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Tips to tackle the competitor
Govindkrishna Seshan | October 04, 2006
Think value brands and Nirma springs to mind almost immediately. The Ahmedabad-based detergent brand's growth from a minuscule, one-man operation to a Rs 2,500-crore (Rs 25 billion) company that employs 14,000 people is the stuff of case studies. In many ways, Nirma was India's original value brand - low cost, low price and good quality.
Now, of course, there are several examples and that too, across categories. And in almost every instance, incumbent players have emerged bruised, if not battered, by the entry of the value brand.
Consider Air Deccan. India's first low-cost airline launched operations in 2003 by offering tickets for Re 1. Its most expensive ticket was still cheaper than the national carrier Indian Airlines (now Indian) and Jet Airways. Three years on, Air Deccan has a 21.2 per cent market share, pushing Indian to third place.
Then there's Gold Winner. The refined sunflower oil brand was launched in 1995 by Chennai-based Kaleesuwari Refinery. When other brands such as Sundrop were selling at Rs 40 a litre, Gold Winner was a price warrior, offering three litres for Rs 100.
In the past seven or eight years, volumes have trebled and Gold Winner is now the leading sunflower oil brand, with a 24 per cent share of the Rs 2,000-crore (Rs 20 billion) mass packaged sunflower oil market.
How do value brands grow? Typically, value brands don't carve out spaces for themselves; they fill existing gaps in the market. Once a value brand identifies a slot, it claims it on the price platform.
By adopting a low-cost business model, offering higher margins to retailers and growing volumes, value brands are able to offer lower prices than the existing players in the market.
Says Chris Outram, chairman, OC &C Strategy Consultants, "Behind a value brand is a business design to give a good quality product at a low price. They don't come and go. We have seen them become leaders in more than one market."
Where does that leave the incumbent players? Running for cover? Not really. They usually have strategies of their own. Here are a few.
Offence is the best defence
Value brands fill spaces that exist within the market. The best way to keep them out is by filling those cracks yourself: cover new need gaps as they emerge.
Tata Motors is a case in point. In 2000, losses at Telco (as the company was called until 2003) had crossed Rs 500 crore (Rs 5 billion) and market share had dipped in both light and heavy vehicles.
Based on the realisation that the company's product-centric strategies were probably at fault, Telco initiated a study among customers to discover what they wanted.
"Traditionally, we took a product to the customer and asked for suggestions. This time we went to 5,000 customers without a product, to understand their requirements," says Shyam Mani, vice president, sales and marketing, Tata Motors.
The findings were startling. There was no vehicle in the market that fit between the Rs 180,000 three-wheelers (capacity: 700 kg) and four-wheelers like Telco's 207 DI (1.1 tonne, Rs 420,000) and 407 (3.2 tonne, Rs 500,000).
Customers wanted a vehicle that fulfilled three important criteria: higher levels of safety than the average three-wheeler, comfort and lower operation costs than most four-wheelers.
Based on that research, last year Tata Motors launched the Tata Ace (750 kg, Rs 250,000). Tata sold 29,000 units of the Ace last year and expects to sell 65,000 this year. "We now look at what gaps the customer sees. Then we reconstruct and fill these gaps," says Mani.
Meanwhile, another blue-chip company is filling the gap between the Ace and the 207. Last month, Mahindra & Mahindra launched the Maxx Maxi, a 900-kg, four-wheel truck priced at Rs 350,000, to compete in the same segment.
"It will be the vehicle of choice for three-wheeler and small four-wheeler owners who want to upgrade," says Mahesh Kulkarni, deputy general manager, marketing, M & M automotive sector.
What's even better than filling new gaps as they emerge? Filling them before they appear. Consider cigarette major ITC, which ensures it is present across price points.
At Rs 3.5-4 for a stick, Wills Classic Milds and Insignia compete with premium brands like Philip Morris's Marlboro Lights and Indonesian clove cigarette brand Gudang Garam.
In the economy segment, Gold Flake and Wills Navy Cut sell for Rs 2-3 a stick, while Bristol and Capstan (Rs 1.4 a stick) fight it out with Godfrey Philips' Four Square and Red & White.
Doesn't leave much room for a value brand, does it? "We look at all our business from a portfolio window and deploy different brands in different price segments to meet varying needs of consumers," agrees Syed Mahmood Ahmad, executive vice president, marketing, ITC.
A healthy distance
Moving up the value chain could help in deflecting competition from value brands. If your brand appeals to premium customers, it may be worthwhile to withdraw attention from the mass-market and instead focus on your upscale audience.
"It's not a question of lower price points. It's about defining a very clear territory or a tangible value and communicating the same to your consumers," points out Kiran Khalap, co-founder of brand consultancy chlorophyll.
