Route to a brand’s best strategy

New findings challenge the belief that market share alone correlates
with profitability. Bain & Company’s analysis of 200 brands shows
that products at the high end stand to earn considerably more
with a smaller share of the overall product category

by Cyrus Jilla, Nicolas Bloch Conventional wisdom holds that market in the market to settle for 40-cent razors.
and Vijay Vishwanath share alone determines profitability for What’s more, 15 per cent of Sensor’s new
branded consumer products. But that sales came from consumers who had
masks the full story. Consider what hap- bought competitors’ disposable razors. The
pened to The Gillette Co. after its main com- Sensor and its succeeding products
petitor Bic introduced low-cost disposable returned the razor to a high-end category.
razors sold by the bag in the mid-1970s. Gillette had decided that making the
Gillette, the global leader in razors, entire wet-shaving category more premium
responded with its own razors in bags. was more important than just getting back
Yet Gillette’s brand managers soon its market share in a category that was
realised that even if they maintained a becoming a commodity. The lesson is that
majority share in a value-oriented category, market share indeed affects profits but
pre-tax operating profit, or return on sales market share alone does not strictly corre-
(ROS) would be restricted to only 5-10 per late with profitability. When Bain & Co.
cent. They looked for another road to prof- studied the profitability of brands in more
itability. Gillette invested more than $200m than 200 categories of global consumer
in research and development, culminating in goods, we found that market share explains
the 1989 introduction of its Sensor razor. only about half of the differences in brands’
The Sensor sold at a 25 per cent price pre- profitability.
mium over its own Atra, which until then A brand’s profit potential is swayed by
had been the highest-priced shaving system both market share and the nature of the
on the market and it sold well. category in which the brand competes. In
Gillette’s innovation convinced con- Europe, premium brands are those that
sumers to pay a premium for a new set of command at least a 25 per cent to 30 per
shaving expectations. Consumers proved cent higher price than value brands or pri-
willing to spend $3.75 for a shaving system vate-label counterparts. Premium cate-
that required 70-cent replacement car- gories are those in which more than 60 per
tridges, while there was an option elsewhere cent of the volume sold is premium brands.
These findings hold implications for con-
Figure 1: Portfolio deployment matrix sumer goods organisations and brand
managers. They affect not just individual
brand strategy, but also brand portfolio
HIGH

'Hitch hikers' 'High road' strategy, category management, marketing

mix, and organisational and investment
ROS in Europe: ROS in Europe: issues such as R&D, manufacturing capabili-
10-15% >15% ties, and even divestitures and acquisitions.
(in US 15-20%) (in US >20%)
'Premium' To begin with, the findings suggest new
Per cent of criteria against which consumer product
category
firms can manage their portfolios. The
'Dead end' 'Low road'
approach, which we call ‘High Road/Low
ROS in Europe: ROS in Europe: Road’, requires asking, first, is the category
0-5% 5-10% premium or value? And second, is the
(in US 0-5%) (in US 5-10%) brand’s market share high or low relative to
LOW

competitors? For any given brand, there are

LOW HIGH
four possible gradations. Each has its own
Relative
strategic imperatives and each carries a
Source: Bain & Company market share
range of expected returns that enables

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EBF issue 21, spring 2005
 Sounding Board

companies to calibrate performance. (See

Figure 1: Portfolio Deployment Matrix) This Figure 2: Winning brand strategies
is a useful exercise to truly identify under-
performing and outperforming brands.
'Hitch hikers' (eg Merci) 'High road' (eg Danone)

HIGH
High road/Low road brand strategies Strategy: Don't rock the boat Strategy: Innovate, innovate
- follow the leader's pricing and innovate
In shorthand, the varying strategic options
- steal share through innovations - trade customers up to new
for each brand can be expressed as follows:
value-added product
● High road Protect and grow the high end - hold/raise prices on value-added
through innovation after innovation. Premium products
● Low road Grow volume relentlessly by per cent of
focusing on operational efficiencies to category
'Dead end' 'Low road'
reduce costs faster than prices. Only (eg Anheuser-Busch)

then, with a substantial leadership Strategy: Completely rethink Strategy: Grow the high end
position, consider moving the category - move right - lower value added costs
- move north faster than prices
premium.
- re-evaluate category participation - plough difference into advertising
● Hitchhiker Target niche segments to and promotions
LOW

