PREFACE The external environment of modern businesses is ever changing. There are several factors which are beyond the control of a business. But to many, the changes present opportunities, which lead them to find new and innovative ways to market their products and services. This overview analyses marketing strategies incorporated by businesses in the Food and Beverage industry in the face of external environment changes and how they have adapted their Marketing Mix to suit these changes. The overview is aimed at Business Management students who can relate marketing theories to practice. In using Michael Porter’s competitive strategies, students can relate to the various strategies that companies test and try to remain competitive. The overview also gives students and teachers the opportunity to discuss and comment on the issue as well as add new case studies of other companies. They can also extend their analysis to other industries and evaluate each other’s comments and critiques. Adapting Marketing Mix to external environment changes – An overview of the Food and Beverages Industry By Leena Palekar INTRODUCTION Marketing Mix is one of the key concepts in modern marketing theory, which consists of elements designed to meet the needs of customers. They are product, price, promotion and place, which have been analysed in this overview. External environment refers to factors that may influence business decisions, but over which the business has very little control. The Food and Beverages Industry has recently witnessed several changes in its external environment. •
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An increased demand for a more meat‐centred Western diet from the growing middle classes of India and China Increasing diversion of agricultural land for making make bio‐fuels A 100% rise in global food prices since 2000 (see chart below) Speculation to increase prices by investment funds on the commodity futures exchange Socio‐demographic changes that show busier lifestyles and increased single‐person households A change in consumer taste towards healthier food Climate change such as, a multi‐year drought in Australia Strategic shift in marketing techniques like using mobile and digital marketing platforms •
The global economic recession (Source: New Internationalist, 2008, p. 16) These external factors challenge firms and businesses to find new ways to adapt and capture market opportunities. The changing socio‐demographic environment necessitates companies to re‐think design, marketing and product development. In addition, rising food prices on the Open Market force many companies to incorporate innovative marketing strategies. This article provides an insight into how businesses in the food and beverage industry have adapted to these changes. Michael Porter’s competitive strategies is discussed to ascertain how these businesses have adapted. Each of the Marketing Mix elements are scrutinised to understand how they have been altered in response to external environment changes. Michael Porter, an influential management thinker, suggested that businesses could achieve a competitive advantage over rivals by following one of three generic strategies: Cost leadership strategy, Differentiation strategy and Focus strategy (Kotabe et al. 2005, p. 496). A company is said to adopt a Cost leadership strategy when it offers a fairly standardized product or service at a lower cost than its competitors. In Differentiation strategy, a company offers a product or service that is perceived as unique. Companies using a Focus strategy concentrate on a highly specialised segment of the market and try to achieve a dominant position in that segment. These strategies are also analysed in this overview. ANALYSIS PRODUCT In the Food and Beverages Industry, products move very quickly through their life cycles. There is a gravitational shift towards fresher, more convenient, more nutritious and better quality foods, besides environmental concerns. Therefore, marketing strategies such as New Product Development become increasingly important. But this requires huge resources like investments in product and market research and development. Changes in external environment, therefore, offer tremendous opportunities for new product development. Starbucks capitalized on consumer trends towards health conscious products by innovating new healthy “smoothies” recipes. Dunkin’ Donuts has a new low‐calorie line called “DD Smart” designed for the health‐conscious, with egg‐white flatbreads and fruit smoothies. Similarly, Kraft launched a new pizza in 2007 called “DiGiorno Ultimate” under its super premium category which accounted for a third of all sales of