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.
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.”
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?