Will Kraft know what to do with Cadbury’s brands?

January 19, 2010

Now that Kraft has acquired the highly-prized Cadbury brands – and turned itself into the world’s largest confectioner ahead of Mars/Wrigley – will it actually know what to do with them?

First, let’s get something out of the way. There’s been a lot of phony sentimentality about Cadbury and its brands during this protracted takeover. The global geographical fit between these two companies is highly complementary and the cultural gulf far less of a chasm than it appears. Sure, Kraft is a machine conglomerate that munches brands for breakfast: I won’t waste time on that. But Cadbury is not quite the pure-play quintessentially British property it seems. A Quaker tradition and two hundred years of family history cannot disguise the fact that Cadbury these days is an international corporation like any other. Its key shareholders are American, its chief executive is American; the breadth of its markets is such that Britain accounts for a small part of them. Of a workforce of about 45,000, only 11% are based in the UK. Certainly it has proved an invaluable training ground for generations of UK marketers, who retain an affection for the company, and produced some great and quirky advertising (latterly through Fallon). But I doubt whether that has much bearing on how the company is regarded outside the UK.

The truth about Cadbury is it was – like a number of other great British corporate brands such as United Biscuits, Beecham, Boots and ICI – a relic of the British Empire. The Empire gave it favourable and abiding access to invaluable growing markets which would these days be recast as “emerging”. India springs to mind as a superior example. Nevertheless, just like the rest of these British brands, it created insufficient momentum to transform itself into a genuinely global corporation. Cadbury, whether as a soft drinks operator (Cadbury-Schweppes) or as a pure-play confectioner, conspicuously failed to crack the single greatest market in the world, the United States of America. Its long-term fate, in a globalising economy, could not therefore be in doubt. The surprise, if anything, is that it has taken so long to pass under the hammer.

That said, is Kraft the right global corporation to buy it? Whatever Kraft executives may say in public, the squeeze on Cadbury’s assets will start sooner rather than later. It will have to. Cadbury, it almost goes without saying, always meant a lot more to Kraft’s future than the other way around. A low-growth US-focused conglomerate in desperate search of high-growth emerging markets (such as Cadbury’s), Kraft needs not only to appease long-suffering investors (Warren Buffett being the largest) but to pay down a vast amount of debt it has incurred as a result of the takeover. By my calculations, this alone is about £7bn. The total figure is about £22bn. The near 20,000 jobs it shed and 35 sites it closed in the UK between 2004 and 2008 (mostly Terry’s) will be as nothing to the cost-cutting stringencies it inflicts on the Cadbury estate. Attila the Hun’s scorched earth policy may come to be judged mild by comparison.

Ultimately, however, there is a more important strategic issue at stake. Will Kraft know how to make best use of the brand culture it has acquired? I rather fear it won’t. Kraft is very good at text-book, incremental marketing. It knows how to build on existing brands by rolling them out internationally, as it has done very successfully with Oreo and will probably shortly demonstrate with TUC. It is less gifted in the new product development area. It’s hard to believe Kraft executives would ever have had the wit, or self-confidence, to acquire Green & Black’s; still less to build from almost nothing some of the world’s fastest-growing chewing-gum brands (Trident et al). You could, of course, argue that, thanks to Cadbury, the essential building blocks are now in place. All that is required of Kraft is to deploy superior resources to ensure that they are properly, if less imaginatively, exploited.

Even there, I find room for doubt. Mars, now it has acquired Wrigley, seems better balanced to exploit its global position; it remains essentially a confectioner. Kraft, on the other hand, looks like a corporate identity crisis in the making. Its confectionery elements remain only one part – admittedly a very important, unwieldy part – in the portfolio of a maker of groceries and “sweet snacks”.

Why Diageo needs to sue the socks off Sainsbury’s

August 18, 2009

Oh no (yawn!), not another supermarket copycat product. The owner of Pimm’s is getting nasty with Sainsbury’s over something called Pitchers, which looks disturbingly similar – but is notably cheaper. Goes on all the time doesn’t it?

Well, yes it does. It’s the way you tell them, though. Let’s try again.

Spot the difference

Spot the difference

Diageo, the world’s most powerful drinks company, is taking Sainsbury’s to court over what amounts to alleged criminal theft. It marks the first time in 12 years that a brand owner has felt sufficiently aggrieved, and sufficiently invulnerable, to mount a legal challenge against a supermarket over the defence of its intellectual property rights. There, that’s more interesting isn’t it?

