Cases in Marketing [1 ed.] 9780857026224, 9780761955702

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Cases in Marketing

edited by Hanne Hartvig Larsen

Cases in Marketing

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CElMS *

Community of European Management Schools

EUROPEAN MANAGEMENT SERIES The European Management Series derives from a unique collaboration, the Community of European Management Schools (CEMS), which was formed in 1 988 and integrates both academic and corporate members. Together they develop and disseminate a shared body of European knowledge in the field of management and award the CEMS Master' s degree. With particular emphasis upon meeting the needs of management students for high-quality European-based material, the series aims to bring to international management education a strongly European perspective. Prepared by CEMS faculty, it includes textbooks, case studies and other volumes that examine key European and international management issues. EDITORIAL BOARD Werner Clement, Wirtschaftsuniversitat Wien, Austria Werner Delfmann, Universitat zu KOln, Germany Rolf Dubs, Universitat St Gallen, Switzerland Pierre Dussauge, Groupe HEC, Paris, France Fn ';; t l t demand while more than 7 5 0 local producers divided the rest of thc 1ll �\I � c t Not only did sales increase significantly, but the company ' s p ro t i t Illari' i :l '. also increased to create a strong financial base for future investmcnts.

lIIycaffe: international activities According to Ernesto Illy, the son of the founder of Illycatlc, the CO lll p:U I \ began to export its coffee i n the 1 960s i n a casual way . Ernesto, whu \\ < 1 .' general manager at the time, had a degree in chemistry and h ad 1 i mi t l'ci interest in the marketing aspects of the business. Yet he Im'C(j to t ra \(' 1 a n d t o convince interested buyers that his was a truly superior product. Ernesto' s major objective in entering foreign markets was to i ncrL' , l sc t i l , sales of I l l y ' s espresso coffee, Yet h e also sought t o find a w a y t o ,iL 'fl l l "' l' this goal without losing control over how his coffee was sold, Thc pro h k i l i was that Illy was stil l a small company ( total sales of 2 , 6 hill ion l i re in I lf: i and could not afford the high fixed costs of wholly owned sales o pe l,l i l l ' I I S across Europe , Ernesto' s solution t o these constraints was t o lou\-; lor independent distributors who would be willing to handle h i s C 0 Il1 11dll \ ' , product in an exclusive way. In choosing such distributors. Ern c s t l l lI d '. k , ' interested i n identifying individuals i n the largest markets ( he w a s L' ( ) n " I l k i' ! ! that gourmet consumers who would appreciate a quality cup uf C ' 11 I C " : , existed in every country ) than in finding people who helielcd as m u c h I I I i ; ! , product as he did. Four such distributors in Europe were found by 1 9 7..+: S lI i t l c r i :l l l l L Holland, France and Germany. These distributors would buy lots o f C S P ll" ' l ) coffee for resale in their home markets, Although Illy reque sted t h it t l h ,,''. follow the generic marketing and sales guidelines establ ished by the c l l li l pany, in practice these distributors had extensive freedom to d c t i r l c t h l' pricing, promotion and distribution policies used for sell ing t h l c l l t lc,' :\ ! i other European markets were served through agents who c a rr i e d Sc: I ,'I:: ! lines of non-competing products, did not take title to the prudUl't and 1\ ,: : , compensated on a commission basis. This system worked wel l for the company for many years . Fh l ') �' 5 foreign markets represented 24% of total sales: 6 1 CJc of which was e �jl ll" ' " for the CHR segment (2,5 kg tins ), 1 1 % espresso for home usc ( 2."> ( 1 i' 1 1 11 '- . and 28% pods for use in the espresso system, In most c ases I l l y \I , i ', positioned as a high-quality Italian coffee suitable for all k i nJs of c( I ! k ( machines, rather than specifically as high-quality espresso coffee. .

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l IIycaffe in Germany The position of Illy in Germany was somewhat different than that in [ h I. other European countries. In 1 974, an exclusive agreement had heen ' 1 � lh d with a German distributor. The cornerstone of this agreement \\ a \ [\ 1 ,

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Grandtner, a traditional German woman who had a love for espresso coffee and worked hard to sell it to bars and restaurants throughout Germany. Despite her limited understanding of the technical aspects of marketing, the company ' s sales grew from 1 0 tons in 1 974 to 30 tons in 1 978. In 1 978, however, one of the major German coffee producers, Hag, approached the management of lllycaffe with a proposal to form a distribu­ tion alliance. Hag was a family-owned and -run business with a long tradition in the coffee industry. The company produced both caffeinated and decaffeinated filter coffee, as well as a line of supplementary products such as sugar and cream. Hag had an extensive distribution network throughout Germany and had noted a growing interest in espresso coffee among its clients. The company had tried to produce its own brand of quality espresso, but had failed and was now looking for an Italian producer who would be interested in hooking up with them in the German market. Ernesto Illy realized that any significant increase in sales in Germany would require much greater investments in both salesforce and promotion, but 1 977 had not been a profitable year in the domestic market and the company' s financial situation would not permit such investments. Nor was the German distributor willing to make further commitments. Ernesto therefore decided to accept Hag' s proposal. As he concluded: 'This was a great offer from a significant player in the German coffee industry who believed in our product. Thi s was all the assurance that I needed.' The contract that was signed by the two companies in 1 978 gave Hag exclusive rights to the sale of Illy coffee in Germany. Illy ' s German distributor, in fact, was required to tllrn over its client lists to Hag; the job of Illy's di stributor was reduced to acting as an interface between the two headquarters and to supplying smal ler cllstomers. Illy maintained control over the brand name and the product, while Hag was given responsibility for promotion and distribution decisions i n Germany. Rough sales targets were indicated in the contract ( 8 0 tons by 1 980, 1 50 tons by 1 98 1 and 250 tons by 1 982). although Hag was under no obligation to reach these targets. No provisions were made for Illy to receive any information about the clients. Ernesto described the contract as a 'gentlemen ' s agreement between two entrepreneurs who trusted each other and believed in each other's capabilities ' . Three years later, Hag was bought by another company in the German coffee business, Goldene Tasse. No significant changes were made in the agreement as a result of this acquisi­ tion. In fact, meetings between the two companies during the whole period of their association were rare and often the contract was renewed at the end of each period without any direct contact between the two partners. According to the original contract. Hag agreed to pay Illy DM 1 3.70 for each kilo of coffee received. This price was broken down into two parts: one half was pegged to the price of green coffee on the international market, while the other half was pegged to Illy ' s production costs. Price changes were provided for only in the share related to the raw coffee: these changes

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Illy in Germany

Exhibit 2

Sales of IIIycaffe in Germany (kg) Direct

Through H ag-Goldene Tasse

1 982

1 0.000

45.-1 1 8

1 98 3

1 0.000

5 3 .650

1 984

1 0.200

66.070

1 98 5

1 1 .650

68. 700

1 986

1 2.983

65.000

1 987

1 2..3 8 9

89.000

1 98 8

1 6.300

1 0 1 . 1 33 1 25 .535

1 989

1 6.37 1

1 990

1 5 .-165

SOllrce: JIIycalTc

1 18 ,400

_._--------------

could be effected only every three months according to fluctuations in the trading price established by the International Coffee Organization. Requests for price increases due to rising production costs, on the other hand, could be made by Illy only once, at the beginning of each contract year, and had to be supported by documentation explaining the actual cost increases. Following the signing of this agreement. Illy witnessed a steady increase in sales ( see Exhibit 2), but as Riccardo complained as he looked over the records in 1 990, the sales may have been increasing, but we were n ' t making any money. Our selling price was too low to earn any margins and we had to absorb the high rates of i n fl at i on in Italy. Moreover, as the price of green coffee continued to fall on

international markets due to the exce s s i n supply throughout the 1 980s, we had no way to raise the price of

our

product to Hag in any substantial way.

Recent developments When Riccardo Illy took over responsibility for the company' s international activities in 1 990, he quickly decided to change Illy ' s strategy in the European market. He was convinced that the move toward a more unified European market provided an excellent opportunity for Illy to appeal to a pan-European consumer through a standardized marketing programme in line with that followed in the Italian market. In order carry out this plan, however, he understood that he needed to create a cohesive team and to bring the various suhsidiaries under his direct control. The most effective way he saw to begin this process was to buy his distrihutors in each major market. Once this process was completed, he gave one of his export managers, Giacomo Biviano, responsibility for the company ' s activities in Europe. Mr. Biviano, a young and decisive manager with a strong back­ ground in both international marketing and administration and control, was appointed CEO in both France and Germany, and was appointed to the supervisory board of the new company in Holland. As Biviano described it,

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'we needed managers who would be loyal to our ideas and would implement a standardized set of policies that were to be decided at a central level ' . Just about this time, however, Riccardo Illy also learned that Hag­ Goldene Tasse had been bought by General Foods, a diversified multi­ national in the food industry which was later acquired by Philip Morris International. By 1 990 both Kraft, another American-based multinational in the food business, and Jacobs Suchard, a Swiss producer of coffee and chocolate with its own l ine of espresso, had also come under the wing of the Philip Morris group. As a result, a merger was made between Hag ' s coffee division, Goldene Tasse, and Jacobs Suchard ' s coffee business in Germany. The new company, called Jacobs-Goldene Tasse, took over Hag's position as Illy' s partner in the German market. Riccardo Illy immediately called for a meeting to discuss the potential effects of these changes on the distribution agreement between the companies. In December of 1 990, Mr Konig, the managing director of Jacobs Suchard in Germany, and Mr Engelhart, the managing director of Hag-Goldene Tasse, came to Trieste to meet with Riccardo Illy and Giacomo Biviano concerning the future of the distribution agreement. The meeting was held in English and focused on two major issues: quality and sales potential. Although Hag-Goldene Tasse had its own l ine of espresso coffee, and Jacobs Suchard had a line of both espresso coffee and espresso pods, all of which were sold to the bar segment in Germany, Riccardo Illy underlined the fact that none of these products was of the same quality as Illy's brand of espresso coffee. Using the results of his marketing strategy in Italy to support his position, Riccardo argued that only his company ' s espresso would guarantee an increase in sales and a substantial increase in profits. Mr Konig responded to these arguments by explaining that Jacobs Suchard was currently conducting market research on consumer perceptions and tastes in Germany; any new policy would have to wait for the results of this study which was due to be completed in February 1 99 1 . All the parties thus agreed to continue the agreement until that time, with one change: Mr Engelhart agreed to allow a technical assistant from Illy to accompany Hag's salesmen during client visits in order to provide con­ sultancy on the use and maintenance of espresso machines. Although this form of cooperation lasted only a few months, Illy gained some important insights from these visits. As B iviano noted, 'one significant lesson we learned from these direct contacts with the clients was that it would be very unusual for bar and restaurant operators in Germany to seek financing from small suppliers. Rather, such financing was required only from suppliers whose products represented a large share of the business, such as filter coffee and beer' . A s February rolled around, Hag-Goldene Tasse and Jacobs Suchard decided to delay encounters between the two sides. It was not until May, in fact, that the meeting took place in Bremen. Jacobs Suchard did not present the research results from the German study, claiming that the data had been

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inconclusive. Moreover, neither of the German counterparts came to the meeting with clear proposals for contract revisions. Riccardo Illy and Giacomo Biviano, however, had prepared a list of changes that they wanted made in the contract:

2

3

4

5 6

The selling price of Illy coffee to Hag-Goldene Tasse would have to be raised to the standard level, and with the same conditions, applied in all other European markets. All marketing activities (especially advertising to the trade, to the consumer and at the point-of-sale) would be managed and controlled by Illy Germany . Hag-Goldene Tasse would be granted exclusive rights to the distribution of Illy coffee in Germany, yet a clause would also be inserted in the contract stipulating that Hag-Goldene Tasse would distribute only Illy' s brand of espresso coffee. Clear growth objectives would be stipulated in the contract. These obj ectives should be in line with Illy' s overall objectives for growth, and Hag should be under obligation to achieve the stated objectives. A structure to manage technical consulting/quality control at the point­ of-sale would be established, managed directly by Illy Germany. A new policy of communication at point-of-sale would be implemented through the use of Illy cups and billboards. Illy should be able to control the implementation of this activity through regular visits to clients.

By the end of the meeting, Jacobs Suchard and Hag-Goldene Tasse had agreed to points ( 1 ) and (4), but had refused to accept point (3). The companies did not adopt a position concerning points (2), (5) and (6). No new meeting was scheduled between the parties. At the end of the contract period in June of 1 99 1 the marketing manager of Illy Germany terminated the contract between Illy and Hag-Goldene Tasse, offering at the same time an option to these partners to renegotiate a new contract. The option was left open until the end of August. In the meantime, Riccardo Illy and Giacomo B iviano began to study the three major alternatives:

2

3

Give full responsibility for sales and distribution back to Illy Germany and work together with the German team to establish an effective salesforce. Look for a new partner in Germany who could offer a solid sales network, and would agree to the terms outlined in the proposal prepared for Hag-Goldene Tasse. Work toward a new contract with Hag-Goldene Tasse/Jacobs Suchard.

