts
on just about every development indicator. In the NE, 53 per cent of the
population live on less than two minimum wages versus 21 per cent inn the SE.
In the NE, only 28 per cent of
households own a washing machine versus 67 per cent in the SE. Women in the NE
scrub clothes in a washbasin or sink using bars of laundry soap, a process that
requires intense and sustained effort. They then add bleach to remove tough
stains and only a little detergent powder in the end, primarily to make the
clothes smell good. In the SE, the process is similar to European or North
American standards. Women mix powder detergent
and softener in a washing machine and use laundry soap and bleach only to
remove the toughest stains.
The penetration and usage of
detergent powder and laundry soap is the same in the NE and the SE (97 per
cent). However, north-easterners use a little less detergent (11.4 kg per years
versus 12.9 kg) and a lot more soap (20 kg versus 7 kg) than south-easterners.
Many women in the NE view washing clothes as one of the pleasurable routine
activities of their week. This is because they often do their washing in a
public laundry, river or pond where they meet and chat with their friends. In
the SE, in contrast, most women wash clothes alone at home. They perceive
washing laundry as a chore and are primarily interested in ways to improve the
convenience of the process.
People in the NE and SE differ in
the symbolic value they attach to cleanliness. Many poor north-easterners are
proud of the fact that they keep themselves and their families clean despite
their low income. Because it is so labour intensive, many women see the
cleanliness of clothes as an indication of the dedication of the mother to her
family, and personal and home cleanliness is a main subject of gossip. In the
SE, where most women own a washing machine, it has much lower relevance for self-esteem
and social status. Along with price, the primarily low-income consumers of the
NE evaluate detergents on six key attributes (Figure 1 provides importance
ratings, the range of consumer expectations, and the perceived positioning of
key detergent brands on each attribute).
Competition
In 1996 Unilever was a clear
leader in the detergent powder category in Brazil, with an 81 per cent market
share, achieved with three brands: Omo (one of Brazil’s favourate brands across
all categories) Minerva (the only brand to be sold as both detergent powder and
laundry soap with a more hedonistic ‘care’ positioning) and Campeiro
(Unilever’s cheapest brand). Proctor & Gamble, which had recently entered
the Brazilian market, had 15 per cent of the market with three brands (Ace,
Bold and the low-price brand Pop). Other competitors were smaller companies
(see Figure 2).
The Brazilian fabric wash market
consists of two categories: detergent powder and laundry soap. In 1996
detergent was a US$106 million (42,000 tons) market in the NE. In 1996 the NE
market for laundry soap bars was as large as the detergent powder market
(US$102 million for 81,250 tons). The NE market for laundry soap is much easier
to produce than powdered laundry detergent. Laundry soap is a multi-use product
that has many home and personal care uses. Table 5 provides key information on
all powder and laundry soap brands (packaging, positioning, key historical
facts, and financial and market data).
Decisions
Robert Davidson, head of
Unilever’s Home Care Division in Brazil, and Laercio Cardoso, head of the
‘Everyman’ research project aided at understanding the low-income consumer
segment, must re-examine Unilever’s strategy for low-income consumers in the NE
region of Brazil and make three important decisions.
1.
Go/no go.
Should Unilever divert money from its premium brands to invest in a
lower-margin segment of the market? Does Unilever have the right skills and
structure to be profitable in a market in which even small local entrepreneurs
struggle to break even? In the long run, what would Unilever gain and what
would it risk losing?
2.
Marketing and branding strategy. Unilever
already has three detergent brands with distinct positionings. Does it need to develop a new brand with a
new value proposition or can it reposition its existing brands or use a brand
extension?
3.
Marketing mix. What
price, product, promotion and distribution strategy would allow Unilever to
deliver value to low-income consumers without cannibalizing its own premium
brands too heavily? Is it just a matter of price?