profit from premium prices set by high - innovate over time

road players, but avoid competing on
price, which could commoditise the LOW HIGH
Relative
category. Source: Bain & Company market share
● Dead End Rigorously rethink
participation in the category, retreat to average price premium moved up from 37 grating into low-price, high-quality can pro-
a premium niche, or exit entirely. per cent to 68 per cent. But the Danone and duction. The total system savings let the
The shorthand rule for consumer products Gillette experience also underscores another brewer beat competitors on price and
firms, no matter what quadrant, is that a hard and fast rule: taking a value category to plough more cash into advertising and pro-
company must pay attention to the nature the high road is only possible if you’re motion. Moreover, it changed the game in
of its category, not just market share. Let’s already a clear leader in the category. beer to one of national scale, which AB was
examine how each quadrant works: uniquely positioned to win.
Low road
High road When a brand competes in a value category Hitchhiker
As the Gillette example shows, the way to and has a high relative market share, we call The rule to follow in this quadrant is ‘live
beat back commoditisation is through fre- this a low-road brand. For better or worse, and let live’. Players here have learned to
quent and meaningful innovation. Gillette many European brands compete in this cat- target niche segments to profit from the
has transformed the safety razor into an egory. The winning strategy here can be premium prices set by high road players.
increasingly high-value device. Its new summarised as ‘bigger is better’. That is, it The game here is all about stealing share
M3Power not only features battery-pow- doesn’t suffice just to be number one or two through innovations and acquiring other
ered vibration or ‘micro-pulsation’ and new to thrive in a value category. Winning brands niche players. But it’s not about price com-
edge technology for a closer shave, it dis- must have at least two or three times the petition, which almost invariably leads the
penses vitamin E and aloe to help heal skin. market share of their nearest competitor. entire category downward. One coffee
Since the MP3 launch in 2004, the product Low-road leaders therefore focus on several brand in Germany learned this the hard way
has helped Gillette slightly increase its share inter-related tactics to maximise the bene- when it undercut the leader, only to see the
in the global blade market. fits of scale: they eliminate costs and entire market move downscale. That also
Similarly, Groupe Danone, the French complexity throughout the system; they happened with Procter & Gamble’s US
food maker, has continually upgraded its devise ways to win at the store level through coffee brand, Folger’s, which took a long
yogurt products’ ‘premiumness’, lifting an trade and promotional activities; they time to recover. A good example of main-
entire category in the process. Historically, manage distribution tightly, and relentlessly taining a ‘tagalong’ pricing strategy can be
the majority of its product was plain and use price to knock out the competition. seen in the market for pralines chocolates.
fruit-flavored yogurt, simply packaged. US brewer Anheuser-Busch is a classic In this category, Germany’s Merci brand has
Today, that percentage has shrunk dramati- example of a company that mastered low- maintained high margins by sheltering
cally, market by market. In the US, for road leadership before embarking on the under Italian chocolatier Ferrero’s Mon
example, simple yogurts have dropped from high road. Thirty years ago it dug a wide Cheri, Raffaello, and Rocher brands.
80 per cent of the firm’s output to less than trench of cost advantage by innovative beer Successful hitchhiker brands typically either
5 per cent. In the interim, Danone has intro- packaging, shifting from traditional bottles attract a base of loyal users or lead in a sub-
duced a host of new yogurt products, to cans that stack more efficiently in trucks segment of the market.
including its health-centred Actimel and and increase gallons of beer delivered per
Activia brands in Europe. In France, the com- run. This single innovation lowered costs Dead end
pany’s share rose from 35 per cent in 1999 to across AB’s value chain. It extended the This quadrant is home to follower brands in
37 per cent in 2004. Meanwhile, the volume brewer’s distribution radius, which justified a value category, which makes it difficult to
of premium product in the French category building larger breweries with better find growth and make decent returns. This
rose from 52 per cent to 72 per cent and the economies of scale and vertically inte- is an important category under pressure