In the latter two cases, given that it was unlikely that all of Illy' s requests would be accepted by any partner, it would be necessary to rank the requests in order of importance and to establish the minimum requirements for any agreement.

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Questions for discussion/suggested tasks Before the next meeting, therefore, the two managers would need to clarify their position on several issues:

2 3

Should they orient their objectives in the German market towards sales or towards a long-term presence? In the second case, would it be possible to export the company's domestic strategy for market penetration into the German context? Would it be possible for Illy to develop a strategic position in the country through an agreement with Hag or with another distributor?

Suggested reading Root, F. ( 1 987) Entry Strategies for International Markets. Lexington: Lexington Books.

Acknowledgements This case has previously been published in J. Johansson (ed.), Global Marketing (Chicago: Irwin, 1 997). Thanks are due to Dr Andrea Illy, CEO, and Giacomo B iviano, export director, Illycaffe, for permission to publish material included in the case.

Notes

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3

The CHR or bar segment included bars. cafes, pastry shops, ice cream shops, restaurants and hotels. World coffee production may be divided into two main categories of coffee: Coffea Arabica and Coffea Canephora (belter known as Robusta). The difference between these two types of coffee bean may be traced to the morphology of the plant as well as to the structure and taste of the bean itself. Coffea Arabica accounts for three-quarters of world coffee production. It is a higher quality bean and is produced in sub-tropical climates at altitudes of 900-2,000 metres in countries such as Brazil, Colombia, Costa Rica, Nicaragua, Guatemala, Salvador. Honduras, Mexico, Ethiopia, Kenya and Java. Arabica coffee tends to be sweet and full of aroma. Moreover, Arabica contains less caffeine and is less acidic than Rohusta: the caffeine content of Arabica is between I % and 1 .7 % , whereas that of Robusta is between 2% and 4.5%. These qualities also make the price of Arabica on the coffee exchange higher than its rival. The production of Robusta coffee is concentrated at much lower elevations (200--600 metres) in countries including the Ivory Coast, Uganda, Angola and Brazil. Robusta beans tend to be more bitter in taste, stringy in texture and bland in aroma. Quality control began with the selection of the beans through taste-testing. Illycaffe was the only company in the world buying coffee on the basis of tasting the coffee samples instead of relying on the description provided by coffee brokers. The beans were then selected through a system that sorted 400 beans per second, separating the bad beans from the rest. Finally, each batch of roasted coffee was controlled and certified both intemally and extemally by the Chamber of Commerce in Trieste.

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Norsk Hyd ro Fertilizers in the Un ited States Entering a highly competitive market Bjarne Bakka

Case A: 1970-1975

At the beginning of 1970, the sales manager of Norsk Hydro felt an urgent need for more efficient marketing of cal c i u m nitrate in the United States. A pre l i m inary market appraisal indicated a considerable potential for growth, w h i l st sales had been stagnating for several years. Contacts with farmers and marketing channel s had revealed unsatisfactory knowledge of the Hydro company, its agents and the ' V i king S h i p ' brand. The problem req uired h igh priority, as stocks of calci u m ni trate were pil ing up and the U S was the main market for it. In case A, a study of the market potentia l , the U S marketing practices and the agent ' s mode of operation is presented as the background for discussing choice of market representation and distribution network, and choice of promotional programme.

Company background Norsk Hydro was founded in 1 905 for the purpose of producing and selling fertilizers. The basic idea was to use inexpensive hydro-electric power from Norwegian waterfalls to bind nitrogen from the air. A leading businessman in Oslo, Sam Eyde, had established contacts with scientists in several countries, especially with Professor Kristian Birkeland in Trondheim. Work­ ing on an idea from a British scientist, they developed a process which

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seemed pronusmg for large-scale industrial production. Capital was pro­ vided from Sweden, Germany and France and technological support was found mainly in Germany. Through times of severe competition, international over-capacity, con­ flicts with capital owners, two world wars etc., Hydro matured into the leading industrial enterprise in Norway. Especially after 1 950, Hydro had tried to diversify into new fields. One line of thought was to look for products where the cheap electric power could continue to form a com­ petitive edge, for instance in the production of aluminium and magnesium. Another line pointed towards employment of the general chemical know­ how which had been accumulated, for instance in the production of plastics. In the 1 960s, Hydro joined the search for oil in the North Sea with remarkable success, which in tum led the company into the petrochemical industry. By this stage Hydro had acquired a strategic importance for Norway, and the state bought up a majority of shareholding, a significant portion of which was owned in France at the time.

Divisional background Throughout the years when fertilizers were the main field of activity, Hydro had a function-oriented organization. The new ventures were handled by project groups directly responsible to the top management. As the new activities grew in size and complexity, drastic organizational changes were needed. In 1 965 it was decided to develop a divisionalized structure where each product group should be run as a business on its own within general frameworks established by a central management committee assisted by a limited staff of specialists. The fertilizers were combined with feedstuff and other agricultural products into a ' Nitrogen Division' . Around 1 970, the N-division was still the company's main breadwinner. The production of fertilizers took place in several locations along the Norwegian coast and in Telemark. Hydro had also ventured into production investments in other countries, notably in Qatar, and this was looked upon as a promising line of expansion. The sales of the N-division were organized on a regional basis with five sales areas. The three most important were Norway, Denmark and Sweden. They were all looked upon as parts of the home market and absorbed around 80% of the sales. The remaining two sales areas were markets beyond Suez and Rest-Europe/USA.

Export background From the start, Hydro had been oriented towards international markets. The scale of investment and production exceeded by far the market potential of

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Norway alone. However, fertilizers turned out to be problematic to sell internationally. Most countries wanted their own production facilities and there had been periods of severe over-capacity. In times of war fertilizers were considered strategic goods, and political interests had to be taken into account. Fertilizers also proved to be very sensitive to fluctuating business cycles. For these and other reasons, the main producers in Western Europe established vehicles for ' sales collaboration ' . Vis-a-vis countries with cen­ tralized buying they tried to bargain as a group; in other cases they tried to reduce costs by coordinating stocks, transport etc. Such collaboration was regulated by long-term agreements which secured participants a market share, but prevented expansion of the more dynamic firms. The US market was somewhat different, giving more scope for active business. American farmers had increased their use of fertilizers year by year and in several periods the local production capacity had been in­ sufficient. Some kinds of fertilizers were not produced locally at all, for instance calcium nitrate. In general, agricultural equipment was marketed in a 'modem ' way with emphasis on product innovation and active promotion through a variety of channels and media.

Product background The Nordic markets mainly demanded a so-called 'complex fertilizer' which combined nutritional chemicals, for instance nitrogen, phosphorus and potassium. Such a product was expensive to buy, but gave good results and saved labour costs. Production followed the so-called 'Odda Process' , an important characteristic of which was that it yielded considerable quantities of calcium nitrate as a by-product. In fact, the profitability of fertilizer production was to some extent dependent on good prices for this by-product. For many years, calcium nitrate had found a good market in the Nordic countries. However, demand had declined and stocks had been piling up. There was a possibility of converting calcium nitrate into other types of fertilizers, but this would require considerable investments, increase produc­ tion costs and take at least one or two years. Calcium nitrate was a relatively simple type of fertilizer with limestone as its main ingredient. Research in many countries had proved it to have several valuable effects. The quality of the soil could be improved by modifying its chemical characteristics, making it more porous and helping the diffusion of humidity. As to effects on the crop, calcium nitrate could, under favourable conditions, increase the volume almost as much as the 'complex fertilizer'. It could also prevent plant diseases resulting in brown leaves, spotted fruits, harsh taste etc. A rather similar type of fertilizer was the so-called Chile saltpetre, taken from natural deposits in South America. However, there was a crucial difference: instead of calcium, it had sodium as its main base and research

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reports had indicated that this gave less beneficial effects, especially on the quality of the soil.

Marketing in the US Exports of fertilizers to the US started in 1 947 through an agent called Wilson & Geo. Meyer & Co (WGM) in San Francisco. WGM had been selling chemicals on the West Coast since 1 850. They had concentrated on what they called chemical specialties, mainly to farmers. WGM pointed out to the Hydro management that fertilizers could be transported by ship from Norway cheaply enough to be competitive, at least in central coastal areas. Hydro decided to test the idea and a rather loose agreement was set up, covering calcium nitrate for the western regions. WGM impressed Hydro with their active marketing. WGM represented eight to ten manufacturing firms (no direct competitors to Hydro) and seemed to have well-planned sales cycles for each of them. They developed their sales force to ten well-trained salesmen who visited wholesalers and retailers regularly, when time permitted also farmers and their organizations. The internal administration and the physical distribution of goods seemed to function well (50 people). Since 1 964 the turnover had been relatively stable, around 30,000 tons calcium nitrate per year. Hydro represented around 40% of the total WGM turnover. On the East Coast, selling had started in 1 968 through Hydro ' s own New York office. Because of a limited staff, most of the selling was done by local agents in the major agricultural regions. However, modest results had been achieved (around 6,000 tons per year) and several agents had been replaced. WGM had aired an interest in taking charge also of the East Coast, and to try this idea they might take over Florida. A preliminary market study, carried out by the New York office, indicated a potential of 1 50,000 tons calcium nitrate in the WGM areas. There was no US production as the manufacturers had chosen other types of fertilizers and other processes than Hydro. The main competitor was undoubtedly the Chile saltpetre which for 30 years had been established under the 'Bulldog' brand. The annual imports of Chile saltpetre to the US were around 300,000 tons per year.

WGM 's promotional efforts For the first 20 years, WGM had operated very independently. After all, the exports of calcium nitrate to the US were not a major issue for Hydro, and its limited marketing staff had other things to look after. WGM had developed a philosophy whereby they selected specialized market segments with limited competition and tried to build up strong positions there. For calcium nitrate, they had concentrated on farmers who had vegetables, fruit or tobacco as main fields of activity.

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WGM asserted that selling a fertilizer was in many ways 'a brand operation ' , where preferences had to be built up amongst the final con­ sumers. The strong position of the Bulldog brand seemed to support this view. WGM had chosen the name ' Viking Ship ' , which corresponded to the visual symbol of the Hydro company. The full product name was ' Viking Ship Calcium Nitrate' . In all printed material, Hydro was referred to as manufacturer and WGM as distributor. In order to build up brand awareness and preference, several media were used. The main medium was professional magazines for farmers, especially those who claimed readership amongst growers of vegetables, fruit and tobacco. During the seasons, whole-page advertisements were inserted in almost every issue of the three major magazines. Local radio was also an important medium, and short messages were broadcast in evening hours when farmers were known to be listening. WGM had also prepared colourful pamphlets and display material which were mainly distributed through the salesmen and their contacts. The salesmen were instructed to be active personal advocates for the WGM products vis-iI-vis trade channels, and on regular sales conferences they were briefed by their sales manager on the latest product news. As to the content of the advertising, WGM had tried to develop a short and clear message about the Hydro fertilizer. Farmers were known to spend limited time on reading their magazines. They had modest educational backgrounds and were reported to shun complicated technical information. The cost of promotion had to be covered by WGM ' s agent commission. WGM had complained that this gave little scope for active marketing. They had indicated that either the commission would have to be raised or Hydro would have to pay an advertising allowance. However, according to the contract, Hydro found that WGM were responsible for all sales activities. Within the Hydro management there had also been aired doubts 'whether fertilizers should really be sold as soap ' . A major problem for WGM representatives had been t o secure a free flow of goods through the distribution channels. American manufacturers of fertilizers etc. had gained a considerable influence over wholesalers and retailers through long-term loans. For this reason, and because the Viking Ship fertilizer was a small product, the dealers were reluctant to stock i t regularly in sufficient quantities. WGM representatives had t o work hard to keep up a kind of ' transit sales' , helping the dealers to deliver goods which had already been ordered by the farmers. The salesmen had reported less problems with this in areas where advertising had been concentrated.

Marketing information Throughout his 1 5 years with Hydro, Sales Manager Hans Hansen had been in sporadic contact with the US market. Only since the divisionalization in

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1 965, however, had he been able to concentrate a major part of his attention on this market. He had visited WGM several times for shorter periods. In tune with the company' s greater interest for mercantile functions, Hansen wanted to develop a deeper understanding of the US operation. Hansen was himself trained as a sales analyst and administrator and felt the need for more agricultural competence in his staff. A young agriculturist, Jens Jensen, was appointed in 1 969 and after a briefing period he was sent to the US for three months. His task was to make a study of the fertilizer market in general and Hydro's position in particular. Jensen travelled with WGM ' s represent­ atives, but also made extensive contacts on his own, especially with those engaged in agriculture. As to the farmers, Jensen found that the knowledge of Hydro and its calcium nitrate was very low. The Viking Ship brand was considered a rather one-sided source of nitrogen, and nitrogen could be acquired more cheaply through urea. Farmers who were better informed preferred Chile saltpetre because they knew it so well and felt they could trust it. Jensen had also received several complaints against Hydro's fertilizer because of hygroscopicity/clotting under open air stocking. There were also complaints about blocking of tubes and nozzles, probably because of insufficient cleaning. The trade channels were better informed through personal contacts with WGM representatives. However, they showed little motivation for passing their information on to the farmers. It seemed fairly obvious that the dealers gave preferential treatment to American products. And after all, who were WGM and Hydro? What did Vikings from the cold north know about farming in the US? Besides, was there any incentive in promoting the Viking Ship brand? If you succeeded in building sales for such an unknown brand, somebody else would immediately cut prices and reap the benefits. Moreover, WGM quoted the same prices to everybody. Shouldn ' t there be some extras for dealers who really intended to promote the brand and bought large quantities? As to professional groups (researchers, teachers, consultants, advisers etc .), Jensen was welcomed both in universities and farmers' organizations. He felt that they spoke the same language and that he could bring news from European agriculture. In fact, he got the impression that there was little contact amongst the US groups and that he could - in a small way - help to bridge information gaps. Jensen found several reports on calcium nitrate, partly unpublished, which coincided with Hydro's own findings. However, this type of fertilizer was considered fairly unimportant and it seemed low in priority for research funding. Publishing alternatives seemed limited, and the researchers were not interested in writing popular stuff for the farmers' magazines. Jensen confirmed the preliminary estimate of the sales potential, but asserted strongly that a major sales increase would need a drastic change in people ' s knowledge of and attitudes towards the product.