Product
Unilever could produce a product
comparable to Campeiro, its cheapest product, but would it deliver the benefits
that low-income consumers wanted? Alternatively, Unilever could use Minerva’s
formula but it might be too expensive for low-income consumers. If they could
eliminate some ingredients, Unilever’s scientists could develop a third formula
that would cost about 10 per cent more than Campeiro’s formula. The difficulty
would be in determining which attributes to eliminate, which to retain and
which, if any would actually need to be improved relative to both existing
brands.
Larger packages would reduce the
cost per kilo but could price the product out of the weekly budget range of the
poorest consumers. Unilever could use a plastic sachet, which would cost 30 per
cent of the price of traditional cardboard boxes, but market research data had
shown that low-income consumers were attached to boxes and regarded anything
else as good for only second-rate products. One solution might be to launch
multiple types and sizes.
Price
Priced significantly above
Campeiro and Minerva soap, the product would be out of reach for the target
segment. Priced too low, it would increase the cost of the inevitable
cannibalization of existing Unilever brands. Should Unilever use coupons or
other means to reduce the cost of the product for low-income consumers? Or
should it change the price of Omo, Minerva
and Campeiro?
Promotion
In the low-income segment, lower
margins meant that volume had to be reached very quickly for the product to
break even. It was therefore crucial to find a radical ‘story’, one that would
immediately put the new brand on the map. What would be the objective of the
communication? What should be the key message? Low-income consumers might be
reluctant to buy a product advertised ‘for the low-income people’ especially as
products with that kind of message are typically of inferior quality. On the
other hand, using the classic aspirational communication of most Brazilian
brands could confuse consumers and lead to unwanted cannibalization.
In regular detergent markets
Unilever had established that the most effective allocation of communication
expenditure was 70 cent above-the-line (media advertising) and 30 per cent
below-the-line (trade promotions, events, point- of-purchase marketing). The
advantages of using primarily media advertising are its low cost per contact
and high reach because almost all Brazilians, irrespective of income, are avid
television watchers. One alternative would be to use 70 per cent below-the-line
communication. At US$0.05 per kg, this plan would require only one-third of the
cost of a traditional Unilever communication plan. On the other hand, it would
lower the reach of communication, increase the cost of per contact, and make a
simultaneous launch in all north-eastern cities more difficult to
organize.
Distribution
Unilever did not have the ability
to distribute to the approximately 75,000 small outlets spread over the NE, yet
access to these stores was key because low-income consumers rarely shopped in
large supermarkets like Wal-Mart or Carrefour. Unilever could rely on its
existing network of generalist wholesalers who supplied its detergents and a
wide variety of products to small stores. These wholesalers had national
coverage and economies of scale but did not directly serve the small stores
where low-income consumers shopped, necessitating another layer of smaller
wholesalers, which increased their cost to US$0.10 per kg. Alternatively,
Unilever could contract with dozens of specialize distributors who would get
exclusive rights to sell the new Unilever detergent. These specialized
distributors would have a better ability to implement point of purchase
marketing and would cost less ($0.05 per kg).
Question:
1.
Describe the consumer behaviour differences among
laundry products’ customers in Brazil. What market segments exists?
2.
Should Unilever bring out a new brand or use one of its
existing brands to target the north-eastern Brazilian market?
3.
How should the brand be positioned in the marketplace
and within the Unilever family of brands?
Case 4 Ryanair: the low fares
airlines
The year 2004 did not begin well
for Ryanair. On 28 January, the airline issued its first profits warning and
ended a run of 26 quarters of rising profits. On that day, when the markets
opened, the company was worth €5 billion. By close of business, its value had
shrunk to worth €3.6 billion, as its share price plunged from worth €6.75 to
€4.86. Investors were dismayed by the airline’s admission that it was facing
‘an enormous and sudden reduction of 25 to 30 per cent in yields’ (i.e. average
fare levels) in the first quarter of 2004 (the last fiscal quarter of 2004).
This was on top of an earlier fall of 10 to 15 per cent in the first nine
months.
