Market View: Robbing Peter to pay Paul

The road to new products is paved with line extensions

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When I was a kid, one of the scariest movies I saw was about cannibalism. As a food executive, the scariest thing for you should be cannibalism! Many brand managers are more interested in introducing new products than getting more customers to buy existing ones. The problem is that most of the "new" sales were cannibalized from "old" products. 

 

The obsessive interest in "new" is somewhat understandable, since the growth of many companies depends on new brands and products. In fact, it's estimated that about 60 percent of category growth comes from new brands. This makes the brand manager's eyes light up. However the road to new products is usually paved with line extensions. Line extensions involve making minor changes to a core brand rather than introducing a new one.

 

Here, the problem is that many line-extended products eat into sales of the company's old products. Robbing Peter to pay Paul makes no sense, though it's common with new product introduction. Information Resources Inc. (IRI) estimates that of the 30,000+ new food shelf-keeping units (SKUs), 36 percent are extensions. Line extensions usually produce little share growth and often destroy the core brand. Al Reis, author of Marketing Warfare, believes that more than 90 percent of all new products introduced in food and drug channels are line extensions. And many don't sell at all. Reis claims that of the 23,000 items in one Midwest supermarket, 5,500 sold less than a single unit per month. All of these underselling products take up shelf space, management time, and brand resources that instead could be spent on the core brand.

 

I once did a statistical modeling project for a pasta sauce. The core brand had more than five line extensions. In each case, the extension -- generally a new flavor or style -- sold less than the previous extension. Fewer resources were devoted to the new line extension, making it less likely to sell at significant levels. Since sales were less for each new extension, the cost of goods was higher and the margins were less. And with each line extension, the actual total brand (core plus line extensions) changed very little. 

 

These "wasted" resources could have been spent on the core brand or a new product.  This dilution of advertising and other resources is not theoretical. An IRI new products study reported that the average advertising expenditure on successful products was more than $9 million, while the average year-one ad expenditure for failing products was less than $4 million. Companies that advertised heavily after the new product was introduced experienced a 268 percent increase in sales while those with comparatively low levels of advertising support only saw a 40 percent bump in sales.  Many line extensions are not supported and fail. 

 

Line extensions get most of their customers from the core brand. Who would likely buy Hellmann's LIGHT mayonnaise but Hellmann's users? Who would likely buy Campbell's Home Style soup but Campbell's Chunky users? Thus, most line extensions cannibalize sales from the core brand. 

 

Another problem with line extensions is what they imply about the core brand. When the extension is lighter, freer, clearer, softer, harder etc., the suggestion is that the core brand is not any of the aforementioned. It is hard to make a strong claim for either the core brand or the line extension without implying that one or the other is not as good.

 

I think that many brand managers confused brand building and brand milking.  They are more interested in getting a little bit more out of the core brand than making a significant investment in a new one. There are reasons for this shortsighted behavior. First, brand managers change jobs so quickly that in order to show any results they have to act quickly, often with blatant disregard for the core brand.

 

To some extent, it's a management-induced problem. Brand managers are told they must have new products in their annual plans, and line extensions are the easiest way to meet that requirement.

 

Are there good reasons for line extensions? To be sure. But not nearly as many as current industry practices would have us believe.

 

Cannibalism in any form is not good.  It scared me at age six; it still scares me at age 45 ok, 57.

 

John L. Stanton is a professor of food marketing at St. Joseph's University in Philadelphia. He can be contacted at (610) 660-1607; fax (610) 660-1604; e-mail at jstanton@sju.edu; or www.johnLstanton.com.

 

 

 

 

 

 

 

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