SpirE-Journal 2012 Q4

Second brands and brand extensions

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Second brands and brand extensions

With the Asia-Pacific poised to dominate the global consumer landscape in the 21st century, the idea of second brands, “Asianized” brands and brand extensions tailored to the region is being taken more seriously. This is not a new phenomenon – think of Levi Strauss’s Denizen brand in China, Burberry’s Blue Label brand in Japan or Yamaha Motor’s YTEQ aftermarket part brand. But it is a field where missteps are all too common. What is the state of play and what we learn from recent successes and failures?

Second Brands or Brand Extensions: How are they received in Asia’s marketing landscape?

The size of the global middle-class is forecast will grow from 1.8 billion in 2010 to 4.9 billion by 2030 – with 85% of that growth coming from Asia1. This segment will not only hold higher income but also bring to the table a more evolved appetite for consumer products.

This phenomenal growth is spurring global marketers to introduce brands that cater exclusively to Asian markets. In 2010, Levi Strauss launched its Denizen denim brand in China to cater to budget-conscious consumers outside of the country’s booming first-tier cities. In a similar yet differentiated way, Burberry sells its Blue Label brand of clothing and shoes (which are not positioned as “lower-quality”) almost exclusively in Japan. The aim has been to offer more fitted and petite clothing to young Japanese consumers.

While several marketers have introduced Asia-centric brands, almost all are confronted with a strategic decision – whether to launch a new brand, extend an existing one to new product categories or acquire a local brand. There are potential pitfalls to all of these approaches, though if well-executed the rewards can be enormous.

New brands have, historically, witnessed a high failure rate amid rising costs – estimated at USD 50-100 million, depending on the consumer market. Brand extensions, if unsuccessful, can harm the equity of the parent brand. The probability of success for these approaches is evenly balanced.

In this article, Spire explores the various approaches to introducing subsidiary brands in Asia and emerging markets (EMs) in search of lessons that can be used to promote branding success.

Introduction of second brands

A familiar approach to new brand launches in Asia/ EMs has been the introduction of ‘second brands’ which are cheaper, lower quality versions of the existing premium brands. This approach is typically adopted because consumers in these markets tend to be price-sensitive.

There have been a number of prominent second brand launches in Asia. One of the most striking examples was Levi Strauss’s launch of its Denizen denim brand in China in 2010 to cater to budget-conscious consumers in second and third-tier Chinese cities. The airline industry affords other examples. In view of the rise of low-cost carriers, Singapore Airlines launched Scoot in mid-2012. The new airline, with fares 40% cheaper than full-service carriers, would initially fly to destinations in Australia and China. Australian carrier Qantas had pursued a similar strategy eight years earlier with the launch of its JV budget airline Jetstar.

Nokia is introducing Lumia, a Windows-based smart phone brand, to capture first-time users particularly in Emerging Markets. These phones will be pitched against similar devices powered by Google’s Android and are 30% cheaper than Nokia’s existing cheapest smart-phone running on Windows.

Philips, too, has launched a second brand for EMs. While the company sells florescent lamps with a life span of 10,000 hours in Europe, it has designed an alternate brand for EMs with a lifespan of 3,000 – 3,500 hours. This, they hope, will meet the demand for cheaper and more energy-efficient lamps.

Lastly, there is the example of automotive brands such as Yamaha Motor (with YTEQ) and Honda Motor (with HAMP). These firms launched the YTEQ and HAMP second brands of aftermarket parts in Asia 10 years ago, extending their brand equity to address consumers at a lower price and quality tolerance position.

Acquisitions of local brands

The second approach to adapt brand identity to the Asian or EM landscape has been to acquire local brands. In 2009, PepsiCo acquired Amacoco, Brazil’s largest producer of coconut water. With this acquisition, the company was able to expand its base not only in Latin America but also in India and other South East Asia economies.

Similarly, Coca Cola in China has been concentrating its marketing efforts on water, tea and juice products through the acquisition of local brands. Its portfolio now includes ‘Heaven and Earth’ (flavored tea), ‘Smart’ (carbonated juice) and ‘Qoo’ (non-carbonated juice). The company has generated recognition and awareness for these brands through product localization.

Groupe Danone SA, the French food giant, tweaked this approach. Not only did the company acquire local brands, it also developed new products for China under its own brand such as Mizone flavored and vitamin-enriched water7. Clearly, this approach enables companies to invigorate their brand identity in emerging markets.

The example of global luxury brand Burberry in Japan exemplifies a slightly different approach to this strategy. Rather than acquire an existing local brand, it created a brand exclusive to a geographic region and one that was not positioned as inferior to its core brand – the Blue Label brand of clothing and shoes for the Japan market. Rather than being a second brand or brand extension, Blue Label was positioned as being a separate brand – thus insulating the core Burberry brand from the risk of failure.

Brand extensions

An alternative to creating or acquiring a new brand is the brand extension, through which an existing brand enters a completely new product category. For instance, Nike leveraged its brand to extend its presence beyond shoes into sunglasses, soccer balls, basket balls and golf equipment.

The brand extension strategy has gained traction in recent years. However, this approach has not succeeded in all cases. This is because it is inherently based on the following assumptions about consumer behaviour:

Consumers hold favourable attitudes towards the original brand;
The positive associations reinforce the favourable attitudes towards the brand extension; and
Any negative reactions to the brand extension are never transferred to the original brand

These assumptions do not always hold. For instance, Rasna, a market leader in concentrated soft drinks in India, launched a fizzy fruit drink ‘Oranjolt’ as an extension to its range of powdered drinks. However, the product extension failed due to the drink’s low-shelf life vis-à-vis competitors. Furthermore, Rasna was unable to scale-up its distribution network to match global competitors like Coca Cola and Pepsi.

Conclusion: Braving the Minefield

Research indicates that, between 2011 and 2015, retail sales in Asia and Australasia will grow at an average rate of over 6% in volume and 12% in value. While growth prospects remain strong, the failure rate of new brand launches is high in Asia and Emerging Markets. In 2009-10, it is estimated that India witnessed 1,500 new brand launches – of which, only 5% survived.

This underscores the need for prudent planning so that new brands and brand extensions truly connect with customer’s needs. In general, foreign companies can achieve tremendous value in Asia and Emerging Markets if their new or subsidiary brands can target the appropriate price point and consumer preferences. An inability to do so can result in costly damage to the parent brand – something that is difficult to reverse.

At the risk of over-generalizing, Asian consumers tend to reward brands that position themselves as premium and global. This explains why, for example, so many Asian brands tend to position themselves as Western (e.g. Bonia) or even Japanese (Creative Technology). Any hint that Asian consumers are being sold a low-quality product designed specifically for Asia is likely to be disastrous.

On the other hand, a second brand at a lower quality-price point that is clearly global, or of a global quality standard, might actually work. To mitigate the risk of damaging the core brand, companies should consider separating the second brand from its core brand identity. Second brands or brand extensions that preserve some linkage to the core brand are strictly for the bravest marketers and should be attempted only after very rigorous market research and testing.

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