In April 2004, Chief Executive
Michael O’Leary forecast a ‘bloodbath’, an ‘awful’ 2004/2005 winter for
European airlines, amid continuing fare wars, with a shakeout among the many
budget airlines. ‘We will be helping to make it awful,’ warned Mr O’Leary, as
he announced an 800,000 free seats giveaway. The most difficult markets were
predicted to be Germany and the UK regions where many new carriers, which were
‘losing money on an heroic scale’, had entered the arena. O’Leary anticipated
that the company’s 2004 profits would decline by 10 per cent, while 2005
profits would increase by up to 20 per cent with a 5 per cent drop in yields.
However, if yields were to fall by as much as 20 per cent, the 2005 outcome
would be break-even, at best.
Yet, by 31 May 2005, on Ryanair’s
20th birthday, the carrier was able to announce record results for
the year ended 31 March 2005. Both passenger volumes and net profits grew year
on year by 19 per cent to 27.6 million from 23.1 million and €268.9 from €226.6
million respectively. The all- important passenger yield figure (revenue per
passenger) grew by 2 per cent, partially offsetting the 14 per cent yield
decline in 2003/2004. Ancillary revenues were 40 per cent higher, rising faster
than passenger volumes, which resulted in total revenues rising by 24 per cent
to €1.337 billion. Operating costs rose 25 per cent, fractionally more than
revenue growth, due principally to higher fuel costs. The 2005 results
announcement was followed by a 3.4 per cent jump in the company’s share price,
to close to €6.46 on the day.
Ryanair’s adjusted after-tax
margin for the full year at 20 per cent compared very to figures for Aer
Lingus, British Airways, easyJet, Lufthansa, Southwest and Virgin, with margins
of 8, 1, 3, minus 5, 7, .1 per cent respectively (2003/2004 results). Despite
the dire warnings and the temporary dip in fiscal 2004, Ryanair had arguably
come through its crisis with flying colours. How did it manage this?
Overview of Ryanair
Ryanair, Europe’s first budget
airline, with 229 routes across 20 countries at of May 2005, is one of the
world’s most profitable, fastest-growing carriers. Founded in 1985 by the Ryan
family as an alternative to the then state monopoly carrier Aer Lingus, Ryanair
started out as a full-service airline. After accumulating severe financial
losses, finally, in 1990/91, the company came up with a survival plan,
spearhead by Michael O’Leary and the Ryans, to transform itself into a
low-fares no-frills carrier, based on the model pioneered by Southwest
Airlines, the Texas-based operator. Ryanair, first floated on the Dublin Stock
Exchange in 1997, is quoted on the Dublin and London Stock exchanges and on
NASDAQ, where it was admitted to the NASDAQ-100 in 2002. In June 2005,
Ryanair’s market capitalization stood €5 billion, the second highest carrier in
the world, next to Southwest Airlines, and ahead of airlines with vastly
greater turnover—such as Lufthansa with capitalization at €4.7 billion, British
Airways at €4.3 billion and Air France/KLM at €3.5 billion. Its market
capitalization was nearly four times that of easyJet, its UK-based budget
airline rival. This was despite easyJet’s higher turnover, similar passenger
volumes and a slightly larger fleet.
Ryanair’s fares strategy
Ryanair’s core strategy entails
offering the lowest fares, and the airline claims that it generally makes its
lowest fares widely available by allocating a majority of seat inventory to its
two lowest fare categories. In fact, was Ryanair, originally styled as the
‘low-fares airline’, actually becoming a ‘no-fares airline’? Half of Ryanair’s
passenger will be flying for free by 2009, pledged Michael O’Leary in an
interview with a German newspaper. He said that ticket prices would fall by an
average 5 per cent a year over the next five years, as passenger numbers grew
by five million annually. One analyst speculated that Ryanair pronouncement on
free seats ‘is designed to put the wind up potential competitors in the hotly
contested German market. Of course, a balance must be struck between low fares
to attract customers and a sufficient yield to ensure viability.
An integral part of the low fares
strategy is revenue enhancement through ancillary activities, increasingly used
to subsidize airfares in order to improve Ryanair margins to compensate for
falls in fare yields. These include on-board sales, charter flights, travel
reservations and insurance, car rentals, in-flight television advertising, and
advertising outside its air-craft, whereby a corporate sponsor pays to paint an
aircraft, whereby a corporate sponsor pays to paint an aircraft with its logo.