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Norsk Hydro Fertilizers: Case A

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Questions for discussion/suggested tasks

2

3

Should Hydro ' s fertilizer business on the US West Coast be con­ tinued? Supposing that exports of calcium nitrate to small and specialized farmers should be carried on, what market representation and distribu­ tion network should be developed? What should a promotional programme targeting the West Coast farmers look like?

Suggested reading Bowersox, Donald J . and Bixby Cooper, M. ( 1 992) Strategic Marketing Channel Management. New York: McGraw-HilI.

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Case B : 1980-1995

From Case A we know the start-up problems facing the firm on the U S West Coast during the 1970s. We s h a l l now re-enter the U S fertil izer scene and d iscuss Hydro ' s strategic c h a l l e nges from 1980 onward s . For each m aj o r c h a l lenge, the m arket background and Hydro ' s choices w i l l be briefly described. We d e l iberately avoid detai l s , as the teach i ng objective is to focus on the strategic essence of a fir m ' s long-term i nternational­ izatio n .

At the Hydro headquarters, people were generally pleased in 1 993. During the past 20 years, Hydro had grown from a marginal exporter to become one of the larger suppliers of fertilizers to the North American market. At this point, Gerd Petersen, who had been with the company for ten years, was asked to review and analyse the development of Hydro ' s activities in this market so far. What was done well? What could have been done differently? The company was also interested in an assessment of Hydro ' s current position in this market. Were there other ways to organize the company' s activities in the United States? Should one make changes in the current position and what, if anything, should be done for the future? The management wanted a thorough analysis of the wisdom of past decisions, and how to proceed for further growth for the future. Gerd tried to envisage what alternative options Hydro had at each stage. She needed to discuss the pros and cons and try to see the rationale behind Hydro ' s decisions. To support her evaluation, Gerd consulted what her textbooks had to say about the firm' s process of internationalization. She also sought examples from local firms which might confirm or challenge Hydro ' s pattern of decisions. Gerd knew that the management were considering her for a top management position and the outcome of this decision was partly riding on her analysis and recommendations. She realized that she did not have all the information she needed in order to make her analysis complete, but for now she would do her best with what she had and make a list of the items about which she would have to seek out additional information, at some point in the future.

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Expansion of the West Coast operation During the 1 970s, the West Coast operation was turned into a success. The market potential of 1 50,000 tons of calcium nitrate was efficiently tapped, and both sales income and profits grew. Distribution channels were devel­ oped and motivated through better information, training, delivery services etc. A new pricing and rebate system made it more worthwhile to distribute the Viking Ship products. As to marketing communication with end users - the small and spe­ cialized farmers - a protracted disagreement between Hydro and the San Francisco agent (WGM) caused advertising to fluctuate between scientific documentation and emotional messages. The Viking Ship name and symbol were heavily criticized, but had to be kept because of Hydro ' s global investments in this 'branding' policy. In spite of the marketing success, Hydro felt that one major issue remained unsolved - their rather weak control of long-term strategy, marketing planning/implementation and client feedback. WGM was certainly cooperative, but had other product markets to look after. Around 1 970, Hydro had approached the agent about the possibility of their buying a share of WGM, say around 50%. The proposi­ tion was turned down flatly by Mr G. Meyer: 'I opened the profitable US market for you over 20 years ago, and now you try to outmaneuver me. Instead, you should show some appreciation by letting my firm cover our target groups all over the US ! ' I n fact, Hydro had contemplated doing j ust that. Apart from the control aspect, they felt that the West Coast operation had developed into a highly professional marketing· set-up with a deep understanding of US farming, distribution channels, competition and marketing practices. Gradually, WGM ' s attitude towards j oint ownership turned more positive. People on both sides got to know each other better. Mr G. Meyers was growing older, his sons had been trained by Hydro in Norway and could more easily see that a partial Hydro takeover could have positive effects both professionally and for the WGM owners. Finally, in 1 985 an agreement was reached whereby Hydro took over 50% of the shares in WGM. A new, professional board was elected, comprising both WGM and Hydro representatives together with local business people with relevant experience from US marketing. The new company retained the WGM name, to capitalize on its goodwill in the agribusiness world. (Internally, the term 'Hydro/WGM' was used to remind everybody of the change.) Now the road was open for WGM to expand to other regions of the US. Some changes had to be made in WGM ' s portfolio o f non-Hydro products. This was b y far outweighed b y the expansion of Hydro sales. In all new regions, WGM ' s 'classical' marketing procedure was followed. The target groups - small and specialized farmers - were carefully studied, so were the distribution channels, and a painstaking, personal networking

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took place. When distribution was secured, promotion started in highly select media with proven coverage and impact on both end users and middlemen. Opinion leaders were mobilized in farmers' unions/clubs, among agricultural researchers and writers, public farming advisers etc. Today, WGM is Hydro' s undisputed, nationwide marketing organization for small and specialized farmers. Young Hydro trainees are being 'brought up' there, to take the valuable US experience to other market places. The WGM experience also plays a central part in Hydro ' s international 'Fertilizer Academy' discussed further below.

Entering the bulk fertilizer market During the 1 970s, repeated discussions had taken place at the Hydro headquarters in Oslo on the pros and cons of entering the big, 'industrial' market for fertilizers in the US . The size of this market was tempting, in fact the biggest and most professional fertilizer market place in the world. However, the competition was very tough indeed, both from locally pro­ duced and imported products, and margins were cut to the bone. A number of product types - other than calcium nitrate - would be requested by producers of com, soybeans, wheat, potatoes etc. The marketing infra­ structure for big, bulk deliveries would have to comprise l arge landing, unloading and stocking facilities in central harbours, regional distribution centres, a fleet of tank lorries etc. It seemed fairly obvious that this type of business was outside WGM ' s range o f resources and competence . A better option might b e another type of organization, specialized for this type of 'giant' marketing. For Hydro to start this from scratch looked rather slow and cumbersome. Quicker and more efficient might be to acquire - or cooperate with - an existing US company. But the entry ticket would in that case carry a high price and considerable risks. The solution came in 1 988 as a side effect of Hydro ' s European strategy. Hydro had, for a number of years, aimed at becoming a market leader in all major fertilizer arenas, first of all in Western Europe. To achieve this, Hydro had started an acquisition campaign, taking over majority positions in leading local manufacturing firms. One of Hydro ' s acquisitions was Nederlandse Stikstof Maatschappij (NSM) in Terneuzen, near the DutchlBelgian border. This company had an asset which looked particularly tempting to Hydro: a well-established marketing set-up in the US called Transnitro - specially aimed at big, industrial farming. Transnitro had an efficient head office in New York and a nationwide network for stocking/distributing large quantities of bulk fertilizers. Of course, this asset brought the price of NSM up considerably, but Hydro found that Transnitro could give them the desired quick and efficient inroad in the US bulk market. And from day 1 they would be in the driver's seat,

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controlling strategy, marketing planning/implementation and client contact and feedback. This might also enhance Hydro ' s global competitiveness, for instance by sharpening its ability to operate in markets with really tough rivalry and small profit margins. The takeover was implemented rather quickly, building on the existing management cadres and their relationship with NSM. Some Hydro officials were gradually introduced in the set-up to promote a stepwise merging of Transnitro into the Hydro world. Today, therefore, Hydro covers the important US fertilizer market with two wholly owned marketing organizations: • •

WGM for specialized farming, where fertilizers are bought in smaller quantities. Transnitro for large, industrial farming, where fertilizers are bought in bulk.

Thus, marketing was well taken care of, based on products imported from Europe. But other strategic issues were waiting around the corner . . .

Direct investment in local production? When Hydro started their internationalization, the production of fertilizers was localized in Norway and based on the use of hydroelectric power. During the post-war years, however, a number of competitive forces had changed. • • • •

New technology had made the use of hydroelectricity less decisive. Production costs had been lowered and transportation costs had become relatively more important. Market integration, like the EU, had made foreign ownership of in­ dustrial plants more acceptable. Political attitudes in many countries favoured local production of 'strat­ egic' goods like fertilizers.

Hydro's first move towards international relocation took place around 1 970. The Arab countries had gained power and wealth via OPEC and were seeking investments which could increase their inhabitants' welfare in the long term. The sheikdom of Qatar wanted to develop fertilizer production in a joint venture with a Western firm, and Hydro was chosen as partner. Despite political risk, strain on management capacity etc . , Hydro took the challenge. They found the Qatar operation interesting per se, and saw it also as a future supplier of markets east of Suez. It could also offer good training for personnel, useful for further international moves. The pioneering Qatar establishment gave good results and sharpened Hydro' s appetite for foreign direct investments. Gradually, a strategy emerged where Hydro was seen as the world's largest producer and exporter of fertilizers. They decided to invest heavily in a global network of

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production and marketing units, and saw acquisition of foreign companies and plants as the main mode of operation. The strategy was first implemented in Western Europe. Companies and factories were bought in major markets like the UK, France, Germany and the Netherlands (NSM). As mentioned above, the latter was of particular importance for the US, because of its bulk marketing set-up there for 'industrial farming' (Transnitro). Around \ 990, the question of having production facilities in the US became rather pressing. The two marketing organizations there functioned well and sold record volumes every year. Efficient deliveries were difficult to achieve based only on large transatlantic shipments. With increasing tonnage coming in, the landing/unloading and stocking capacity might have to be expanded. Last, but not least, clients still showed some preference for US-made products. Hydro considered several alternatives for the start-up of fertilizer produc­ tion in the US. A green-field establishment might mobilize the latest achievements in Hydro ' s production technology. A quicker solution might be to acquire one of the existing operators on the US market. Systematic searching for candidates was carried through according to requirements such as size, location, technology, environmental issues, profitability, market reputation, management resources etc. Gradually, the search zoomed in on one of the US's largest regional, cooperative groups - Farmland Industries - with headquarters in Kansas City. Farmland had an annual turnover of US$3.5-4 billions in terms of fertilizers, oil products, feedstuff and food articles in 19 states. Farmland' s production facilities were located in Green Bay, Florida. They had been built around 1 970 and had later undergone considerable modernization. Thereby, some environmental problems had been reduced or eliminated. Negotiations led to a joint venture agreement whereby Hydro bought a 50% share in Farmland's fertilizer plant. Farmland would run the produc­ tion, whilst Hydro would do the marketing. Of special importance for Hydro was the fact that Farmland's products were phosphate-based, supplementing Hydro ' s nitrogen-based products, thereby covering a wider range of client needs. Hydro also gained access to natural deposits of phosphate close to Green Bay.

Coordination of US fertilizer business We have now seen how Hydro ' s US fertilizer business developed over 45 years to the point where it: •

•

• •

•

covered both large and small farming operations in most US states with a wide range of products distributed through many channels by many organizational units

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Norsk Hydro Fertilizers: Case B •

• •

29

located in diverse areas with varying degrees of overlapping and interdependent activities.

This complex situation, rather typical for firms diversifying and going international, called for measures that could foster better coordination and efficiency. Top management of Hydro ' s world-wide businesses (fertilizers, light metals, oil and gas etc.) were located in Oslo. The basic idea was to have a lean, tightly knit management team to draw up global policies and struc­ tures, and leave as much as possible of the operative business to the sub­ structures of the company. The main substructures were product group divisions with global responsibility. The divisional top management was also located in Oslo, to secure close contact between all sectors on the general management level. The product group divisions were subdivided in various ways. For instance, the Aluminium Division was subdivided according to the further refinement of the metal: one subdivision looked after the rolling into plates for packaging etc . , another was responsible for extrusion into building products etc., while a third worked with machining into car equipment etc. The aluminium extrusion business had developed a new organizational structure to promote better international market orientation: its headquarters had been moved out of Norway to Lausanne in Switzerland. From there, the top management could stay in close, personal touch with the operating units all over Europe. It was also easier to recruit top international businessmen to Lausanne than to Oslo, thus developing a highly competent milieu which might also be used for training young, aspiring internationalists. Against this background, Hydro discussed the build-up of the agri­ business. The Nordic and West European markets were still dominant, and represented a 'home' market; other markets were grouped under the term ' Hydro Agri International ' . The top management should remain in Oslo, and delegation should be achieved through a geographic/regional subdivision. One of these was to be 'Hydro Agri North America ' , HANA for short. HANA should report to Hydro Agri International in Oslo on major, strategic issues, but be responsible for all aspects/functions of the operational business (sourcing/production, logistics, marketing, administration etc .). HANA ' s headquarters was located to Tampa, Florida. Its first general manager was a Norwegian with wide experience from agribusiness in many parts of the world. Most of the staff, however, were recruited in the US, mainly from Hydro ' s units there, to secure two-way cultural understanding and market orientation. From the start, HANA had more than enough to look after: the two marketing organizations, WGM and Transnitro, had to be streamlined and trained to cover new products from Farmland and others. Hydro' s entry into production and other types of sourcing required better logistics. Operating within a joint venture also called for top management attention.