That's what Kwality Walls did. Sales of Hindustan Lever's ice cream division plummeted from Rs 171 crore (Rs 1.71 billion) in 1999 to Rs 89 crore (Rs 890 million) in 2004. A key reason for the meltdown was the 2002 entry of Amul into the ice cream industry. Amul laun-ched on the value-for-money platform, with prices substantially lower than Walls'.
Consumers lapped it up and Amul is now the leader with 34 per cent of the market (volumes), while Walls is down to a meagre 6 per cent.
Walls did react to the Amul launch, though. It changed focus to concentrate on only the top six metros.
Changes in the product portfolio also underlined the urban emphasis: Vienetta, a premium vanilla ice cream, Double Sundae, Vienetta Capuccino Nut, Super Cornetto triple chocolate and Feast Almond Fudge were clearly aimed at the affluent, urban consumer.
In 2004, Walls extended its distribution to the top 16 cities and sales grew to Rs 98.15 crore (Rs 981 million) the following year. Amul's stranglehold on the market continues, but Walls' change in positioning from mass to class is clearly bringing in results, albeit slowly.
Says a Hindustan Lever spokesman, "This strategy has been hugely successful for us and is evident in our growth in the past six quarters."
Sometimes, premium brands see the growth of value brands in related product categories as early warning signals, and react accordingly.
Marico's blended oil brand Saffola is a case in point. Launched in the 1960s, the brand chugged along reasonably well for close to 30 years. Around the time Gold Winner was making its presence felt in the mass segment with its sunflower oil, the premium refined oils segment was taking a hit.
Nevertheless, Saffola continued and extended its premium positioning to the wellness platform: now it was the good-for-the-heart oil. Meanwhile, it restricted its presence to the top 20 cities.
"This way, we can run specialised ad campaigns that speak to our target audience," points out Saugata Gupta, chief marketing officer, Marico. The shift in positioning has helped Saffola launch brand extensions and also grow at 21 per cent in the past five years.
If you can't beat 'em, buy 'em
Finally, if nothing else works, analysts believe it makes perfect sense to acquire value-for-money brands. Of course, there's a caveat: study the value brand's business model and ensure you can leverage the same cost advantage once it is part of your stable.
In March 2006, when Hindustan Lever put its hair oil brand Nihar on the block, Marico paid Rs 216 crore (Rs 2.16 billion) for it. Hindustan Lever had acquired Nihar as part of its 1993 acquisition of Tata Oil Mills.
Under Hindustan Lever, Nihar continued to promote its value-for-money promise, but with little success. Marketshare dipped to 7 per cent in 2005, and Nihar was shown the door.
For Marico, the acquisition made immense sense. In one stroke, it was removing competition for Parachute, its premium hair oil brand, and also improving its presence in the eastern markets, where Nihar was popular.
Nihar will be a flanker brand for Parachute, even though it's now down to a low 6.2 per cent market share of the Rs 800-crore (Rs 8 billion) market. It allows Marico to cater to a new consumer segment.
As Gupta says, "More than anything else, the move was beneficial because it enabled us to prevent any other brand from getting into that space."
Value brands worldwide
What has been the value brand experience in the US and Europe? According to an estimate by marketing consultancy OC &C Strategy Consultants, value brands in these developed markets already make up a quarter of all brands, and the share will only increase in the coming years.
As in India, there are striking examples globally, too, of value brands that have come up from the sidelines and seized centrestage.
When French bottled water Cristaline was launched, it stood out on two important counts: the water came from 17 different sources, which were marked prominently on the bottle pack, and it was priced 40 per cent lower than private "source" labels and 50 per cent lower than leading water brands.
How could Cristaline keep prices so low? Its bottling plants were close to the source springs, cutting down on transport costs, and advertising was kept to a minimum.
Cristaline ads accounted for less than 3 per cent of all bottled water commercials on French television. Instead, on-ground promotions helped the brand spring to the top of the water market. With a 19 per cent market share (2003 figures), Cristaline left well-known brands like Evian gasping.
Here's an example somewhat similar to ITC and Tata Motors - a company with incumbent brands launching its own value brand. In 1999, the London-based Imperial Tobacco (the world's fourth-largest tobacco company) relaunched Richmond, a brand dormant since the 1970s.
Richmond was consciously priced 10 per cent below the existing cigarette brands and didn't spend lavishly on marketing - communication was mainly through a targeted, low-spend campaign focused on traders and dealers. By 2001, the brand had gained 6 per cent market share, which grew to 15 per cent in the next four years.The value brands experience in these and other markets highlights one clear trend: loyalties are shifting to either low-priced value brands, or high-priced premium brands. Looks like the middle-level, mid-price consumer is becoming an endangered species.