Advertising on Ryanair’s popular website also provides ancillary income.
Despite the abolition of duty-free sales on intra-EU travel in 1999, Ryanair’s
revenue from duty-paid sales and ancillary services has continued to rise. In
2005, ancillary revenues comprised 18.3 per cent of total operating revenue, up
from 16.1 per cent the year before, and the ambition is to grow at twice the
rate of increase in its passenger traffic. The company has outlined plans to
continue raising ancillary revenues through further penetration of existing
products and the introduction of new ones, especially on-board entertainment
and gaming products/services. Ryanair is also considering entering the highly
competitive mobile phone market and has been in talks with various UK operators
with a view to forming a joint venture.
Its low fares policy
notwithstanding, Ryanair was able to realize a 2 per cent growth in yields in
fiscal 2005. This is attributable to a number of favourable factors in the
competitive landscape. Underlying passenger growth volumes returned in the
industry as a whole, reducing the intensity of competition. Mainstream European
operators like British Airways, Lufthansa and Air France/KLM were increasingly
abandoning the short-haul sector, preferring to concentrate their growth on
more lucrative long-run haul routes. Moreover, these airlines reacted to the
massive price rise in the cost of aviation fuel by introducing a fuel surcharge
on their fares. For example, the surcharge levied by British Airways equated to
22 per cent of an average Ryanair fare.
Another favourable factor was the
failure of the threat of new entrants to materialize. Michael O’Leary’s
prophecy of a 2004/2005 winter bloodbath in the European airline industry had
been based on the forecast of many new entrants into the budget airlines
sector, thus intensifying overcapacity. While new rivals continued to enter the
fray, at any one time large numbers were also dying off. Autumn 2004 saw the
demise of a number of budget airlines—for example, Volare, an Italian low-fare
and charter operator, and V-Bird, a Dutch-owned carrier. Yet, new entrants were
still launching. However, it was agreed that the industry could not sustain the
some 47low-fares airlines operating as of the end of November 2004, Michael
O’Leary predicted that the anticipated shake-out would be accelerated by rising
oil prices. ‘Many of our competitor airlines who were losing money heroically
when fuel was US$25 a barrel are doomed the longer it stays at US$50. We
anticipate there will be further airline casualties as the perfect storm of
declining fares and record high oil prices force loss-making carriers out of
the industry.
Low fares require cost savings
To quote Michael O’Leary, ‘Any
fool can sell low air fares and lose money. The difficult bit is to sell the
lowest air fares and make profits. If you don’t make profits, you can’t lower
your air fares or reward your people invest in new aircraft or take on the
really big airlines like BA and Lufthansa.’
According to the company, its
no-frills service allows it to prioritize features important to its clientele,
such as frequent departures, advance reservations, baggage handling and
consistent on-time services. Simultaneously, it eliminates non-essential extras
that interfere with the reliable, low-cost delivery of its basic flights. The
eliminated extras include advance seat assignments, in-flight meals,
multi-class seating, access to a frequent-flyer programme, complimentary drinks
and amenities. In 1997, Ryanair dropped its cargo services, at an estimated
annual cost of IR£400,000 in revenue. Without the need to load and upload
cargo, the turnaround time of an aircraft was reduced from 30 to 25 minutes,
according to the company. It claims that business travellers, attracted by
frequency and punctuality, comprise 40 per cent of its passengers, despite
often less conveniently located airports and the absence of pampering.
In conjunction with the
elimination of non-essential extras, the organization of its operations enables
the airline to minimize costs, based on five main sources.
1.
Fleet commonality
(Boeing 737s, like Southwest Airlines): this results in lower maintenance
and staff training costs. In 2005, the company negotiated a new Boeing deal
that takes down its per-seat costs for all post-January 2005 deliveries to
rock-bottom levels. This deal not only establishes a platform for growth; a
younger fleet also enables further cost reductions through lower fuel
utilization and maintenance costs.
2.
