Cars
We have three successful examples of mass-market car brands launching high-end brands—separate brands, I emphasize—and one other company on the fence. The three success stories are:
- Toyota launching Lexus
- Honda launching Acura, and
- Nissan launching Infiniti
All three have worked splendidly, with Lexus the true thumping success stand-out. When launched in the US roughly 20 years ago, Toyota’s ambitions to take on BMW, Audi, and Mercedes at the top of the market were thought risible. And yet the best-selling luxury car brand in the US from 2001 to 2011? Lexus.
The brand that’s on the fence is Hyundai with its Genesis model, taking direct aim at the BMW 5-series, Audi’s A-6, and Mercedes E series. In a fascinating attempt to have it both ways—on which the jury is still very much out—Hyundai is using the Hyundai brand in the US but not in its native Korea. To buy a Genesis here, you go to a Hyundai dealership and look at a car with the Hyundai signature stylized “H” on the trunk lid and the steering wheel but not, interestingly, on the front hood or grill. Nor does the full name “Hyundai” appear conspicuously anywhere. In Korea, as I understand it, the Genesis is its own brand.
Why, given the proven track record of Toyota, Honda, and Nissan, did Hyundai go this route? Economics. Published reports have said the Hyundai estimated it would cost $2.5-billion and take a decade to establish a separate brand. We’ll come back to this.
Airlines
The airline industry is, along with cars, famous for high-end and low-end offerings coexisting side by side. But here, by contrast, the track record of incumbent carriers setting up discount subsidiaries is ugly.
United and Delta Airlines, both “legacy” carriers, tried launching bargain brand carriers and both failed completely.
United’s effort, “Ted,” first flew in 2004 and was shut down in 2009. (Its planes were repurposed into United’s fleet.) Among other things that went wrong was insufficient differentiation between Big United and Little Ted. The only difference in the planes themselves was the elimination of first class in Ted-brand planes, but they were operated by United Airlines crew and, because of predictable operating needs, Ted-branded planes often operated as mainline United flights and United aircraft were substituted on Ted routes.
Delta’s effort didn’t last half as long: It launched “Song” in 2003, another all-economy-class carrier, and closed it down in 2005. The skepticism with which Big Delta viewed Little Song was summed up by Delta’s CEO Gerald Grimstein who came on board just after Song was launched and said it should have been called “Swan Song.” Among other problems, maintaining a clear marketing distinction between the two brands, especially in large markets like New York and LA served by both Delta and Song, was problematic, and Delta’s COO at the time of the shutdown admitted running both the main Delta brand and the sub Song brand was “very expensive.”
Food
Two case studies:
#1. In 2000, the vast cereal manufacturer Kellogg, based in Battle Creek, Michigan, acquired the new-agey Kashi brand in La Jolla, California. Kellogg’s goal was to import the cachet of a natural, organic, back-to-basics portfolio of cereals into its grocery store aisle-busting megabrands such as Frosted Flakes, Rice Krispies, and Corn Flakes. Understandable intent; terrible execution.
For awhile all was well, but starting in the 2010’s the acquisition began to run off the rails. First, food activists discovered and broadcast far and wide that despite Kashi claiming its products were “all natural” and contained “nothing artificial,” ingredients included pyridoxine hydrochloride, calcium pantothenate, and other ominous-sounding chemicals. Although they actually occur naturally, food companies often use synthetic versions to control quality and manage consistent supplies. Be that as it may, the alarmist bell had been rung. Kellogg ended up paying $5-million and agreeing to change its labeling to settle a class action lawsuit.
Next, in 2011, it came out that Kashi used GMO’s, another no-no to its core customers. Sales had already been sliding but this made matters worse. In 2013, Kellogg management decided to relocate Kashi from its long-time home in La Jolla to HQ in Battle Creek. The rest of the story has not been written but the portents are not promising.
#2. In 1994, Quaker Oats acquired the niche tea/fruit drink maker Snapple, also a “new agey” brand, for $1.7-billion. In 1997 Quaker sold it off for $300-million (a loss of $2-million per day while Quaker owned it, for those of you keeping score at home). This was immediately characterized as “one of the worst acquisitions in history.” What went wrong?
Among other things, Quaker couldn’t relate to the independent distributors Snapple relied upon, who were not at all like the mass market distributors Quaker was used to. It also bollixed the marketing message, doing away with Snapple’s quirky employee-based campaign (featuring one Wendy Kaufman, a real person) and replacing it with a confusing boast that it would be happy to be third in beverages behind Coke and Pepsi.
So what might we conclude from this very mixed track record in Corporate Land?
Bruce,
Closer to home, have any of the Big 4 accounting firms or bulge bracket investment banks tried things like this? Also, just looking at the success of the carmakers launching those subbrands, I don’t think it is coincidence that all of them were “upmarket” moves rather than downmarket. The firms you are talking about don’t really have that option.
For the reasons you cite, I don’t think large law firms themselves can do this. Not directly. But what they can and should do is look at deploying “passive” capital within the alternative provider universe. Private equity or venture capital type investments, or maybe a JV if the business case is strong enough. I know some firms are doing this already, a trend likely to continue. You can start on a much smaller scale, and see where it goes.
Hilton and Marriott do offer multiple price points under different brand names. And now, they sometimes build two brands in one building. That does not address, however, the meddling partner issue.
Thought provoking article. I’ve been mulling it over for the last couple of days.
I have to declare a particular interest in this topic, having founded the contract lawyer hub Vario within the brand of Pinsent Masons. My experience suggests that we should ask a different question: not ‘can different price points exist under one brand?’ but ‘can different service lines (which, most likely, will attract different price points), exist under one brand?’ By taking the service(s) offered as the starting point, rather than the price, I think we can arrive at a more optimistic view.
Sure, partner intransigence and cultural inflexibility will remain issues to overcome, but, in a way, it was ever thus. Crucially, however, in taking the service-first approach, we will be responding first to client demand for flexibility and choice from their trusted legal brands. From that solid foundation flows differential pricing, which is a natural consequence of the varying market forces associated with delivering services in a variety of ways.
So perhaps all of this would sit more comfortably with law firms if we started to think about differentiation in terms of a horizontal spectrum rather than the more pejorative ladder of services where some are ‘upmarket’ and some are ‘down’? Clients expect quality in all types of legal services they procure, be they LPO services, contract lawyers or partner-led strategic advice. The difference is not the quality but the nature of the output. The method by which the services are delivered is a consequence of the required output and the price point is a consequence of method.
Dear Katherine:
Many thanks for such an insightful comment. You have nicely articulated the difference, which far too many fail to appreciate, between “value” and “inexpensive.” I have long been a firm believer that product and service providers can deliver value at all price points along the pertinent market spectrum, from inexpensive to super-luxury pricing. And “value” itself embodies and essentially entails the concept of quality, as in quality fit for purpose or suitable for the client’s needs for that matter or that application.
Lawyers too often denigrate the prospect of less-expensive services by immediately and thoughtlessly assuming they will bring with them compromises in both quality and value. Not so in the least. (For a discussion of some of these issues in a different context, see my recent “Bergdorf Effect” column.)
I mostly agree with the conclusion, but wonder if the comparisons are apt. In the auto, airline and food examples, the upmarket or downmarket moves were aimed at targeted different segments of consumers. Law firms who are trying to successfully move up or down market are typically trying to get a broader swath of work types from their existing client base, not trying to establish a radically new and different set of clients.