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Cases In marketing

Thus, a new structure for better US agribusiness coordination gradually emerged. It was supplemented with management development efforts, both centrally and locally. The central Oslo management started the 'Hydro Fertilizer Academy' with the aim of offering teaching programmes for the commercial side of the business. People from all parts of the world could be selected for training, also agents and their representatives.

Future HQ-subsidiary relationships Textbooks tend to give limited attention to the development of the HQ­ subsidiary relationship. However, this is an extremely important aspect of the process of internationalization. Lack of fit between 'foreign' activities and 'home' strategy and structure often creates problems, conflicts and retarded international expansion. Without pretending a generally valid description of an 'unhealthy' development, we shall point at some risks. First, let us look at the HQ. •

•

•

The home top management tend to keep the reins too tight. They are sceptical towards the local (provincial?) managers 'out there ' . Do they really have a holistic view of the company or division? Can they be trusted not to indulge in some crazy local activity, contradicting central policy? As a compromise between centralization and delegation to operating units, a regional 'sub-headquarters' may be established for groups of markets which are geographicallylculturally/commercially related. But still, the 'home' HQ feels that it must be in control and asks for all kinds of reporting and even inspection. An unofficial, dual management network may develop, creating confusion, obstruction and loss of efficiency. Another compromise is for the home HQ to delegate in the line relationships, and develop central service and advisory staffs to be drawn upon by the subsidiaries. If these staffs are clever enough always to be in front with respect to, for instance, marketing issues, they may be respected and listened to. If not, they may represent a source of irritation, bureaucracy and unnecessary costs.

Turning now to the subsidiaries, many dangers are lurking under the surface even there. •

•

When the subsidiaries are newly established, they tend to be very obedient. They owe everything to the home HQ - resources, compet­ ence, technology, management systems etc. Often, the first subsidiary managers are recruited from the home base, and bring with them the rules of good behaviour from there - even if they need not be locally palatable. As subsidiaries mature, they tend to develop 'teenager' opposition: 'Back home, they don't really trust us. They doubt whether we really

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•

31

understand the world (our market) and can do sensible planning on our own. They question our economic responsibility, and show irritation every time we need fresh capital. ' At a later stage, 'home' managers may be replaced by locally recruited people. The teenager opposition may now be strengthened by cultural misconceptions. In the local business milieu, it may be degrading to receive too much instruction from the HQ, especially if that instruction comes from someone lower in the hierarchy, like a sales manager, not to mention a subordinate staff person. This may be a threat to a desired macho image, and contacts homewards may therefore be minimized.

Well, Gerd Petersen thought these descriptions were somewhat cari­ catured. But, she did see how perceived power bases change along with the process of internationalization. She realized that she needed to take another look at the HQ-subsidiary relationship among other things. It was not an easy task that Gerd had been given. Many things had happened over the past several years, and the information available to her was not complete. But, eager to meet the challenge and hoping for a promotion, she set out to do her analysis of the past, the present and the future for Hydro in the United States. With hard work and some luck, she also hoped for a future as head of Hydro ' s US operations . . .

Questions for discussion/suggested tasks

2 3

4

Should Hydro aim also at the big 'industrial ' farmers, buying fertilizers in bulk, and should they build market position from scratch or buy themselves into an existing sales and distribution set-up? At what stage should Hydro go into production of fertilizers in the US? Should Hydro choose a green-field approach or try acquisition of a US manufacturer, perhaps as a joint venture? Supposing that Hydro ' s US fertilizer business has become big and profitable, but also highly diversified, how could better coordination be achieved?

Suggested reading Albaum, G. et al ( 1 994) International Marketing and Export Management, 2nd edn. Reading, MA: Addison Wesley. Bradley, F. ( 1 995) International Marketing Strategy, 2nd edn. Englewood Cliffs, NJ: Prentice Hall ( selected articles and cases).

Acknowledgements Thanks are due to Hydro Agri InternationaL Oslo, for permission to publish material included in this case.

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Med iaMarkt The price-active market entry into Switzerland Christian Belz, Thomas Rudolph and Hermann Schindler

Category k i l l ers experience success i n many retai l industries and coun­

tri e s . Examples are Toys ' R ' U s and Ikea. Their expansion rate i s very i m pressive. Through the ir expans i o n , these category k i l lers have devel­ oped new foreign markets and changed the rules of doing business for a l l those i nvolved in these markets . T h e market entry o f a new com petitor c h a l l e nges the existi ng retai lers. In Spring 1994, the price-aggress ive category killer Med i aM a rkt opened two outlets for consumer e l ectron ics i n Switzerland. T h i s case deals with European ma rketing as seen from the perspective of the com petitors and market participants in a country and the c h a l l e nges they face from a new m arket entrant. I nternational marketing means more than i nternationalization or expansion i nto new markets abroad . It a l so

means successfu l ly asserting oneself i n o n e ' s own market vis-a-vis new i nternational competitors. How successful will Europe ' s l a rgest electronics retai l er, MediaMarkt, be in Switze rland? How w i l l the market structure and the rules of com peti­

tion c hange? How should suppliers of consumer electron ics behave? How can the existing retai lers ( d i scounters, speci alty store s , c h a i n s ) react against this new com petitor? These are the questions to be d iscussed .

Challenge through price-aggressive category killers Category killers are operations with large, mostly ground floor, sales areas. An essential element of this retail format is its concentration on one or very few product categories. This leads to a positive image of competence. Locations are normally found at city peripheries and are easily accessible by

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car. The goods are usually transported home and installed or assembled by customers themselves. This concept is based on presenting the merchandise so that self-service is possible. The customer can look at the goods, often test them, and then choose. Assistance is available, if it is requested by the customer. MediaMarkt, a category killer for electronics (a Metro/Kaufhof sub­ sidiary), entered the Swiss market and opened two stores in Spring 1 994 in Dietikon and Dietlikon, near Zurich. Up to that point, MediaMarkt operated in Germany, Austria and France. Other European countries (for instance Scandinavia, Belgium, Netherlands, Great Britain) have been targeted for future expansion and another eight to ten branch openings have been announced for Switzerland. MediaMarkt has a particularly aggressive, as well as a clearly focused and innovative, concept. Until recently operations with such big sales areas, offering large quan­ tities and many products within a product category, did not exist in Switzerland. Even Migros, for example, does not make use of a large sales area within its stores for its household appliances and consumer electronics. With the existing retailers, assistance and product information was obligat­ ory for the customer to make a consumer electronics purchase. Even in discount stores, customers had to ask for assistance; self-service and in many cases self-selection with optional assistance was not possible. Both the manufacturers and the existing electronics retailers are facing a variety of challenges. What opportunities and problems will arise and which strategies will be the right ones? Are Swiss retailers vulnerable? This case focuses on 'brown goods' (TV, radio, video, HiFi, CD players), because MediaMarkt has proved to be very successful in this product category.

A highly competitive consumer electronics market The market for consumer electronics is saturated and has been severely hit by the recession. The entire Swiss market for consumer electronics shrank approximately 1 5% between 1 992 and 1 993. The development of the different product categories varies: stereo equipment and colour televisions have seen stable sales whereas video equipment sales have continued to decrease. Consumer electronics specialty stores have a 62% market share. The rest of the market is divided between chains (24%) and department stores ( 1 4%; including Migros and mail order). The continued strong market position of specialty stores has, on the one hand, been maintained by increasingly professional management, often supported by cooperatives, and, on the other hand, is due to the Swiss customer' s demand for high quality and good service. Yearly per capita spending on consumer electronics in Switzerland is high compared with other European countries; for example:

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• •

• • •

Cases in marketing

Switzerland Germany Netherlands Austria Belgium Norway

sFr.590 sFr.574 sFr.474 sFr.462 sFr.462 sFr.459

The behaviour of Swiss consumers differs from that of consumers in other countries. The essential differences are: • • •

up to 1 994 the consumer showed little price SenSltlVlty; however, a tendency towards greater price sensitivity is now apparent; consumers are very security and quality conscious - product warranties are very important; consumers are not used to travelling long distances to make purchases.

The Swiss market, in comparison to the German and EU markets, shows some special qualities, as can be seen in the following Exhibit I . Exhibit 2 shows the different market positions by retail format and product category, and Exhibit 3 shows the sales decrease in the market for consumer electronics.

MediaMarkt MediaMarkt is a subsidiary of the Kaufuof group. In European retai ling the MediaMarkt group is the leader in electronics, with a turnover reaching DM6.8 billion in 1 995. The total number of employees is approximately 8000. The MediaMarkt group has about 90 stores in different countries, including Germany, Austria, France and Switzerland. Expansion into other countries such as Spain, Belgium, the Netherlands, Finland, Sweden, Norway and eastern European countries is planned. Exhibit 4 shows the milestones of MediaMarkt' s market entry into Switzerland. Purchasing strategies: negotiation power and new rules of doing business Purchasing is an important part of retail management. It also plays an important role in MediaMarkt' s concept. In its first negotiations with potential Swiss suppliers, MediaMarkt clarified the rules of doing business. The purchasing concept MediaMarkt presented to its potential suppliers before the market entry was as follows : Purchasing conditions. MediaMarkt takes advantage o f its negotiation power (high buying volumes) in the area of purchasing. While being frank is an important aspect of their negotiations, they also push to

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MedlaMarkt

Exhibit 1

35

Special qualities of the Swiss consumer electronics market

Environment

Special qualities

Legal/political

Federal legal system (i.e. store closing hours) Specific laws regarding unfair competition and collusion Restrictive construction laws (building permits for shopping centres are scarcely available) Different norms for some products, especially for large home appliances Different electrical system standards High percentage of rented apartments: direct sales of large household appliances from the importers/producers to real estate owners High savings rate Road infrastructure: few parking places, but well developed public transportation system High personnel and rent costs Few national manufacturers; high percentage of imports High number of stores per inhabitant Consumers unwilling to travel long distances to make a purchase High environmental awareness

Technological Economic

Social

Exhibit 2

Market positions by retail format and product

category

Market position

Specialty store

A

Very strong

Stereo

B C

Strong Average

TV/video

D

Weak

E

Very weak

Department store Personal audio" Cassettes

Chain Personal audio

TV/video Cassettes Stereo TV/video Stereo Personal audio Cassettes

" i.e. Walkman, portable CD player.

Exhibit 3

Sales (sFr. m) and sales changes in selected

product categories in the consumer electronics market

Product categories TV/video (total)

TV Video recorder Camcorder HiFi (total)

HiFi set CD player Personal audio (total)

Radio receiver Walkman CD player Cassettes

Feb. 1 992Jan. 1 993

Feb. 1 993Jan. 1 994

Sales change

966.3 589.0 2 1 9. 5 1 50.4 362.0 237.3 44.9 132.3 66.7 33. 1 23.2 1 12.1

842.6 527.2 1 8 1 .6 1 29.7 314.2 220.5 32.7 131.2 6 1 .6 30.2 2 5 .0 101.2

-12.8 - 1 0. 5 - 1 7.3 - 1 3.8 -13.2 -7 . 1 -27 . 2 -0.8 -7 . 6 -8.8 7.8 -9.7

Source: IHA Retailer Panel for Consumer Electronics, 1 993

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Exhibit 4

Milestones of MediaMarkt's market entry into

Switzerland

Time period 1 992

March 1 993 Summerl Autumn 1 993 November 1 993

MediaMarkt Search and evaluation of alternative locations First announcement of commitment Beginning of the search for partners (Some services like installation, repair are outsourced) MediaMarkt informs all suppliers about the MediaMarkt concept and the way of doing business/terms of payment

Spring 1 994

Decision made by some competitors to rebuild/renovate some stores Fust calls itself 'category killer' and changes its ad layout: national TV campaign The Manor group opens its own category killer concept: 'Elektro-Plus'