new frozen pizzas in that year. In 2008, Kraft also offered individual servings of this pizza, aimed at singles (The Economist, April 12th‐18th, 2008, p. 72). However, new product development processes can be extremely expensive and time‐consuming. Product development is not the only marketing strategy that businesses undertake in response to changes in the external environment. Many also resort to “Product adaptations”, where new products are actually modified improvements of existing products. For example, Mc Donald’s has reduced the size of their french fries helpings, thereby cutting the number of calories per servings (The Economist, Aug 13th‐ Sep15th, 2008, p. 56). Nestle is another example where an increase in milk prices by 50% in the Open Market in 2007 resulted in recipe changes to reduce milk content in their products. It now buys more milk‐making baby formula and chocolate bars directly from farmers than on the Open Market. Also, it has stopped making basic wholesale products like tomato puree and cocoa paste because of slender margins and has put a huge pasta factory at Sansepolcro in Italy up for sale (The Economist, April 12th‐18th, 2008, p. 71). This shows Nestle has resorted to Porter’s “Differentiation” strategy for its product range by changing its recipes to leverage against rising milk prices. Similarly, Kraft has changed its recipe for Miracle Whip, a salad dressing and sandwich spread advertised as a taste of mayonnaise with half the fat. Miracle Whip now contains less soya oil, which is less fattening and has more water content, making it a healthier and less expensive product (The Economist, April 12th‐18th, 2008, p. 71). Again, by following a “Differentiation” strategy, Kraft attempted to take advantage of its product’s real and perceived uniqueness to better serve the exact needs of its weight‐conscious customers. Such businesses are said to have the first‐mover advantage. PRICE New product development discussed above allows for “Price Skimming” due to new technologies involved in the process. This means businesses charge a premium for new products to gain first‐mover advantage. However, pricing strategies have to be more carefully tailored to specific market segments to gain a competitive advantage. For example, the deteriorating American economy in light of the global recession resulted in Starbucks announcing 600 stores closures by July 1st, 2008 in the United States. Labelled as a “premium priced” supplier, it will be interesting to see whether Starbucks will resort to its premium pricing strategy due to its purchase of the Coffee Equipment Company in March 2009, which manufactures an expensive coffee‐making machine called Clover. Although it has already started testing the machines in some of its American shops, an obvious choice for Howard Schultz, the new CEO will be to apply Porter’s “Focus” strategy to concentrate on quality rather than growth. By focussing on a highly specialized quality‐conscious market segment, Starbucks aims to achieve a dominant position in that segment to make a comeback. Meanwhile, Mc Donald’s has perfectly timed its decision to start selling coffee that is pleasant to drink (The Economist, July 5th‐12th 2008, p. 70). Similar ‘Focus’ strategies can be noticed in Mc Donald’s Penetration Pricing strategy which resorts to setting lower prices with the assumption that a higher sales volume will lead to lower unit costs and higher long‐run profits. In 2008, Mc Donald’s came up with a range of items that cost just US $1 and rivals like Wendy’s and Burger King soon followed suit. By focussing on mass markets and cheap prices, Mc Donald’s 2008 sales increased compared to 2007 (The Economist, April 12th – 18th 2008, p. 72). To cope with turbulent economic and market conditions, Nestle hedged its purchases of raw materials by buying forward. As a result, it was able to sustain its competitiveness in the face of rising commodity prices. Its global sales, as a result, grew 7% in 2007 compared with an average of only 1.8% for the whole industry in that year (The Economist, April 12th‐18th, 2008, p. 71). In Australia, the super market giant Coles resorted to “Low Cost Focus’ strategy, which focuses on pricing products cheaply for daily shoppers. According to Ruslan Kogan, founder of Kogan Technologies, ‘In a recession economy, customers research every bit of money they spend’ (Dent, cited in BRW 2009, p. 49). As consumers tend to move towards bulk buying and bargain hunting in recessionary times, many retailers offer discounts to woo consumers. Such businesses have wafer‐thin margins on products but make profits on selling add‐
ons at the point of purchase (McColl, cited in BRW 2009, p. 29).
