Friday, 30 January 2015

It is no fun to be a mid-market brand, whether in smartphone or diapers

When it comes to brand placement, it is not easy these days to be in the middle of your product segment. This was graphically brought home this week in the announcement by Apple that disclosed profits of $18 billion dollars, reportedly the single largest quarterly profit in corporate history. To a large degree, Apple’s success was due to the popularity of its iPhone 6, which has become the hands-down winner in the premium sector for smartphones. By contrast, Samsung announced another dismal quarter for smartphone revenues and faces the likelihood that Apple will recapture the lead in the overall number of smartphone sales. Samsung is staring at the dire prospect of being sandwiched between Apple at the top end, and a number of Chinese and Indian competitors at the low end of the smartphone market. In a world where the middle class is being hollowed out, being mid-market with your product is an alarming prospect.

But the danger lurking in being in the middle of your market is not limited to high profile products such as the smartphone. Something similar is happening in the market for baby diapers (“nappies” to those of you on the eastern side of the Atlantic), a product close to this grandfather’s heart. According to a report last week in Reuters, “Diaper wars: Kimberly to take on P&G through innovation, higher ad spend”, Kimberly-Clark, the well-known US personal care products company (think Kleenex tissues), faces a similar problem as it competes in the diaper market with its even larger competitor, Procter and Gamble (“P&G”). The problem for Kimberly-Clark is that P&G has come to dominate both the premium and down-market segments of the diaper market, the former with its Pampers brand and the latter with its Luv brand. As a result, the market for diapers seems a lot like that for smartphones, at least for those in the middle.

Thus consumers, aka mothers, of diaper products are increasingly opting for either premium or down-market brands, while Kimberly-Clark’s competing product is the mid-tier Huggies brand which, in a word, is a diaper product “without a real identity.” Put in dollars and cents terms, Huggies is the principal source of Kimberly-Clark’s $7 billion in annual sales in its baby care products business. By contrast, the Pampers brand itself brings in revenues of over $10 billion for P&G. As for the Luv-brand diaper product, the Wal-Mart website showed the lowest-priced mid-tier Huggies Snug & Dry 44-pack for a newborn at $8.97, while the price of the comparable P&G's 48-pack of Luv diapers is $6.99. In response, Kimberly-Clark would seem to have two possibilities, both of which involve moving beyond the mid-market segment for diapers. It can try to market a genuine low-price competitor to the Luv’s line or come up with a feasible competitor to the Pampers brand.

But how to accomplish this? At the low end, Kimberly-Clark can only cut the price of its Huggies product by such much. In tandem, the company somehow has to come up with an “improved” Huggies’ product at a lower price point, in effect to offer consumers “more for less”. In other words, in order to extricate itself from the ever-shrinking middle of the diaper market, Kimberly-Clark faces the daunting challenge of ramping up R&D and innovation to come up with diaper products that can compete both at the low end and the high end, as well as to ramp up advertising and promotional spending in support of these products. It is estimated that these efforts will cost Kimberly-Clark $500 million dollars. Once again, in dollars and cents terms, Kimberly-Clark expended approximately $3.71 billion overall on marketing and research in fiscal 2014. By contrast, P&G spent $9.73 billion in 2013 just on advertising. All of these efforts, to remind you, are directed towards moving Kimberly-Clark out of the middle of the product segment.

True, the company may have has little choice (Kimberly-Clark saw at 6% drop in its shares last week). However, one wonders to what extent a company can simply decide that it needs to innovate more (and in a hurry) to better compete in the marketplace, and to make good on its strategy. One would have thought that innovation is an ongoing aspect of company life. Branding compounds the challenge: if Kimberly-Clark succeeds in coming up with “more for less” so it can compete at the low end, it will then need to reposition the Huggies brand accordingly. How exactly does one move a brand from the middle to a down-market segment? The alternative is to come up with a new brand identify for the down-market product, but that presents its own set of challenges. The same will hold true if Kimberly-Clark also seeks to launch an up-scale diaper product under a new brand name. The upshot is that while a commitment to R&D innovation and branding support both seem worthy goals, the likelihood of success is far, far from being assured.

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