Why don’t big companies launch new brands?

March 1, 2004

In the last 20 years, Procter & Gamble, the world’s most magnificent marketing machine, has launched many magnificent brands.

They include: Vicks, Oil of Olay, Pantene, Cover Girl, No

xzema, Clarion, Old Spice, Max Factor, Giorgio, Baby Fresh, Tampax, Iams, Spinbrush, Clairol, Wella and Glide.

Wait a minute, you might be thinking. Didn’t P&G buy Glide from W.L. Gore and Wella from that German company?

That’s right. They did. As a matter of fact, Procter & Gamble bought all of these 16 brands and relaunched them as P&G brands.

That’s what most big companies do. Instead of launching their own brands, they buy them from other companies, sometimes for a lot of money. The Wella deal was worth a reported 6.5 billion euros.

I have a lot of respect for the marketing savvy of the people at P&G. In books and articles, I have commented favorably on the strategies developed for many of their brands. The launch of Crest toothpaste and Scope mouthwash in particular.

But in the last few decades, I’ve had this nagging thought in the back of my mind. With all of Procter’s marketing smarts and financial muscle, why don’t they launch their own brands rather than buy them?

This is not an indictment of P&G. Most big companies do the same. They buy rather than launch. PepsiCo bought Mountain Dew and Gatorade, for example, instead of launching their own caffeinated citrus and sports drinks.

(Actually PepsiCo did launch a sports drink, All Sport, which went nowhere. So they spent $13 billion to buy the real thing (Gatorade along with its corporate parent Quaker Oats.)

Then there’s Coca-Cola, the Procter & Gamble of soft drinks. But Coke is no better in launching new brands than P&G.

Coca-Cola missed the caffeinated citrus category (pioneered by Mountain Dew), so they tried to get into the game with Mello Yello. That didn’t work, so they tried Surge which didn’t work either.

Coca-Cola missed the spicy cola category (pioneered by Dr Pepper), so they tried to get into the game with Mr. Pibb. That didn’t work either.

Coca-Cola missed the all-natural category (pioneered by Snapple), so they tried to get into the game with Fruitopia. That didn’t work either.

Coca-Cola missed the sports drink category (pioneered by Gatorade), so they tried to get into the game with PowerAde which hangs in there as a weak No.2 brand.

Coca-Coca missed the energy drink category (pioneered by Red Bull), so they tried to get into the game with KMX. That didn’t work.

Why do companies like Procter & Gamble and Coca-Cola miss the boat when it comes to launching new brands? There are three reasons.

1. An advertising-driven launch.

Most big companies will not launch a new brand without the backing of a substantial advertising budget. Yet a successful new brand is usually built around a new category which can take years to develop.

That’s why many successful new brands start slowly using primarily PR techniques. Starbucks, Gatorade, Google, Red Bull, to name a few. These brands and many others were introduced by entrepreneurs who have the patience to hang in there while the market develops.

Red Bull, for example, took four years to reach $10 million in annual sales and another five years to reach $100 million. Any big company that took a look at Red Bull in its early days would have said, “There’s no market there. We can’t afford a big ad budget to launch an energy drink brand.”

By the time the market develops, it’s too late for a me-too brand.

2. A research-driven name.

You can’t create a new category with a line-extension name. Invariably, new categories are dominated by new names created especially for the category. Red Bull, not AriZona Extreme Energy. PowerBar, not Gatorade Energy Bar. Amazon.com, not BarnesandNoble.com. Dell, not IBM personal computers. Nickelodeon, not the Disney Channel.

With marketing history clearly in favor of new names rather than “stretched” names, why do companies continue to take the line-extension path.

They do research.

When asked which brand name he or she prefers, the average consumer invariably chooses the familiar name.

Toyota Super or Lexus? Invariable the answer is “Toyota Super.” Who’s ever heard of a Lexus? (Either Toyota neglected to research the Lexus name or they chose to ignore their own research.)

Mercedes-Benz Ultra or Maybach? Would your average multi-millionaire prefer to drive a car that he or she has never heard of than a Mercedes? Yet in the long run, Mayback is the clearly superior name.

3. A broad distribution plan.

With a substantial advertising launch, a new product needs broad distribution to make the economics work. So companies pressure the distribution with discounts, two-for-ones, free merchandise and sometimes the payment of slotting fees.

The odds are stacked against such a plan. New brands take off slowly and with little selling at point of sale, most new product launches are bound to fail. A recent Nielsen BASES and Ernst & Young study put the failure rate of new U.S. consumer products at 95 percent and new European consumer products at 90 percent.

A better distribution plan is to start “narrow,” often with a single chain. Charles Shaw (Two-Buck Chuck) started with a single chain (Trader Joe’s) in a single state (California) and became the fastest-growing table wine ever.

Newman’s Own salad dressing was launched in a single supermarket (Stew Leonard’s in Norwalk, Connecticut). The store sold 10,000 bottles in the first two weeks.

With narrow distribution, you can often arrange special displays and promotions which increase your brand’s chance for success.