PROMOTION The global recession has benefitted some companies, but not all. Luxury restaurants and high‐end eateries have been affected by the recent global recession as more consumers stay away to save money. But fast food and take‐
away restaurants say business is booming. This is because they focus on lower cost and consumer convenience. Burgers and pizzas are an affordable take‐away option for consumers who prefer eating in the relative comfort of a home environment. In Australia, Domino’s Pizza Enterprises increased sales by 6.8% in mid‐2008. Its family meal costs only A$20. Its Chief Executive, Don Meij says that ‘It is near impossible to make a meal for that amount’ (Lindhe, cited in BRW 2008, p. 29). Another company that has benefitted from the downturn is hamburger chain Grill’d whose sales rose by 4‐5% in mid‐June 2008. Similarly, in Japan, firms offering instant food like Toyo Suisan Kaisha, a maker of instant noodles, has seen sales shoot up as customers move towards convenience and lower costs (Rial, 2008). With fast food chains and take‐aways benefitting in the downturn, retail stores, super markets and giant food manufacturers face a bigger challenge to attract customers with new and innovative promotions. In mid‐2008, Starbucks introduced loyalty cards to its customers. In New York, restaurant chains are required under a new law to state the number of calories on their menus. While some companies have complained that it is costly to reprint menus and are loosing business as customers are drawn to calories than food, others say they have profited by adapting quickly to the new rules of stating calories on their menu. Starbucks has substituted whole milk with reduced‐fat milk, which has cut calories in its drinks by 14%. (Source: The Economist, Aug 30th‐Sep 5th 2008, p. 56) (Source: www.starbucks.com) Le Pain Quotidien, a mid‐range bakery chain in the U.S. has overhauled its menu, reduced portions and eliminated items that have high calories to boost its business (The Economist, Aug 30th‐Sep 5th 2008, p. 56). Displaying calories on products has proved to be a “strategic advantage” where overhead costs are reduced due to the introduction of low‐calorie items and smaller servings. This reflects Porter’s “Overall Cost Leadership” strategy. In a new report titled ‘Policy Responses to the Economic Crisis: Investing in Innovation for Long‐term Growth’, the Organization for Economic Co‐operation and Development says that, New business models and new technologies, particularly those allowing a reduction in cost, often arise in downturns, as was the case with low­cost airlines which grew out of the recession of the early 1990’s. As dominant players weaken, they open space for new players and innovators (Sibillin, cited in BRW, 2009, p. 23). The integration of technologies such as digital media and television allows for more innovative promotional approaches. Smith’s Snackfood Company runs a promotion that invites people to suggest a new flavour for its chips. That along with an image is then explained on the company’s website. The person who suggests the winning flavour will receive A$30,000 and 1 percent of the sales for that product, up to a maximum of A$200,000 a year (Shoebridge, cited in BRW, 2009, p.43). New technologies allows firms to target specific markets more cost‐effectively, especially, television advertising available to small firms on niche satellite channels. An example is Master Chef Australia sponsored partly by Coles, a leading supermarket chain in Australia. With millions watching the episode every week, Coles was promoting its image as a grocery super market to the right target audience at the right time. In an international study released by ING Direct in late July 2009, it was revealed that half of all Australians cook at home to save money – second only to the financially ravaged U.S. (Garner, cited in The Courier Mail, August 3rd 2009, p. 14). The Coles “Feed your family for under A$10” promotion campaign is another innovative strategy used by the company to attract consumers to their stores. These marketing efforts have seen an increase in Coles sales climbing 6.2% for the year ended 30 June 2009. (Source: IGD Retail Analysis, 2009) On April 20th, 2009, Coca‐Cola said it would adopt a “value‐based” compensation system for the advertisers that work for its 400 brands. Rather than paying advertising agencies based on hours worked, Coca‐Cola will pay for results achieved (The Economist, May 16th‐22nd 2009, p. 70). With increasing “clutter”, Coca Cola’s new compensation system has explored a novel promotional strategy. According to communications media agency Zenith Optimedia, ‘the recession has witnessed a nearly 7% decline in global advertisement spending in 2009’ (The Economist, 16th May‐22nd June 2009, p. 70). Coca Cola’s aim, with its new promotion strategy is to inspire creativity and efficiency. It fits with Porter’s “Differentiation” strategy, where Coca Cola has attempted to achieve a market share by concentrating on its unique offer. Its “Open