February 1 994

9 March 1 994

1 3 March 1 4 March 19 March 22

March

24 March

2

3

Competitors

First ad in a daily paper Announcement of opening on national TV (DRS) Beginning of a broad PR campaign Start of a concentrated ad campaign (primarily print ads) Opening of the first markets in Dietikon and Dietlikon

obtain the best deal possible. MediaMarkt requires the following from its Swiss suppliers: • the best purchasing terms in Swiss retail or • if MediaMarkt gets better purchasing terms for one specific brand in Germany, France or Austria, then they expect to get these terms in Switzerland as well. This is particularly problematic, because Media­ Markt' s buying conditions in Germany are based on a higher volume and German suppliers have a better cost structure than Swiss suppliers. Terms of payment. Negotiations dealing with the (basic) terms of payment are first taken up with MediaMarkt' s central office in Switzer­ land. It is expected that individual branches that buy directly from the supplier will require further discounts and financial contributions (special terms of payment). Purchasing and logistics. MediaMarkt has no central warehouse. Instead a small warehouse is attached to every MediaMarkt store and most of the products are placed directly on the sales floor. The merchandising is handled by the supplier in cooperation with the responsible MediaMarkt

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MedlaMarkt

4

5

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manager. MediaMarkt requires a final date for payment which is based on the time it takes to sell the goods. This means that the suppliers themselves finance the products MediaMarkt offers in its markets. In its negotiations with the suppliers, MediaMarkt emphasizes that the sup­ pliers do not need storage facilities because the merchandise can be put directly onto the sales floor after production. By using this approach MediaMarkt is able to encourage competition among the suppliers. In Germany, MediaMarkt was able to negotiate a date of payment of up to more than 1 00 days. Support from the suppliers. Supplying MediaMarkt requires a different logistics concept and infrastructure on the part of the suppliers. The detail s involved in arranging the products and the meetings with depart­ ment and branch managers at each branch alone require a qualified employee to spend at least one half-day every one to two weeks at MediaMarkt. MediaMarkt asks its suppliers to send sales representatives frequently and regularly . During these visits MediaMarkt obtains the newest information about products and technologies; furthermore, pro­ motional activities can be discussed. Negotiation power of the importers. Since MediaMarkt Swi tzerland has no interest in building up an import department or a logistics and storage system, it works with the existing Swiss importers for consumer elec­ tronics. In the long run. the MediaMarkt system thus depends on the support of the importers. Nevertheless, many Swiss importers fear that the subsidiaries in the different European countries could be consolidated and the importers would lose their function.

Marketing concept The category killer concept depends on low prices and a deep assortment (i.e. a large choice of similar goods) in the product categories the category killer carries. By focusing on just a few product categories a positive image of competence is created in the customer's mind. Customers are free to select and test the products themselves . If requested by the customer, experienced and competent service and assistance is available. MediaMarkt strives for sales of around sFr.40-50 million for each market.

Assortment: a wide selection of brand names The product range carried by MediaMarkt Switzerland corresponds to that offered in Germany: consumer electronics, household appliances, computers. photography and communica­ tions equipment. MediaMarkt offers all of these product categories in each of its outlets. The company carries branded products across all price ranges (i.e. products of one brand with price levels ranging from low to premium prices). MediaMarkt advertised 35,000 stock-keeping units at each of its outlets. including CDs and cassettes. MediaMarkt reasons that a neutral sale is only possible if the customer finds a wide choice and can compare all of the

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d i ffere n t h ra nd s

and products. Referring to this, Mr Walter Gunz, Managing MediaMarkt International. stated: 'We don ' t sell what we have, but rather sell the c ustomers what they want, because we have everything. ' The MediaMarkt concept is therefore based o n customers being able to i n l orm themselves about the extraordinarily large selection of goods. The ,i Ie of the sales area, the presentation of the merchandise and the quantity of products play an important role in customers' perceptions. From the market­ i llt' p e rs p ecti v e the decisive factor is not the exact, actual number of stock­ I\ee p i ng units. but rather how the customer perceives the selection and the d \ ai lahi lity of the products ( see also discussion of store design below). D i rector PI'

;>rice:

(/

to\'ourable price image MediaMarkt strives for price leadership. have an important function for both consumers and competitors. hicc� arc easier to communicate than, for example, outstanding assistance or al l -encompassing customer service. In the initial phase of opening up an n l l t l e t t h i s is an important advantage. The prices, therefore, have a l arge i ll l pact on what happens in the market. In the start-up phase of MediaMarkt S w i 17cri and. v ery high price reductions were featured in multi-page ads. B y � i \ i n g h i gh discounts o n a few selected products, MediaMarkt tries t o create d i! 0 od price im age for the whole assortment. MediaMarkt and other d l \,."ounters face the task of building up a favourable price image while k e e p i n g the average margin profitable. Prices

fJ wlI/oliot/

and adl'erlising: product versus price In its advertisements, advertises product prices in big letters. The ads are clearly a rranged so that six to eight products can be seen on one page (for CDs and l a s s e tte s this number can be higher). A red background is used to attract the a\ ! c n t ion oj" the reader and thus increase the effectiveness of the ad. In the e n t rv phase multi-page ads were placed in local and a few national 1 1 C \\ � pa pe rs Attention-grabbing and entertaining radio spots were used to uh ta i n a high degree of recognition. For the two Swiss stores, advertising ,: x pendi tures in the first six months are estimated at sFr.3 . 8 million. i\ l c d i a M arkt

.

LO('(llion: lu rge .lull'S areas. easily accessible b.v car, and a high number of l il >I('lI li([1 shoppers In order to achieve success, MediaMarkt needs large s a k s floor areas and a high number of potential shoppers. Locations of the appropriate size and meeting MediaMarkt' s specific requirements (shopper frclj l le n cy a good road network, complementary branch structure etc . ) are h a rd to come by, as are the building permits. MediaMarkt normally selects locations in industrial parks that have existing super- or hypermarkets and good road links. Ope n i n g stores with such large sales areas took a long time: MediaMarkt needed approximately three years for its first two stores. A further eight to tell .'i tnres have been announced for Switzerland, but there are few locations i l l thc country with the market potential which Zurich offers. .

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MedlaMarkt

Exhibit 5

Examples of MedlaMarkt's advertising campaign

Andere ver aulen jelll �Ladenbuler, wir biiten % Dauerlielslpreise.

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40

Exhibit 6

Cases In marketing

MedlaMarkt's store design

edialMarkf I

S

Exhibit 7

MedlaMarkt's product presentation

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MedlaMarkt

Exhibit 8

MedlaMarkt's product presentation

Exhibit 9

MediaMarkt Dietlikon

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42

Cases in marketing

Store design and presentation of merchandise: 'pallets instead of marble ' Products such as TV sets are displayed along the walls. The packaged equipment is placed in the middle of the sales floor on pallets. Despite the sales floor's warehouse atmosphere, the area is also open, bright and friendly. The customer can enter, get oriented and freely walk around. A sample of every piece of equipment is displayed and plugged in so that customers can test each one. Sometimes this freedom has led to product damage. Exhibits 6-9 illustrate the store design and product presentation of MediaMarkt. Service: available if requested MediaMarkt displays a different approach to assistance and customer service. Customers should be able to inform themselves about the products based on the presentation of the merchandise. The displays themselves and the labelling on the goods provide the answers to many customer questions. Through this approach the company aims to create the atmosphere found at a fair or exhibition. Nevertheless, a customer can also request competent assistance and this is clearly indicated by signs throughout the store. Differentiation of MediaMarkt Exhibit 1 0 shows how MediaMarkt differentiates itself. The Rudolph model (Rudolph, 1 993) contains the eight most important marketing instruments of a retailer (location, store l ayout, personnel, communication, price, service, product range and new technologies) . Starting from the inside, the model distinguishes three zones:

2

3

Certain measures are found in the security zone. These are expected by the customer and offered by all competitors. Through these measures a retailer cannot differentiate any further. The measures in the differentiation zone help the retailer to satisfy the customer's needs better than the competition. These measures contribute to a company's differentiation and its profits. Measures in the early recognition "one are those which no competitor offers at the moment and only few customers are ready to pay for. These are basically innovative measures through which a retail company can gain a competitive advantage in the future.

Competitors in the electronics market Description of important competitors There are many different competitors in the electronics market; for example, a specialty store for CDs and cassettes represents a competitor, while a specialty store selling computer or office communication equipment rep­ resents a different competitor. A short description of MediaMarkt' s most important competitors follows.

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MediaMarkt

Exhibit 10

43

Differentiation of MediaMarkt

wide and deep selection

newspaper ads

clearly communicated Wide and deep selection

Although the independent specialty retailers p l ay a very i mport a n t ru k . they display great diversity i n their concepts, which makes the m d i ff ic u l t t t ) consider a s a whole; even in the cooperatives, the members di frer gre�lt I ) . and it is dangerous to speak in general about 'specialty stores ' . The I\lan()1 group has been picked out here to represent the department store c u n l· e p t .

Fust: integration of price and service leadership F u s t o ffcrs l ar� c �tnd small household appliances, consumer electronics, some CDs a nd casse t t e , . lightingllamps and most recently photography equipment. Th e area o f consumer electronics is in rapid growth. Today Fust sells co ns u m e r e k e tron · ics in 5 1 of its 1 1 7 Swiss stores and achieves sFr. 378.9 m in sales. Fuq a l s o places great importance o n customer service. I t o ffe rs adv ice. del i \ uy . installation, maintenance and repairs. Approximately 400 o f the 7 9 0 e m p l oy ­ ees work in service areas; of these, about 1 00 do repair work. The numbe r I I I service and leasing contracts is also significant.

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44

Cases In marketing

Fust' s pOSitIOn in household appliances is also particularly strong. Novamatic, its own private label, holds a signi ficant position in Fust' s assortment and strengthens its position i n relation to its competitors. In some areas of household appliances, Fust is considered one of the biggest European retailers. Fust is acting in a price-oriented way and is therefore able to meet MediaMarkt' s prices. A low price guarantee makes the customer feel sure about Fust' s honest pIice policy. Moreover. Fust manages to combine both price and service leadership. The customers are able to choose the extent of service they need or wanl. Prices are differentiated depending on the individual extent of service asked for. The location of Fust stores varies - shopping centres, downtown, city outskirts - and the size of the stores may range from approximately 500 to 2,000 me . The assortment of goods offered is put together differently , according to the size o f the store.

Interdiscount: a discounter with emphasis on portable products Inter­ discount has 1 1 0 sales locations ( shopping centres and downtown areas) and therefore a good market coverage in Sw itzerland. Sales for the Interdiscount chain reached sFr.373.5 million in 1 99 3 . The Interdiscount group also has a share in several other companies, which also run category killer formats in other countries. Interdiscount follows a discount strategy and strives to be the price leader. The product range offered includes a large percentage of own labels and small, easily transportable products in a low to medium price range. The company gives a low price guarantee. Interdiscount rarely uses print ads, but rather makes use of catalogues. Interdiscount stores only weakly embody the discount philosophy; they are more easily comparable to specialty stores and follow a different concept compared to MediaMarkt. Elektro-Plus: a newcomer with a demanding expansion strategy On 9 March 1 994, Jumbo AG ( hypermarkets for food and non-food) opened two electronics category killers under the name ' Elektro-Plus ' . Jumbo (Maus Freres) is looking for complementary activities to its existing 28 Do-It­ Yourself markets (two more under construction) and its seven hypermarkets (two more under construction) . With 1 5- 1 8 branches in Switzerland, Elektro-Plus has higher expansion objectives than MediaMarkt. However, most of its store locations are found in rural areas and the relevant market area covers fewer consumers. Sales objectives are thus set at between sFr. 1 0 and 1 5 million per year for each store. retora-Expert and Interfunk: cooperatives of diverse specialty retailers There are altogether 375 specialty businesses with over sFr.5 80 million in sales in the Tetora-Expert and the Interfunk cooperative. Tetora-Expert's central office is managed by a small full-time staff. The cooperative assists its members in advertising, setting up the stores and offering training courses

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45

MedlaMarkt Exhibit 11

Example of a Fust advertisement

Nur Fust-Ausstellgeriite sind noch billiger ! . GtsdIirnpiIoi Bosdo SPS S 127 �. "-Ien ""'" ... 4S .... pmliljodon Haw..It Ii/III ISt4S.6O (I!I. Mitt, 69.-/M'" iokl. SA

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167

Guardian Properties

Appendix 8: Visitors to Covent Garden Market Table 22

Tourists and non-tourists, by

age, 1992 Age group ( yr) 0-24 25-34 35-54 55+ U nskilled 1%

Tourists (%)

Non-tourists (%)

26 27 32 15

54 20 26

Semi-skilled 3%

Shop/service 4%

Homemaker 38% Student 4%

Figure 8 Visitors to Covent Garden Market by occupational group, 1992 50

_ � D e D

40

30

0-30 min 31-BO m i n 1-3 hours 3+ hours For the day

% 20

10

0 Length of stay

Figure 9

Visitors to Covent Garden Market by length of stay, 1991

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Cases In marketing

168

Appendix 9: Pedestrian flows in Covent Garden Market, September 1991 Russell Street D

E

F

C

G

D

(j) OJ c (j)

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A

N

M

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K

L

Kings Street

Figure 10

Q) [l: +-'

CI) C 0 +-' C.