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EBF issue 21, spring 2005
across Europe, as pricing and volume growth
have flattened in the face of declin-ing popu- Figure 3: Brand Co's water portfolio by country
lation growth and the incursions of
private-label players and hard discounters. 1.5
High 'Hitch hikers' 'High road'
Consumer product firms in this position portion
are often tempted to spend more on promo- premium FR
tion and trade incentives with retailers to try market
to revive sales, or to increase advertising in a BEL UK
1.0 Italy
saturated media environment. But these
efforts frequently fall short. Instead, execu- F G SW IRL Spain
P NL
tives should confront some hard questions:
Should they retreat into a premium niche, a
strategy of shrinking to grow later? Should 0.5
they begin manufacturing private-label prod- SWI
Poland
ucts for retailers themselves? Or, should they Mostly Germany
exit the category by selling to a scale player value
3,000 M L
to whom the business is worth more? Firms market
'Dead end' 'Low road'
that focus on just one of these strategies do 0.0
best, whereas those that attempt to do some 0.01 0.02 0.05 0.1 0.2 0.5 1 2 5 10
of each can become schizophrenic as they try Relative market share Brand Co. 2001
to manage the complexity of two completely Source: Bain & Company
different business models and organisations.
(See Figure 2)
Moving around the matrix vodka’s, which catalysed its low-road cate-
Europe’s complex market reality Each category dictates a distinct strategy gory to move to the high road. But such
Without a doubt, every company would with related metrics, organisation and feats can take decades and are thus rare.
prefer to be in a high-road position like people. This means that a common strategy Indeed, we have found the only quick and
Gillette or Danone. But most important, – for example, attempting to pursue only easy category move is downward.
companies need to understand their high-road opportunities – will not succeed.
starting position. With that knowledge, Some of the greatest dangers consumer Managing the brand portfolio
firms in all quadrants can develop strategies products firms face in Europe involve trying What does this say about growth prospects?
to grow market share and profitability. too hard to get out of the box they are in. First, that there is no correlation between
In Europe, this means getting to grips Such can be the case for companies with being in a premium or a value category and
with a market reality far more complex and brands in value categories that ambitiously unit sales growth. Rather, each quadrant
challenging than in the more homogenous seek to take the whole category premium. offers a unique growth opportunity that
open US markets. There are major differ- Sometimes referred to as the ‘Starbucks calls for a tailored strategy to adjust market-
ences. The same categories can behave effect’ in the US, this happens when a com- ing spend, research and development based
very differently in different countries, and pany creates a step-function change in on the category’s profit potential. Brand
market fragmentation means that achieving market innovation and perception. In owners with portfolios that span multiple
scale is more difficult. Moreover, the level of Starbucks’ case, this came from an outsider countries and categories can use the High
expected return in each quadrant is about creating a wholly new coffee-drinking occa- Road/Low Road as a framework to allocate
five percentage points lower in Europe than sion and experience, leading to growth and resources differentially across the most
in the US. Finally, the growing strength of pushing the packaged goods coffee cate- promising businesses and stop spending it
private-label brands and hard discounters gory in the US more premium. on dead ends. However, there is a correla-
make business much more challenging for A second example is the UK’s Walkers tion between understanding your position-
brands in the dead-end category. Crisps, which used innovation in packaging ing – and whether your category is shifting
A multi-country portfolio strategy there- to segment its offering and drive growth in south or north – and profitable growth.
fore starts by charting categories by a very mature value category. Today, Whether you’re selling yogurt or mobile
country. (See Figure 3) For instance, bottled Walkers, owned by PepsiCo, leads savoury phones, picking the right strategic direction
water is a value category (or ‘low road’) in snacks in the UK, with half of the market. To begins with an understanding of what road
Poland, but is more premium in France. drive upward, Walkers used innovations in you are travelling. In the end, the High-
In most of the world, even companies in packets that lock in flavor with a patented road/Low-road matrix emerges as a
a dead-end position can retrench to prof- foil design; it created premium-priced ‘posh dynamic instrument of corporate strategy
itable niche plays. But the pressure toward crisps’ and rolled out smart advertising fea- that calls for regular and systematic review.
‘value’ categories has been building in turing a top comedian and football players.
Europe. This reflects the growth of hard dis- When such feats are carried out from Cyrus Jilla is a partner with Bain & Company in
count retailers like Germany’s Aldi and Lidl, inside, they are nearly always accomplished London and heads the firm’s European Consumer
which sell private-label goods, and it reflects by a leader with a leading market share, as Products Practice. Nicolas Bloch is a partner in
the private-label counterstrategies of other, was true for Gillette, Danone and Walkers. Brussels. Vijay Vishwanath is a partner in Boston
higher-end retailers, like Carrefour. How It’s tempting to imagine one’s company and leader of the firm’s Global Consumer
should consumer products firms respond? engineering a marketing coup like Absolut Products practice

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