Happiness” ad campaign has also come at the right time, as the global recession cuts into its soft drink sales. PLACE With globalization and new information and communication technologies, companies are distributing products in new and innovative ways. Direct Marketing is becoming the new channel of distribution to reach consumers without the use of traditional intermediaries. This contributes to efficiency and cuts costs. Direct online selling is one such method that sells goods and services online, which offers a two‐fold advantage: low‐price and a wide distribution platform. It allows prices to be more competitive with lower administration costs, similar to Porter’s “Cost Leadership” strategy which allows companies to allocate overhead costs across large volumes to achieve large economies of scale. ‘The marginal cost of gaining an additional audience member is essentially zero’ (Grannell, cited in Marketing, September 2009, p. 65). Mobile and digital marketing techniques incorporate location‐based advertising, which helps companies connect to a large consumer base at all times where content is customized as per their geographic location and individual preferences. According to Kent Weritime, the author of the book “DigiMarketing: The essential guide to new media and digital marketing”, ‘The mobile industry is driving innovation and growth in marketing and advertising, so much so that, mobile is a “must‐have” component of a media plan’ (Soccio, cited in Marketing, May 2009, pp. 58‐60). Companies are increasingly using mobile specific multimedia formats to market retail loyalty programs. This includes product catalogues, digital vouchers, tracking and redemption of loyalty programs. Firms are also using micro‐blogging Internet sites like Twitter to market products and relay information in real time. ‘The number of users accessing the social networking site while on the move has increased 1382 per cent in the past year’ (Thom 2009, p. 63). Sam Riley, Managing Director of data management company Ansarada, offers an example of a Coffee Shop using Twitter: You can message your Twitter followers that for the next two hours coffees will be only A$2. If you do it about 2 pm when customers probably feel like a pick­me­up, they are likely to respond (Douglas, cited in BRW June 25th­
August 5th 2009a, p. 27). In the Courier Mail, Alex Tilbury quotes Iggy Pintado, author of the book “Connection Generation” as saying, Marketing online has gone beyond websites – its now about how your company’s profile stands out on business network site LinkedIn, whether the company sends regular “tweets” to its followers, if the company has a Facebook page for its business and whether it uploads its ads on to YouTube (Tilbury, 2009). Companies such as Microsoft, MTV and Yahoo! conduct in‐depth research studies of online consumer behaviour to ensure that advertisers are able to target the right audience, especially children and teens who increasingly use mobiles and the Internet to communicate. According to the Berkeley Media Studies Group, 2009, ‘These digital ads include various forms of eye‐tracking studies, galvanic skin responses, social network analysis and statistical modelling. In China, Mc Donald’s and Pepsi have collaborated on a mobile marketing campaign involving digital coupons that generated one million unique visitors and a sales‐volume increase of 29%. In Italy, P & G’s Pringles created an interactive web‐based football game, complete with videos and downloadable digital toys’. (Berkeley Media Studies Group, 2009). According to the Media Studies Group, Doritos began promoting its Late Night chips to customers in the U.S. by asking them to point a special symbol located on the back of the chip package, through their webcams, to gain entry into its Doritoslatenight.com site for a virtual 3‐D music concert. While Unilever and Starbucks offered free ice cream via the free social networking site Facebook, Mc Donald’s, in Hong Kong, used Microsoft’s Messenger to generate “immense response levels across Hong Kong” for its Hello Kitty promotion tied to its products. ‘Over 70 million messages were exchanged with Hello Kitty during the campaign’. (Bekerley Media Studies Group, 2009). Companies like Mc Donald’s claim that online marketing has impacted sales. ‘The Return on Investment (ROI) delivered by online campaign was 16% greater than that delivered by T.V. advertising’ (Berkeley Media Studies Group, 2009). For 99 cents, iFood Assistant powered by Kraft ‐‐ an iPhone/iPod touch application ‐‐ guide users through the various stages of meal preparation, from generating ideas to locating ingredients in the grocery store aisle. The Company also offers video instructions via iPhone on using Kraft products. ‘iFood made the Kraft name one of the top 100 paid applications on iTunes, and the number 2 most popular paid application in the lifestyle category’ (Berkeley Media Studies Group, 2009). According to an analysis of the Australian retail sector by Citi Investment Research and Analysis, ‘Australian retailers