Contracting out of
aircraft cleaning, ticketing, baggage handling and other services, other than
at Dublin Airport; this is more economical and flexible, while it entails less
aggravation in terms of employee relations.
3.
Airport charges
and point-to-point route policy: Ryanair uses secondary airports that are
less congested, motivated to offer better deals and have fewer delays,
resulting in increased punctuality and shorter turnaround times.
4.
Staff costs and
productivity: productivity-based pay schemes and non-unionized staff.
5.
Marketing costs;
Ryanair was the first airline to reduce and finally eliminate travel agents’
fees. In January 2000, Ryanair launched its www.ryanair.com website. This has
had the effect of saving money on staff costs, agents’ commissions and computer
reservation charges, while significantly contributing to growth. In 2005,
Internet sales accounted for 97 per cent of all bookings. Ryanair supplements
its advertising with the use of free publicity to highlight its position as the
low fares champion, by attacking various constituencies that threaten its cost
structure. These include EU regulators, airport authorities, politicians and
trade unions. Its per passenger marketing costs of 60c are considered to be the
lowest across the European airline sector.
The year 2005 saw enormous
volatility in the price of oil, and the global airline industry faced losses of
US$6 billion. Ryanair, which had been unhedged with respect to oil prices since
September 2004, announced on 1 June that it was hedging 75 per cent of its fuel
needs for the October 2005 to March 2006 period, at a price of US$47 a barrel.
At times, in previous weeks, the price had stood at US$53-plus per barrel. At
the end of June, the price had hit US$60 and analysts were predicting it would
rise to US$70-plus in the coming months.
Low costs contribute to a low
break-even load factor of 62 per cent, so the airline can make money even if it
fills fewer seats than other budget competitors with higher costs and higher
break-even load factors. For example, easyJet’s break-even load factor is 73
per cent, while that of Virgin Express is 83 per cent. Table 6 shows Ryanair’s
operating cost structure.
The airline’s claims of attention
to customer service are encompassed in its Passenger Charter, which embraces a
number of doctrines:
·
Sell the lowest fares at all times on all routes
and match competitors’ special offers.
·
Allow flight and name changes with requisite fee
·
Strive to deliver on-time performance
·
Provide information to passengers regarding
commercial and operational conditions
·
Provide complaint response within seven days
·
Provide prompt refunds
·
Eliminate overbooking and involuntary denial of
boarding
·
Publish monthly service statistics
·
eliminate lost or delayed luggage
·
Ryanair will not provide refreshments or meals
or accommodation to passengers facing delays; any passenger who wish to avail
themselves of such services will be asked to pay for them directly to the
service provider
·
Ryanair facilitates wheelchair passengers
travelling in their own wheelchair; where passengers require a wheelchair,
Ryanair directs those passengers to a third-party wheelchair supplier at the
passenger’s own expense; Ryanair is lobbying the handful of airports that do
not provide a free wheelchair service to do so.
The company has confirmed that it
would introduce a number of cost-cutting new features on its flights. For
instance, the Ryanair fleet would heretofore be devoid of reclining seats,
window blinds, headrests, seat pockets and other ‘non-essentials’. Leather
seats instead of cloth ones would allow faster turnaround times since leather
is quicker and easier to clean. More controversially, Michael O’Leary hoped
eventually to wean passengers off checked-in luggage, eliminating the need for
baggage handling, suitcase holding areas and lost property. In 2004, Ryanair
had one of the lowest baggage allowances of any major airline, at 15 kg a
person, and charged up to €7 for every additional kilo, one of the highest
surcharges in European aviation.
Successive Annual Reports
cite-on-time performance (defined as up to 15 minutes after scheduled time in
UK Civil Aviation Authority statistics) and baggage handling as of key
importance to customers. On punctuality, Ryanair claims to be the most punctual
airline between Dublin and London. On baggage handling, Ryanair claims less
than one bag lost per 1000 carried, better than even the best US airline,
Alaska Airlines, with 3.48 bags per 1000 lost, and considerably better than its
role model Southwest Airlines with 5.00 per 1000 lost.
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