Henrietta Street

Plan of entrances and exits

Table 23 Entrances used by duration of stay (total for each entrance = 1.00%) Duration of stay

A

B

0-30 min 3 1-6 1 min 1 -3 hr Over 3 hr For the day

14 29 57

12 28 49 7 4

Entrances F E H L K D C G J (in % of total number of inflows of each entrance) 15 31 36 10 8

12 34 37 10 7

25 21 43 9 3

20 25 35 5 15

26 23 37 6 9

13 13 50 13 13

Copyrighted Material

18 25 43 10 5

40 60

19 29 38 7 7

26 23 35 9 7

M

N

13 32 45 4 6

28 20 38 4 10

Guardian Properties

169

160 140

2 120 c Q)

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60 40 20 O �������--�-�Ati10 30 1 1 30 12 30 13 30 14 30 15 30 16 30 1 7 30 11 00 12 00 13 00 14 00 15 00 16 00 1 7 00 18 00 Time period of i nterview Duration of stay 0-30 min

30-60 m i n

1-3 h r

3+

hr

F_ o_ r tt:� day

�-----

Figure 11

The duration of stay of visitors

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_To_t_al_l

10

God iva Europe The standardization versus customization dilemma Jean-Jacques Lambin

In this case the President of Godiva Europe is presented with an opportu­ n ity to shape the worldwide advertising programme for Godiva ' s l uxury Belgian chocolate as Godiva Europe examines its advertis i ng strategy for Europe and Belg i u m . Godiva U SA has suggested an outli n e for an i nter­ n ational adverti s i ng campaign that does not seem to fit Europe a n d , specifical ly, God iva ' s largest single market, Belgi u m . T h e c h a l lenge h e faces is t o t h i n k about t h e merits of a global advertis i ng campaign wh i l e

' glocal izing' Europe and localizing Belgium , where Godiva' s competitive position is frag i l e .

In July of 1 99 1 , Charles van der Veken, President of Godiva Europe, examined with satisfaction the financial results of Godiva Belgium for the last period, which showed an operating profit of 1 3 million Belgian francs. 'We' ve come a long way,' he thought to himself, remembering the financial situation he inherited just one year ago, which showed a loss of BFr l O million francs ( 1 99 1 : BFr34 = US$ l .OO) . Over the course of the past year van der Veken had completely restructured the company. He started by firing the marketing and sales staff and then changed the retail distribution network by removing Godiva' s representation from numerous stores. He then completely rethought the decoration and design of the remaining sales outlets, and established precise rules of organization and functioning applic­ able to those stores. These changes made the Godiva Belgium network of franchises comparable to the kind seen in the United States and Japan. For Certain names and data within this case have been disguised and the case cannot be used as a source of information for market research.

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171

Godiva Europe

while in all other countries Godiva stores conveyed an image of lUxury and of high class products, in Belgium, where the Godiva concept was originally conceived, this image was poorly maintained. Fearing what he called the 'boomerang effect' , van der Veken had first focused on restructuring the Godiva retail network, an objective that was today on the way to realization. 'It is time,' thought van der Veken, 'to communicate the desired image of Godiva more widely, now that we have a retail network capable of maintaining that image on the level of the Triad Countries . ' J

Background to Godiva Europe Godiva has its roots in Belgium, where the hand crafting of chocolates stems from a long tradition. Joseph Draps, founder of Godiva in the I 920s, took control of the family business upon the death of his father and created an assortment of prestigious chocolates for which he lacked a name. He finally chose the name 'Godiva' because it had an international sound and a historical association, that of Lady Godiva: Lady Godiva is the heroine of an English legend. She was the wife of Leofric, Earl of Chester in the I I th century, whom she married around 1 050. Roger de Wendower ( 1 3th century) tells that Godiva implored Leofric to lower the taxes that were crushing Coventry. The Earl would not consent unless his wife would walk through the town completely naked, which she did, covered only by her long hair. John Brompton ( 1 6th century) added that nobody saw her. According to a ballad from the 1 7th century, Godiva ordered all the inhabitants to remain at home. The only one to see her was an indiscreet Peeping Tom. S ince 1 678, every three years in Coventry, a Godiva Procession is held. (Grand Larousse, vol. 5, p. 522)

Godiva was purchased in 1 97 4 by the multinational Campbell Soup Com­ pany. Godiva International is made up of three decision centres: Godiva Europe, Godiva USA and Godiva Japan, as shown in Exhibit I . An essentially Belgian company in the beginning, Godiva has become today an Exhibit 1

Campbell Soup organization structure Campbell Soup

Campbell North

Grocery Soup

Frozen Condi ments Food

Sauces

Biscuit Biscuit & Bakery & Bakery USA Europe

Japan Europe

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Godiva International

� t

Japan USA Europe

172

Cases In marketing

almost entirely triadic enterprise with a presence in the United States, Japan and Western Europe. Godiva Europe has its headquarters in Brussels. The company' s factory, which has an annual production capacity of 3,000 tons, is also situated in Brussels, from where products are exported to more than 20 countries throughout the world. A production unit in the United States provides about 90% of the needs of the US market, with the remainder being imported from Belgium. In 1 990, Godiva Europe had annual sales of BFr926 million. The company is well placed to serve Belgium, its largest market. After Belgium, the principal European markets are France, Great Britain, Germany, Spain and Portugal. Godiva USA and Godiva Japan distribute the Godiva products to their respective markets and constitute the two other most important markets. The largest part of European production volume (55%) is sold under the Godiva brand name, about 1 0% is sold through private labels arrangements, and another 1 0% is sold under the brand Come Toison d'Or; 25% of Godiva Europe' s production is sold directly to Godiva Japan and Godiva USA at a company transfer price. Thus, only 65% of total sales are made in Europe, under the brand name Godiva. A significant share of Godiva Europe' s sales are made through more than 20 airport duty-free shops throughout the world. Those sales, free of value added tax (VAT), are made at the expense of local country sales, but they help to establish the international image of Godiva. 2 Godiva Europe also owns the Come Toison d ' Or brand, which is distributed through 40 stores in Belgium, which are mostly located in the Brussels area. This brand has an image very similar to Godiva: a refined, hand-made and luxury product. The acquisition of Come Toison d'Or was made in 1 989 to exploit fully the production capacity of the B russels plant modernized two years earlier. The original objective was to differentiate the positioning of the brand Come Toison d'Or from Godiva, but this objective was never pursued by management. A further complication stemmed from the fact that another Come brand, Come Port Royal, also exists in the Belgian market with a retail network of 1 8 stores. Godiva USA has a factory in Pennsylvania that serves the US market. Godiva Japan, which is solely concerned with marketing, distribution and sales of Godiva chocolates, imports the product from Belgium. The Japanese market is very important for Godiva International because of the high price level - BFr4,OOO per kilogram compared to BFr2,OOO in the United States, and BFr l ,000 in Belgium. The reference market of Godiva International consists of the 'triad nations' . As a branch of Campbell Soup Company, Godiva benefits from a privileged position. Godiva International is directly attached to the Campbell Soup Company Europe and Asia Vice President without an intermediary, which facilitates communication.

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173

Godiva Europe

Exhibit 2

Tons (OOOs) Index

World consumption of chocolate confectionery 1 980

1 985

1 986

1 987

1 988

1 989

2,359.6 100

2,778 . 1 1 18

2,780.2 1 18

2,862.0 121

2,990.8 1 27

3,083.6 131

Source: International Office of Cocoa, Chocolate and Sugar Confectionery (IOCCC),

December 1 990, p. 45

The world chocolate market Unlike coffee or tea, chocolate lends itself to multiple preparations. It can be eaten or drunk, munched or savoured. The official journal of the European Community divides chocolate into four categories: bars of chocolate, filled and unfilled, chocolate candies or chocolates (called 'pralines' in Belgium), such as Godiva' s chocolates, and other chocolate preparations. Chocolate consumption stabilized in the mid- 1 980s as a result of increas­ ing raw material costs and an ensuing price rise of finished products. As depicted in Exhibit 2, the past three years have shown very good per­ formances with worldwide consumption of confectionery chocolate (all categories included) of just over 3 million tons in 1 989, or an increase of 30.7 percent compared with 1 980 consumption. Overproportional consump­ tion was observed in Japan (+ 54.2%), Italy ( + 1 02. 1 %), Australia ( +45 . 1 %) and the United States since 1 980. A distinction is made within the chocolate candies category between industrial chocolates and chocolate pralines. Industrial chocolates are sold in prewrapped boxes with or without brand names. The generic boxes are mostly sold through large retail chains at Christmas or Easter; brand boxes are luxurious, offer a high-quality assortment of chocolates and emphasize the brand name in the package and through mass-media advertising. Typical of this subcategory is the brand Mon Cheri from Ferrero. Sales of generic boxes are stable in Europe, while sales of brand boxes are increasing. This suggests that consumers pay attention to brand names and to the quality image communicated by chocolate packaging and advertising. The name pralines, on the other hand, designates chocolate products that are hand-made or decorated by hand. The distinctive characteristics of pralines are their delicate flavour and luxurious packaging. They are also highly perishable and fragile with regard to shelf-life and transport. Typic­ ally, Godiva' s product belongs to this last category.

Chocolate consumption per country The per capita consumption of chocolate varies among countries, as shown in Exhibit 3. Chocolate consumption is higher in the northern part of Europe and lower in the Mediterranean region. In 1 990, Switzerland had the highest per capita consumption, with 9.4 kilograms per person. The lowest per capita consumption rate is observed in Spain, with 1 .2 kilograms per person.

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174 Exhibit 3 �989

Cases In marketing

Chocolate confectionery consumption per country,

Country Belgium Denmark France Spain Italy Japan Germany (F.R.) Switzerland United Kingdom United States

Per capita consumption (kg) Chocolate All chocolate confectionery candiesa 6.09 5.61 4.59 1 .2 1 1 .84 1 .59 6.81 9.41 7.15 4.77

Share of candies in chocolate confectionery %

2.65 1.17 1 .69 0. 1 4 0.65 0.44 1 .64 3 . 17 2.96 1 . 14

43.5 20.9 36.8 1 1 .6 35.3 27 . 8 24. 1 33.9 4 1 .4 23.9

Available statistics do not allow precise estimates of the share of 'chocolate pralines' in the category of chocolate candies a

Source: IOCCC, Statistical Bulletin, Brussels, December 1990: Chocolate candies: candy

bars, pralines and other chocolate products.

Exhibit 3 also shows that the share of chocolate candies (which category includes pralines), with respect to total chocolate confectionery consump­ tion, is strongest in Belgium (440/0) followed by Great Britain (4 1 0/0), France (37 0/0), Italy (350/0) and Switzerland (340/0). Switzerland is the largest consumer of chocolate candies, followed closely by the United Kingdom and B elgium, while the other countries are found far behind these three leaders. In examining the level of consumption reached in countries such as Switzerland, the United Kingdom and Belgium, it is possible to get an idea of the enormous potential that the world chocolates market holds. Countries like Spain, Italy and Japan are susceptible to reaching a future level of consumption roughly comparable to Switzerland, the United Kingdom and B elgium providing effective marketing programmes are implemented. Evolution of consumption Growth rates of chocolate confectionery are also very different among countries, as shown in Exhibit 4. Countries experiencing the highest growth rates are Italy, Japan, United Kingdom and the United States. With the exception of the United Kingdom, these are the countries where the per capita consumption is the lowest. The largest consumer countries like Belgium, Germany and Switzerland have probably reached a plateau in terms of per capita consumption. Purchase behaviour of the chocolate consumer Chocolate was imported to Europe by the Spanish at the time of the exploration of the New World. At that time, only the wealthy ate chocolate.

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God/va Europe

175

Exhibit 4 Evolution of chocolate confectionery consumption: average yearly growth rate, 1980-1989

Country Belgium Denmark France Spain Italy Japan Germany (F.R.) Switzerland United Kingdom United States

Per capita consumption (kg) 1 989 1 980 6.04 4.80 3.96 NO

0.92 1 .09 6.56 8.44 5.48 3.69

6.09 5.61 4.59 1.21 1 .84 1 .59 6.8 1 9.4 1 7.15 4.77

Average growth Index Average ( 1 980 1 00) growth rate (%) =

1 00.8 1 16.9 1 1 5.9

1 .76 1 .79 1 .65

200.0 1 45.9 1 03.8 1 1 1 .5 1 30.5 1 29.3

8.00 4.28 0.42 1 .22 3.00 2.89

NO

NO, no data. Source: IOCCC, December 1 990, p. 49

Today, chocolate is a mass-consumption product, accessible to everyone. Consumers are demanding and desire variety. In making chocolate a luxury product, chocolatiers have given their confectionery a certain prestige. The hand-made nature of their production and refined decoration give these chocolates their status. Chocolates are offered and shared on special occa­ sions; they are eaten among friends in an atmosphere of warmth. They are not purchased like chocolate bars; the behaviour of the consumer of chocolate pralines is much more deliberate and involved. The higher prices of chocolate pralines with respect to the other categories of chocolate do not inhibit the consumer, but limit more impulsive purchases. The consumption of chocolate of all categories is associated with pleas­ ure. A qualitative study of the Belgian market shows that this pleasure is associated with the ideas of refinement, the pleasure of taste and gift-giving: 'chocolate pralines are offered as a gift while chocolate bars are purchased for self-consumption. A praline would be mainly feminine, . . . women seem to appreciate them more and pralines are described by them as refined and fine.' In addition, the strong and powerful taste, particular shapes, the consistency of chocolate that melts in the mouth, and the feel of the chocolate to the touch are also factors to which the consumer is sensitive. Finally, the idea of a pure product devoid of chemicals is also in the consumer's mind.