earned A$5.1 billion online in 2008 and predicts that sales on the web in 2009 are expected to grow faster than sales from traditional stores’ (Douglas, cited in BRW, 2nd – 8th July 2009b, p. 24). In a recent edition of “Marketing” magazine, Adam Good says, ‘The BRIC nations are all going straight to digital content. China has nearly 650 million mobile owners and over 290 million Internet users, India has 350 mobile subscribers and already its mobile advertising market has hit US $10 million. The BRIC countries are going straight to mobile, straight to next­gen advertising models’. (2009, p.85). So traditional retailers who do not integrate the Internet into their business models are in danger of losing market share, vis‐à‐vis their competitors, if they don’t become more active online. The Internet has become a strong platform to collaborate with customers directly, rather than through the typical channels of distribution. CONCLUSION An examination of the above businesses suggests that the marketing mix elements of product, price, promotion and place need re‐designing and adaption to suit the constant changes that external environments undergo. REFERENCES ‘Advertising’s new model: Clock‐watchers no more’ 2009, THE ECONOMIST, May 16th‐22nd vol. 391, no. 8631, p. 70 Barber, Joe, 2009 ‘Behind the eight ball’, MARKETING, May, pp. 64‐65 Berkeley Media Studies Group 2009, ‘Interactive food and beverage marketing’, viewed 7th September 2009, <http://www.digitalads.org/updates.php> Dent, Georgina 2009, ‘Cut from the middle’, BRW June 25th – August 5th, p. 49 Douglas, Jeanne‐Vida 2009a, ‘Socially active', BRW June 25th – August 5th, vol. 31, no. 25, p. 27 Douglas, Jeanne‐Vida 2009b, ‘Twist in the E‐tail’, BRW July 2nd‐ 8th, vol. 31, no. 26, pp. 24‐25 ‘Food regulation in America: Menu items’ 2008, THE ECONOMIST, August 30th‐
September 5th vol. 388, no. 8595, p. 56 ‘Food crisis: the facts’ 2008, New Internationalist, December, no. 418, pp. 16‐17. Garner, Nick 2009, ‘Homing in on savings’ The Courier Mail, 3rd August, p. 14 Good, Adam, 2009, ‘Embrace an age of innovation and collaboration’, MARKETING, September, p. 85 Grannell, Chris, 2009, ‘The psychology of user‐generated content’, MARKETING, September, pp. 64‐66. Higgs, Bronwyn 2008, ‘On location’, MARKETING, December‐January, pp. 82‐84 IBO Mark scheme 2008, Business and Management Higher Level, May, Paper 2, p. 5 IGD Retail Analysis 2009, ‘Coles sales continue to climb’, viewed 3rd September 2009, <www.igd.com/analysis> Kotabe, Masaaki, Peloso, Antony, Gregory, Gary, Noble, Gary, Macarthur, Wayne, Neal, Cathy, Riege, Andreas, Kristiaan, Helsen 2005, INTERNATIONAL MARKETING, John Wiley & Sons, Australia, Ltd., pp. 495‐510 Lindhe, Jane 2008, ‘Simple pleasures: Business benefits as consumes rediscover inexpensive options’ BRW October 23‐29, vol. 30, no. 42, p. 29 McColl, Gina 2009, ‘Add‐on sales’ BRW July 9th – 15th, vol. 31, no. 27, p. 29 Rial, Patrick 2008, ‘Toyo Suishan climbs to record in Japan on Merrill Lynch upgrade’, viewed 8th September 2009, < www.bloomberg.com/apps/news > Shoebridge, Neil 2009, ‘Consumers sell the message’, July 2nd‐9th, vol. 31, no.26, p.43 Sibillin, Anthony 2009, ‘A time to innovate’, BRW June 25th – August 5th, vol. 31, no. 25, p. 23 Soccio, Matty, 2009, ‘Helping the hand of progress’, MARKETING, May, pp. 58‐60 ‘Starbucks: Grounds Zero’ 2008, THE ECONOMIST, July 5th – 11th vol. 388, no. 8587, p. 70 ‘The food industry’ 2009, THE ECONOMIST, April 12th – 18th vol. 387, no. 8575, pp. 71‐72 Thom, Greg 2009, ‘New phones your virtual eyes and ears’ THE COURIER MAIL, 16th September, p. 63 Tilbury, Alex 2009, ‘Twitter the new way to cash in’ THE COURIER MAIL, 20th July. KEY DEFINITIONS The External Environment of business refers to the external forces that play a part in influencing the direction that the firm takes. It usually has 4 elements: political, economic, social and technological, commonly referred as PEST factors. Commodity markets are markets where agricultural or primary products are exchanged. These commodities are traded on regulated commodities exchange, in which they are bought and sold, much the same way as shares are bought and sold on the stock exchange. Futures exchange (also known as derivates exchange) is a central financial exchange where people can buy specific quantities of a commodity at a specified price with delivery to occur at a specified time in the future. Mobile and Digital Marketing – aims at reaching consumers through the internet, meaning that they can be reached by marketers at all times, whether it’s through their computer or mobile handset, etc. An example would be QR (Quick Response) codes that literally allow people to connect at point of sales. A recession (also called a downturn or economic slowdown) is a period when Gross Domestic Product of a country is negative for two consecutive quarters. In simple words, incomes and output start to fall. Businesses might experience a fall in demand for their products and an obvious decline in their profits. Some firms might start to make its workers redundant. Opportunities are the directions that a business could profitably take in future by considering the business environment from the widest and most creative possible standpoints. Marketing strategy is a process of allocating a company’s resources on opportunities that can lead to an increase in its sales and dominate a niche target market. Michael Porter’s Competitive strategies – Porter developed a five‐