Last time, in the case of Penguin v Puffin (as it came to be known), Penguin’s owner United Biscuits successfully sued Asda for “passing off” its brand with a cheaper supermarket imitation. Asda was allowed to keep the own-label brand name temporarily, but forced to change the packaging – a decision which effectively neutered the purpose of the copycat in the first place.

Before moving on to how Diageo intends to ‘neuter’ Sainsbury’s, perhaps we’d better tackle an elephant lurking in the room. How come, if UB was so successful and created a legal precedent, that supermarkets have largely ignored the implications of the court ruling and blithely continued with imitations that are a hair-split away from the branded originals? I call to witness, for example, Tesco Temptations crisps, a flattering tribute to the success of Walkers Sensations (2003). Then, let me see, there’s Asda’s ‘You’d Butter Believe It’ margarine, spookily similar to Unilever’s ‘I can’t Believe It’s not Butter’; and Lidl’s ‘Jammy Rings’, so comfortingly close to Burton’s Biscuits ‘Jammie Dodgers’.

The supermarkets do it because they can. In the first place, the law on passing off is weak and ambiguous. Any brand owner taking a supermarket to court could not, heretofore, be certain of a positive outcome.

And that neatly brings me on to a second explanation. Which brand owner in its right mind would dare to do so? Answer: only a very powerful one. The reason is not hard to find. Supermarkets have an ambivalent relationship with brand owners. They  are at once principal customers and competitors (as own-label producers). Offend them, and you risk destroying your distribution.

Indeed, one way of viewing the copycat issue is that it is a symptom of the abuse of market power by our retailers. When I last checked, Tesco held about 31% share of the UK grocery market, and the next three grocers a further 45% between them. Supermarkets may be the main abusers, but they are not unique. Consider, for example, Boots Alliance. Are we seriously supposed to believe that Boots Foot Survival is not a rip-off of Scholl Party Feet? In short, copycatting is arguably as much of an issue for the competition authorities as it is for the passing-off specialists.

But I digress. We’ve looked at why brand owners fear challenging powerful retailers, but not whether, outside the interests of their own shareholders, they are right to do so. Surely we could turn the whole copycatting argument on its head and lionise the supermarkets. Are they not championing consumer interests against greedy manufacturers by producing own-label versions of desirable products at a more affordable, accessible price?

Well, no they are not – whatever they may say. While it is true that the consumer benefits in the short term from a lower price, in the longer run he or she is just as much of a loser as the brand owner. In effect unfettered copy-catting coat-tails on the success of brand-owners at a fraction of the original investment. But the easy ride comes at a high cost. That cost is the chilling effect on future product development by brand owners. If, after years of expensive product development, they are going to be ripped off and their brand premium undermined, why bother? Indeed, some may conclude that it’s better to get into generic production straightaway and form an explicit own-label alliance with the supermarkets; which at least has the merit of keeping the factory production line rolling. It is a process that Andy Knowles, founding partner of design consultancy Jones Knowles Ritchie, has dubbed “brand commoditisation” – the slow death of the brand premium.

Will the Diageo court case make any difference? Surprisingly – given the background – it may. The rights and wrongs of intellectual property law in this area have been left in a mess after a High Court judgement handed down by Lord Justice Jacob in December 2006. This particular case centred not on supermarket “knock-offs” but a dispute between two brand owners, Procter & Gamble and Reckitt Benckiser. Briefly, P&G claimed RB had copied its Febreze air freshener design. Despite the fact that there was an uncanny similarity between the two products (other than the price, that is), P&G lost. And it lost on the curious grounds, according to the judge, that because the RB product was a manifestly cheap imitation, it didn’t deceive anyone. It was the first time a UK court had been asked to decide the scope of a new piece of EC regulation, the so-called Registered Community Design (RCD), and by common account it fell down on the job – creating instead a “Charter for Copycats”.

So, why does Diageo think it might get lucky? Probably because there has been yet another subtle shift in the law that may allow it to have a shot at the problem from a different angle. Last May new consumer protection regulations came into force banning lookalike products which are packaged and marketed with the intention of misleading consumers.

So far they are untested. In the words of Nina Best, an expert in advertising and marketing law at legal practice Browne Jacobson: “…If Trading Standards were to decide to investigate this potential breach of the regulations, it would undoubtedly strengthen Diageo’s case as well as give them the right to apply to the criminal courts for the forfeiture of Sainsbury’s Pitchers.”

Sainsbury’s would enjoy that experience about as much as Admiral Byng his execution. Others, however, might be suitably encouraged.

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