Godiva chocolates in the world The ancestry of chocolates can be traced to the chef of the Duke of Choiseul de Plessis-Praslin, an ambassador of Louis XIII of France, when he prepared almonds browned in caramelized sugar. However, chocolates as we know

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176

Cases In marketing

them today, a filling surrounded by chocolate, were born in Belgium. It was at the end of the nineteenth century that Jean Neuhaus, son of a confectioner from Neuchatel living in Brussels, created the first chocolates, which he named 'pralines' . The current concern of Godiva International is to convey a similar image of the Godiva product as a lUXUry chocolate that is typically Belgian across the world. In what follows the main characteristics of consumers in each country where Godiva is distributed will be briefly presented.

Belgium Belgium is the birthplace of praline chocolates and the country where their consumption is highest. While there are no significant differences in the consumption rate among the different Belgian regions, differences do exist among the four main socioprofessional categories, as shown in Exhibit 5 . The total population includes 3,876,549 households. In 60% of purchases, chocolates are offered as gifts, and consumers make a clear distinction between a purchase for self-consumption and for a gift. The customer prefers a package where he or she may select the assortment. However, the image of chocolate pralines has become dated; chocolates have now become a product more comparable to flowers than to a luxury item. The results of a brand image study conducted in the Brussels area (see Appendix 1) show that, while Godiva is strongly associated with the items 'most expensive chocolate' , 'nicest packaging' and 'most beautiful boutiques/stores' , it is not clearly perceived as very different from its main competitors on items associated with superior quality or a significant quality differential. Neuhaus and Corne, two directly competing brands, are per­ ceived in a very similar way as shown in the perceptual map presented in Exhibit 6. In Belgium, Godiva holds a 10% market share and Leonidas 43%. Leonidas also has a large international coverage, with more than 1 ,500 outlets throughout the world and a production capacity of 1 0,000 tons, or three times that of Godiva Europe. In 1 99 1 , the size of the total Belgian market for chocolate pralines is estimated to be BFr3.6 billion (VAT included) or about 8,800 tons. This estimate is based on the data presented in Exhibit 5 .

Exhibit 5

The demand for pralines in Belgium: average expenditures per household, 1.988

Region

Av. expo (BFr)

Belgium Brussels Wallonie Flanders

814 884 812 793

Type of household Independent White-collar Blue-collar Inactive

Source: INS, Enquete sur les budgets des menages ( 1 988)

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Av. expo (BFr) 1 ,239 800 567 755

177

Godiva Europe

Exhibit 6

Brand image study: chocolate pralines in Belgium (bubble area = awareness)

1 'Queen of chocolate' 0.2 10

•

0

· 12

2 Ideal for gift 3 For self-indu lgence

3 · .9

6•

4 Special occasions 5 Most beautiful boutique 6 Most attractive price 7 Nicest packaging

4.

-0. 2

8 Most refined chocolate

2.

9 Typical ly Belgian chocol ate 1 0 'Taste I like best'

-0. 4

11 Most expensive chocol ate 12 Brand known world-wide

-0 . 6

O

-0 . 5

M on Cheri

1 .0

0. 5

0

Survey 20/23 May 1992, Brussels Sample size

128

=

France French chocolate is darker, drier and more bitter than Belgian chocolates. B elgian chocolates are well known in France, however, and appreciated due to Leonidas, which introduced chocolates in France and today holds the largest market share and sells through 250 boutiques. Belgian chocolates are represented as well by Jeff de Bruges, which belongs to Neuhaus. Godiva has a share in a small niche, which is also occupied by several French chocolatiers, none of whom has national market coverage. In France chocolates are above all regarded as a gift that is offered on certain special occasions, and their purchase is very seasonal (60% of all purchases are made at Christmas), which poses problems of profitability during periods of lower sales. Estimates of market size are presented in Exhibit 7 . Exhibit 7 Estimated consumption of chocolates" in France, 1.988-1.990

Production (tons) Imports (+) (tons) Exports (-) (tons) Total consumption (tons) Per capita consumption (kg)

1 988

1 989

1 990

44,302 9,677 3,788 50, 1 9 1 0.900

47,660 1 0,478 5,739 52,399 0.935

50,720 1 1 ,546 7,970 54,365 0.965

Figures are for 'bonbons de chocolat' and include other products than chocolate pralines: thus, total consumption is overestimated.

a

Source: SCEES, Production des fAA, December 1 99 1 , p. 6 1 (bonbons de chocolat); Eurostat, Foreign Trade, Categories

1 806.90. 1 1 and 1 806.90. 1 9

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178

Cases In marketing

United Kingdom An assortment of confectionery products, in which different types of chocolate are mixed, is most appreciated in the United Kingdom. Godiva is currently being introduced to the British market and seeks to create an image of high-quality and more refined Belgian chocolates. The change of mental­ ity is progressing, but the British are viewed as rather conservative and the economic climate is not very favourable for a luxury product. Marks & Spencer, a British retailer associated with good quality, is selling Belgian chocolates under the private brand name Saint Michael, but with the Belgian origin of the chocolates clearly indicated on the packaging.

Spain and Portugal In Spain and Portugal, chocolate pralines are a completely new concept. Godiva was the first to introduce chocolates a few years ago and the reception was excellent. Godiva chocolates immediately acquired the image of a refined, luxury product. In Spain, Godiva is sold through the quality department store Corte Inglese and by several franchises. Consumers' attitude towards chocolate is very positive. Chocolates are principally offered as gifts and most often in luxurious boxes.

Germany In Germany, a 'chocolates culture' does not really exist. Germans appear to be satisfied with a classic chocolate bar and do not yet place much importance on the distinctive qualities of fine chocolates. Godiva pralines are distributed through five franchised dealers.

Other European countries In Holland chocolate pralines are perceived as too expensive. In Italy and in the Nordic countries chocolate praline consumption is still a very marginal phenomenon.

United States Chocolates are very popular in the United States. Chocolates are given as presents on special occasions such as birthdays, Valentine' s Day and Christmas. Chocolates are typically offered in prewrapped packages, with an interior form to house them. The output of the Godiva facility in Pennsylvania almost suffices to cover the needs of present domestic con­ sumption. A small proportion of the Brussels plant output is exported to the United States. The Belgian factory delivers only new products or some products that cannot be produced by the Pennsylvania plant, such as the Godiva golf balls and the chocolate cartridges. In addition to 95 company­ owned stores, 800 outlets carry Godiva chocolates in the United States. These outlets are generally located in up-market department stores situated

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in suburban shopping malls, like Lord & Taylor, Neiman Marcus, Saks Fifth Avenue, Filenes and Magnin. Japan In Japan the Godiva chocolate is perceived primarily as European (60% as Belgian and 40% as Swiss or French). Chocolates are a prestigious and luxury gift. A large problem of seasonality exists in Japan, with 75% of purchases taking place near Valentine ' s Day. A unique feature of this market is that Japanese women give Japanese men chocolates on Valentine' s Day. The Japanese market is very attractive for Godiva International and still expanding. The duty-free market In addition to these countries, one must also include the duty-free market, which represents a very significant market segment in terms of output. The number of duty-free stores is still increasing and sales are closely linked to the development of passenger traffic. Godiva holds a very strong position in this market where Leonidas is not present. Generally speaking, the annual growth potential in Europe is very different and varies from country to country. In the United States, growth varies between 5 and l O% annually, while in Japan growth is very strong, varying between 20 and 25% annually.

Godiva's marketing strategy Godiva pralines are produced by four methods: those that are formed in a mould, those that are hollowed then filled, those where a solid filling is coated with chocolate, and finally those that are produced entirely by hand hand-made chocolates. Seventy per cent of Godiva pralines are machine­ made and 30% are hand-made, but of the machine-made chocolates, 60% must be decorated by hand to assure the quality level and the look of the praline. Godiva strives to find an optimal compromise between automatization and hand-work, hoping both to ensure the profitability and to perpetuate the name of Godiva as a producer of hand-made luxury chocolates. However, the difference of production costs between machine-made and hand-made chocolates is considerable (hand-made chocolates can cost up to seven times more than machine-made) . Charles van der Veken often had second thoughts about the wisdom of maintaining this product policy. He thought: 'Isn't the investment in making hand-made chocolates disproportional to the expecta­ tions of our customers? Do they really perceive the added value of these hand-made chocolates? Aren't these chocolates just a bit too sophisti­ cated?'

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Whatever the case, the objective pursued by Godiva is to convert the European market to the quality level of the Godiva praline. The Belgian consumer is the reference point: 'Shouldn' t a product that has passed the test of the Belgian consumer, a fine connoisseur of chocolate and a demanding customer, be assured of success throughout the world?' The Godiva facility in Belgium produces chocolates for the entire world, with the exception of the United States. Products exported from Belgium are identical for all countries, but sales by items are different. For example, in France, the demand for drier and bitter chocolates is stronger, while in the United Kingdom, cream and white chocolates are more popular. The production capacity of the Belgian factory is not fully utilized and there is a significant available capacity. The US factory still produces a slightly different and more limited assortment of chocolate pralines, but these differences will progressively vanish and the trend is toward similar produc­ tion. Production planning is particularly complex, however, because of the high seasonality of consumption combined with the emphasis on chocolate freshness. Packaging policy Only packaging will distinguish products for one country from another, in order better to meet national and local chocolate consumption habits. In the United States the tradition is to purchase chocolates prewrapped, while in Europe and Japan the custom-made assortment dominates. What is more, in Japan chocolates are purchased in very small quantities (given the price), thus the beauty of the packaging becomes all-important, whereas in Europe, and more precisely in Belgium, the value of the gift is more often related to the judicious assortment of chocolates that were chosen. As one Godiva dealer stated, 'Customers have very precise ideas on the type of assortment they want, even for gifts, and they don ' t like to buy prewrapped standard assortments. ' Currently, the trend in packaging at Godiva is packaging by themes called 'collections' . With these 'collections' , Godiva leaves the common food industry for the luxury products sector. These hand-made creations con­ stitute a research and development activity that ensures continuous innova­ tion, and provides renewed promotional displays in the Godiva boutiques. In these 'collections' beautiful fabric boxes, hand-crafted according to the principles of haute couture, will illustrate through the calendar Valentine' s Day, Spring, Mother' s Day, Easter, Christmas etc. I n Belgium, the price of such a box (BFrl ,000) is exorbitant with respect to the price of the chocolates, thus these boxes serve more often for in-store decoration than for sales. For several years Godiva has also tried to develop tea rooms attached to Godiva boutiques where customers can eat fine pastries or ice cream. The people who stop here see these tea rooms as quiet havens of peace where they can rest between purchases while shopping and buy a few, or even a box of chocolates.

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Exhibit 8

Price of 1. kg of Godiva pralines, 1.991.

Country

Price to franchisees (BFr)

Retail price (VAT included) (BFr)

640 763 640 757 640 640 640 640 NA NA

1 ,080 1 ,920 2, 145 1 ,782 2,009 1 ,2 6 1 1 ,64 1 2,408 2,040 4,000

Belgium France Spain United Kingdom Italy Holland Germany Portugal United States Japan

Rate of VAT

(0/0)

6.0 1 8.6 6.0 1 7.5 9.0 6.0 7.0 1 6.0

NA, not available. Source: Trade publications

Pricing policy Making a Godiva chocolate incorporates an enormous amount of manual labor and the gross margins are modest (35-40% on average), while top management of Campbell Soup requires a 1 5 % rate of return on capital invested for Godiva, a normal rate of return for a luxury product. From one country to another, the price differences are great, as shown in Exhibit 8. One of the main preoccupations of Godiva Europe is to standard­ ize retail prices at the European level to meet the effects of the more closely unified European Community in 1 993. Previously, Godiva franchisees were held to a contract with the Godiva national and had to be supplied within that country. From 1 993 on, following derestriction within the European Union, it will not be possible to prevent French franchisees from getting their supplies directly from the Belgian factory, which sells its chocolates at a much lower price. Prices must therefore be modified and this adaptation has been started in Belgium with a 1 0% increase in prices effective from I August 1 99 1 . The price of 1 kg of Godiva chocolates is BFr l ,080, whereas the average market price for chocolates in Belgium is BFr450 per kilogram. This price policy, however, has not been easily accepted by the market, particularly in Belgium, where the price gap between the high and the low end of the market is already wide (see Exhibit 9). Charles van der Veken observed that, in Belgium, a 1 0 % price increase has generated a loss in volume of about 7 % . He is also aware that this lost volume goes to Leonidas for the most part. Distribution policy The ultimate goal that Godiva is pursuing in its distribution policy is to obtain across the world something akin to the Benetton model: boutiques

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Exhibit 9

Retail price comparison among brands

Belgium Brands Godiva Neuhaus Corne PR Corne TO Daskalides Jeff de Bruges Leonidas

France Price (BFrlkg) 1 ,080 980 880 870 680 595 360

United Kingdom

Brands

Price (FFrlkg)