factor model for analysing the competitive structure within an industry. They are the threat of new entrants, the threat of substitute products/services, bargaining power of suppliers, bargaining power of buyers and the rivalry among existing firms. These five factors interact to determine the degree of competition within an industry and its level of attractiveness. Firms then chose the overall competitive strategy to be followed. Porter has suggested three generic strategies that a manager can choose: overall cost leadership, differentiation and focus strategies. Marketing Mix is the set of marketing tools that the firm uses to pursue its marketing objectives in the target market. The four elements of the marketing mix are product, price, place and promotion. Product life cycle is the typical sales pattern of a product over time from its introduction on to the market and its eventual decline as it is displaced by new, more innovative products or until demand for it falls, due to a change in consumer tastes. The product life cycle portrays the sales history of a typical product as following a bell‐
shaped curve. This curve is typically divided into four stages: introduction, growth, maturity and decline. New product development – for most companies, new products are the bread and butter of their growth strategy. Unfortunately, developing new products is time consuming and costly, with immense challenges. A company can develop new products in its own laboratories or it can contract with independent researchers to develop specific products for the company. Porter’s Differentiation strategy – in a differentiation strategy, a company attempts to take advantage of a product or service’s real or perceived uniqueness. This sense of uniqueness may come in the form of comfort, product performance, aesthetics, status or exclusivity and some customers are willing to pay a premium price for unique features that they desire. First­mover advantage – businesses are said to have the first mover‐advantage when they are the first ones to enter a market segment and gain control of that particular niche market. Market segments – The division of a market into separate and distinct groups of customers, each having a distinct characteristic. Porter’s Focus strategy – firms using a focus strategy concentrate on a highly specialised segment of the market and try to achieve a dominant position in that segment. Hedging – hedging is the act of reducing uncertainty about future (unknown) price movements in a commodity, financial security and foreign exchange. This can be done by undertaking forward sales or purchases of the commodity, security or currency in the Forward Market. Fund managers aim to make windfall profits by ‘correctly’ guessing future price movements. Buying forward – when there is an anticipation of a potential price increase in future, firms buy now, when prices are lower. Promotional mix – the means which a firm can use to inform prospective customers of the nature and attributes of its products and to persuade them to buy and repeat‐purchase those products. The promotional mix is made up of advertising, sales promotion, merchandising, packaging, personal selling and public relations. Porter’s overall cost leadership strategy – involves a company offering a fairly standardized product or service at a lower cost than the competition, thus allowing the firm to build its competitive advantage on economies of scale. Direct marketing is a form of marketing a product that lead the customer to make an active response to the selling stimuli, rather than merely passively absorb advertising messages. Direct marketing’s principal aim is to sell the good or service which is on offer. Economies of scale – is the reduction in the unit (average) costs of producing and distributing a product as the size of the firm’s operations is increased. Marginal cost – is the extra cost that is incurred by a firm in increasing output by one unit. Return on investment – is an accounting measure of a firm’s profitability, which expresses the firm’s profits for an accounting period as a percentage of its capital employed. Next­gen advertising – advertisers look at the recently discovered power of the World Wide Web for better promotional avenues. The traditional media has seen a diminished audience, hence the move to mobile and digital advertising. Channels of distribution – the route used in the physical distribution of a product from the manufacturer to the ultimate buyer of that product. A typical distribution channel consists of three basic interrelated operations: manufacturing, wholesaling and retailing.