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Brand Extension Success —New Profit Growth

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Asian Brand StrategyGiorgio Armani is one of the biggest brands in the global fashion industry. Leveraging its strong brand equity in the fashion apparel market, Giorgio Armani has ventured into other related categories like eye wear, watches, and cosmetics. These are made available in each of the above-mentioned brand categories to ensure that the brand is experienced in different segments of the market. It is usually reasoned by fashion houses such as Giorgio Armani that eye wear, perfumes, watches, and cosmetics are strongly related to fashion and luxury and thus it is natural for such fashion houses to extend their brands into these categories.

Giorgio Armani is a good example that proves this point. By leveraging its expert knowledge of the fashion and luxury industry, Armani has been able to come up with winning concepts in the other product lines of cosmetics, watches, jewelry, and eye wear. But Armani has not stopped at just these product categories: Armani has extended the brand into multiple other categories such as Armani Casa (up-market furniture), Armani-branded Dolci (confectionary), and Armani-branded Fiori (Flowers). And to add to this wide portfolio of brands, Armani very recently struck a deal with a Dubai-based property group Emaar to come up with a chain of 14 Armani branded hotels and resorts by 2011 investing more than US$1 billion (6.95 billion yuan). As is the trend in the fashion industry to operate in the entire spectrum from apparel, jewellery, cosmetics, watches, perfumes, and luxury hotels, Armani has been able to leverage its brand equity to be present in most of these lucrative sectors.

This example demonstrates one of the very important corporate phenomenons—brand extensions. With success rate for new products less than 35%, more and more companies are resorting to extending their existing products and product lines. Even though this seems simple and straight forward, facts paint a different picture—failure rates of brand extensions in many of the fast moving consumer goods product categories are approximately 80%.

This article looks into this highly popular corporate activity and offers some guidelines to companies that aspire to extend their brand and ensure success of such brand extensions.

Brand Extension —A Brief Introduction
Brand extension refers to the corporate activity whereby companies introduce new products, new product variants, or product improvements by leveraging the brand equity of the existing parent brand. When Starbucks decided to launch its line of bottled cold coffee called Frappucino (a mixture of coffee, water, milk, and different syrups), the logic used was to leverage the very strong equity of the Starbucks brand in gaining wide spread acceptance for the new product line. As such, brand extension is a type of short cut that companies resort to, to minimize risk and maximize their investment in the brand.

But more often than not, brand extensions fail. The simple reason for such failure is that companies usually tend to overlook the fact that the equity of the parent brand is just one of the many factors that impact the success of brand extensions. Much has been researched on the success factors of brand extensions in the industry and in academia. Knowledge from the collective wisdom of the industry, best practices of some of the biggest brands, and empirical evidence from research is used to present some guidelines on brand extensions to companies.

Dynamics of Brand Extensions
Brand extensions become inevitable because of companies’ chosen strategy path. As has been proven with in strategy, companies would benefit from adopting either of the two dominant strategic paths —low cost competitor or the differentiator. Low cost players usually formulate their value propositions in a way that would appeal to their target segment—budget customers who are primarily cost conscious and prefer buying products at lower price points. Similarly, differentiators are those companies that prefer offering higher quality and at often times highly differentiated (branded) products at comparatively higher prices to segments of customers that are affluent or that prefer paying for high quality products. As a result of such focus, low cost players leave out the premium market and the differentiators leave out the budget market. But as has been seen in industry after industry, companies always are eager to expand to segments that were left out initially. As a result low cost players seek to enter the premium market and differentiators seek to enter the budget segment of the market. Such a corporate intention gives rise to brand extensions.

The automobile industry is a classic case for brand extensions. When Toyota entered the US market, it introduced Corolla and Camry brands that were targeted at the masses. But as the car brand gained credibility and popularity, Toyota wanted to leverage that very brand equity and expand into the lucrative luxury/premium car segment. Toyota introduced the Lexus as an altogether new brand in the luxury market.

Such an extension is referred to as an upward brand extension. Similar is the case with Mercedes Benz. When Mercedes, which is the quintessential luxury car, realized that it was losing out on the budget segment, it brought out the Mercedes C class, at a lower price point and targeted at young professionals. Such an entry into the budget segment is referred to as a downward brand extension.

But in both of these examples, the parent brands (Toyota and Mercedes) extended their brands in the same product category—cars. But many times companies will extend their brands into different product categories with a hope that the equity of the parent brand will ensure the success of the brand extensions. The following section of the article discusses the main factors that impact the success of brand extensions.

Essential Factors That Impact Brand Extension Success
Fit between parent brand and brand extension: The fit between the parent brand and the brand extension is probably the most important factor that impacts the success of the brand extension. Fit can be analyzed from multiple perspectives. But generally fit refers to the compatibility of the brand extension’s product category to the parent brand’s product category, the compatibility of the brand extension’s product attributes to the parent brand’s product attributes, and the compatibility of brand extension’s associations with the parent brand’s associations. Greater the fit between the parent brand and the brand extensions, higher is the probability of the success of the brand extension as there is a higher chance for the transfer of the brand equity from the parent brand to the brand extension.

Parent brand conviction and parent brand experience: The other important factor that influences the success of the brand extension is the quality of experience that consumers would have had with the parent brand. Such brand experience can include the physical quality of the product, the service encounters, the price and value perceptions, the post purchase service, the retail atmosphere, and such. Also, the parent brand conviction, which refers to the extent of support and commitment the parent brand has towards the brand extension, also impacts the success of the brand extension.

Retailer experience: In spite of the ever increasing influence of the Internet on shopping of even the branded products online, retail spaces in the physical world still continues to have a stranglehold on distribution. As such, the success of many brands is contingent on securing shelf space and the marketing push provided by the retail establishment. Similar is the case with brand extensions. If companies that extend their brands are not welcomed by retail stores and are not offered marketing support and push by the retail stores, then the success of such products are limited.

Marketing support: This is one of the important factors that determine the success of brand extension that is under the control of the company. Given the proliferation of brands in the market, it is only natural that the company that invests highly in promoting its brand extension eventually ends up in a better position. However, marketing support does not mean just increased advertising or higher promotions in retail stores. It also includes the commitment of the organization—internally in terms of corporate management support and externally in terms of financial, technological, marketing, and managerial resources. Such support will help achieve two objectives—one, it will facilitate a very aggressive push and pull demand for the brand extension and two, it will help create positive perceptions about the company in the minds of the consumers.

In the light of very high rates of new product failures, brand extension seems very attractive. After all, all companies seek to extract the maximum possible returns from the investment in their brands. But brand extensions done without due diligence can be equally detrimental to companies. One of the critical consequences of wrong brand extension is the dilution of the parent brand’s equity. The examples of Calvin Klein and Pierre Cardin are cases in point that demonstrate that when a parent brand extends its products into multiple categories and multiple segments, the equity gets diluted and there is a high risk of the brand becoming a commodity as the exclusivity is lost. But if companies carefully study the brand extensions and follow the general guidelines offered in this article, brand extension success could indeed become a corporate reality and drive shareholder value.

Print ed: 01/10


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