Brands

Godiva Hediard Fauchon Maison ch. Le Notre Fontaine ch. Leonidas

320 640 430 390 345 327 1 20

Godiva Gerard Ronay Valrhona Charbonel Neuhaus Leonidas Thornton' s

Price (£/kg) 1 3.50 20.00 1 6.80 14.00

1 2.00 6.75 5.80

Source: Trade publications

with a unifonn look. For Godiva, this ' look' includes a logo with golden letters on a black background, a facade incorporating these same colours, interior fixtures in pink marble, glass counters, and so forth. The current retail distribution problem lies in the great disparity between the Godiva stores in different countries, mainly in Europe and even more particularly in Belgium (Exhibit 1 0 shows the Godiva distribution network). Through the years the Godiva outlets in Belgium have become less and less attractive. As a consequence, the Godiva brand image has aged. Abroad, however, Godiva benefits from an extremely prestigious image and the 'boutiques' merit their name. Nevertheless, Charles van der Veken fears the worst: ' If we don't react quickly, we could compromise the world brand image of Godiva. What would a Spanish tourist think in comparing the boutique of a local distributor in Brussels to the refined boutiques that he finds in Spain, although Belgium is the birthplace of chocolates?' Godiva' s retail distribution action plan for Belgium covers a period of 1 8 months. A contract has been made with the franchisees in which Godiva imposes both exclusivity and design; all the stores must have complete renovation. Once the movement is well established in Belgium, Godiva Exhibit 10

The Godiva distribution network Company-owned stores

Franchised dealers

Belgium France Spain United Kingdom Italy Holland Germany Portugal

3

54 19 6

Total Europe

6

Country

United States Japan

2

Department stores and others

18 15

2 2 4

Total outlets 57 20 24 17 2 2 5 10

3

7

90

41

137

22

800 67

895 89

95

Source: Trade publications and Yellow Pages

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hopes this will create a spillover effect to all of Europe, because the new 'boutiques' will constitute a reference point for the recruitment of new franchises or for spontaneous requests for renovations. This renovation movement has already begun and every two weeks a 'new' outlet is inaugurated. The renovated stores have been transformed so that everything is in black and gold, with interior redecoration according to a uniform standard of luxury. Generally, consumer reactions in Belgium seem favourable, although in certain respects consumers find the shops almost too beautiful. As for the franchisees, they feel as though they have a new business enterprise, and appear to be changing some of their former bad habits. If the effects remain favourable in the medium term, van der Veken has said he will increase the margin provided to franchisees, which still differs between countries (see Exhibit 8). The Chairman of Godiva International, Mr Partridge, has frequently questioned the wisdom of this costly exclusive distribution system because he believes chocolate is not really a destination purchase. In Europe, the adoption of a broader distribution system is difficult, however, because of consumer reluctance vis-a-vis prewrapped assortments of chocolates. Van der Veken, on the other hand, is convinced that the Godiva shops are a key component of the Godiva image of a luxury product. The competitive environment The hand-made lUXUry chocolates segment is occupied by many other brands. Exhibit 1 1 presents a ranking of the speciality brands for Belgium, France and the United Kingdom, in descending order of market share. The strength of the Leonidas competitive position in Europe is clearly shown by this comparison. Leonidas was created in 1 9 1 0: it did for chocolate pralines what Henry Ford did for the motor car, provided a mass­ consumption product sold at a low price. Their recipe is simple: a price of BFr360 per kilogram, 8,600 square metres of industrial space, a production capacity of 1 0,000 tons. Leonidas is a very important competitor for Godiva. Exhibit 11

Main European competitors France

Belgium Brands Leonidas Godiva Neuhaus Mondose Come TO Others

Share (%)

Brands

Share (%)

42.8 1 0.3 7. 1 5.4 2.7 3 1 .7

Leonidas Thornton's Jeff de B ruges Godiva Le Notre Others

62.0 1 8.0 1 4.0 3.0 \ .0 2.0

United Kingdom Consumption Brands (tons) Thornton's Leonidas Godiva

1 ,200 300 40 n.d. n.d. n.d.

n.d., no data. Source: Industry trade publications (market shares are calculated on sales revenues)

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With a total sales of over BFr2.6 billion and a 32% operating profit margin, Leonidas has 1 ,500 stores worldwide, and is now expanding rapidly in the international market. The next major competitor is Neuhaus, which recently merged with Mondose and Come Port Royal and which is also pursuing an international development strategy . The 'others' include the many small confectionery-chocolatiers who nibble at the market share of the larger companies in offering fresh, original products, made from pure cocoa. However, given its broad market coverage, Charles van der Veken believes that Godiva has a significant competitive advantage due to its integration into Campbell Soup l 3 years ago, which provided Godiva with an opportunity for global expansion much more quickly than its competitors. Thus Godiva is present everywhere, and even if it often skirts a competitor in a particular market, it is rarely the same one across the world. Godiva can thus currently be considered the global leader in the l uxury chocolate segment. Only in Belgium is Godiva having difficulties making use of its com­ petitive advantage. The volume growth has proved important everywhere, except in Belgium. According to Charles van der Veken, the market is already too saturated and it is up to the best to make the difference. Advertising strategy Today Godiva does not need to make itself known on the international level: its brand name is already globally recognized. Its current concern, in line with the policy that has been pursued for the past several months, is to create a common advertising message for the entire world. However, this will not be an easy task, as evidenced by a comparison of the situation in Belgium, the United States and Japan. In the United States and Japan the product is relatively new, and has a strong image inasmuch as there is no direct competitor. In Belgium the consumer has followed the evolution of Godiva chocolates, and the progressive commoditization of the brand. It is therefore more difficult to impress Belgians with a product that is already well known. What is more, Belgians are in daily contact with other brands of chocolates, with which they can easily compare Godiva. Thus, as van der Veken pointed out, Godiva finds itself faced with very different worlds. Up until now, in the United States advertising was focused on prestige, luxury, refinement, with a communication style similar to the one adopted by Cartier, Gucci or Ferrari. These advertisements were presented in magazines well adapted to the desired positioning: gourmet, fashion or business magazines that cater to higher-income echelons (see Exhibit 1 2) . I n Belgium, however, this type o f advertising tended only t o reinforce the dated, 'grandmotherish' image of Godiva chocolates. Moreover, the gap between the 'perceived image' (a food item interchangeable with others of the same type) and the 'desired image' (an exceptional luxury product) was so large that spectacular results could not be expected.

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Exhibit 12

185

Typical Godiva print advertisement In the United States

A study performed by Godiva seems to show that nobody could remember the message of the advertisements. In Belgium, Godiva had also made use of event marketing, that is, being represented at events at which the target population had a large chance of being present. Thus, two years ago, Godiva

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was the sponsor of a golf competition in Belgium that carried its name (Godiva European Master). Such actions are extremely costly, however, and their effectiveness is difficult to measure. The total advertising budget of Godiva Europe is BFr3 1 million per year.

The advertising decision Aware of this problem, Godiva Europe is in the process of evaluating its advertising strategy. The following situation had to be solved: how to create a common advertising message targeted at the three main markets while taking into consideration the inevitable cultural differences among coun­ tries . Godiva U S A had just sent Charles van der Veken the briefing of an international advertising campaign, which is summarized in Exhibit l 3 . Adopting this advertising style o n the European market worried van der Veken to a certain degree: 'The least one can say is that differences of mentality exist between our two continents. We certainly need to wake up our old-fashioned Godiva, but we should also be careful of overly radical changes.' Reflecting with his marketing staff, van der Veken tended to define the advertising objective in the following manner: 'The objective of Godiva USA is to increase the frequency of the purchase of chocolates for gifts as well as for self-consumption, whereas Belgium wants to make its brand image more youthful. Thus, the United States should adjust its advertising slightly "downward", in making the product more accessible through con­ vivial advertising and less "plastic beauty". While Belgium should strive, jointly with other marketing efforts (redesign of boutiques, increased quality of service, creation of "collections"), to adjust its advertising slightly "upward", in affirming itself as a prestigious lUxury product, only younger.' The upward adjustment for Belgium was a daring challenge. Charles van der Veken wondered if it would not be preferable to pass through a transition period before beginning a global marketing campaign, which would take into consideration the historical and cultural context of Belgium. Just then, Mrs Bogaert, van der Veken' s assistant, entered his office holding a fax from Godiva International : The campaign cannot be launched in time for Christmas; prepare as quickly as possible your advertising campaign for Belgium and contact your agencies. Meeting in five weeks in New York for the confirmation of our projects.

Charles van der Veken immediately called his Director of Marketing, informed her of the freshly arrived news, and asked her to submit for the Belgian market a campaign project based upon the American model, targeted in a first step to the Belgian market, but which could be extended to the other European markets, if not to the entire world. Together they agreed upon objectives in three main categories:

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Exhibit 13

187

The briefing from Godiva International

Current Positioning To adults who want a quality product for special moments, Godiva is an accessible luxury branded by Godiva Chocolatier and distinguished by superior craftsmanship. 2 Consumer Benefit • Whether you give Godiva or consume it yourself, you will relish its uniquely sensual pleasures: taste and presentation. 3 Promise • Using the finest ingredients and Belgian recipes for a remarkable taste experience. • Godiva heritage of fine chocolate making. • Beautifully crafted packaging. • Handcrafted in fine European heritage/style. • Created by an expert chocolatier 4 Psychographic Characteristics • Godiva purchasers are discerning and driven by quality expectations. While they are value-oriented, they will pay a higher price if a significant quality differential exists, since they aspire to have or share the best. • Godiva men and women are sensual individuals, enjoying the pleasures that things of exceptional look, feel, taste, sound and smell can offer them. 5 Competitive Frame • Gift: flowers, perfume, wine, other fine chocolates, giftables of the same price range. • Self-consumption: any item meant to provide a range of self-indulgences at Godiva's basic price-points. 6 Target Audience • The Godiva target covers a range of demographic characteristics: • Broad age range (25-54 primarily) • Women and men • Across a breadth of income levels, but with reasonable to high disposable incomes. 7 Advertising Objectives • To revitalize Godiva's worldwide premium position most specifically as it pertains to the superior quality of the chocolate product. • To motivate our current Godiva franchise to purchase on more frequent occasions (gifting and self-consumption). • To motivate current purchasers of competitive chocolates and non-chocolate giftables to convert to the Godiva franchise. 8 Message • Godiva chocolates are expertly crafted to provide an unparalleled sensory experience. 9 Tone and Manner • Luxurious - Energetic - Modem - Upmarket - Emotionally involving. •

2

3

Qualitative objectives: Rapidly reinforce the luxury image of Godiva Make visibility a priority Quantitative objectives: Increase the frequency of purchase Other objectives: Concentrate all efforts on Belgium during months of peak sales Synergy of all other methods of promotion and advertising

An additional BFr 1 3 million advertising budget would be allocated to the campaign. After some thought, it seemed possible to Mr van der Veken that a triad campaign would, on a long-term basis, be feasible in spite of cultural

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differences. He did not believe, however, that business generated in the other European countries would be high enough today to justify the same advertising budget as for Belgium. This became even more obvious when one considered that, in terms of media costs and for the same impact, BFr l in Belgium is equivalent to BFr 1 .6 in France and BFr 1 .9 in the United Kingdom. Charles van der Veken was also convinced that a European advertising campaign was useless without having first improved and reinforced the Godiva European distribution.

Questions for discussion/suggested tasks 1

2 3 4

5

6

How would you characterize consumer purchasing behaviour and con­ sumption in the chocolate praline market and the major differences observed among countries? How would you characterize the strengths and weaknesses of Godiva in Europe and particularly in Belgium? How might you characterize Godiva's existing marketing strategy on a 'standardization-customization' continuum? Propose two advertising themes based on the briefing of Godiva Inter­ national and compatible with the objectives of Charles van der Veken. Use successively the 'copy strategy' and the 'star strategy' to develop your advertising proposals. What is your assessment of Charles van der Veken's views on Godiva' s advertising objectives and strategy? Does a single global advertising campaign make sense? Are the economics of the proposed incremental expenditure for advertis­ ing sound? Why or why not?

Suggested reading Aaker, David E. ( 1 995) Strategic Market Management, 4th edn. New York: Wiley & Sons. Andrew C. Gross, Peter M. Banting, L indsay N. Meredith and David Ford ( 1 995) Business Marketing. Boston: Houghton Mifflin. Keegan, Warren J. ( 1 989) Global Marketing Management, 4th edn. Englewood Cliffs, NJ : Prentice Hall. Lambin, Jean-Jacques ( 1 997) Strategic Marketing Management. London: McGraw­ Hill International.

Acknowledgements The cooperation of Jean-Fran�ois Buslain and Sophie Lambin in the preparation of this case is gratefully acknowledged. Material contained in this case appears with the permission of Godiva Europe. This case was first published in France in 1 994 by EdiScience International.

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Notes

2

The Triad Countries comprise the United States, Japan, and countries in Western Europe. Value added tax is a government tax levied upon the value that is added to products as they progress from raw material to consumer goods.

Appendix 1: Results of the brand image study in the Brussels market area Table 1

Aided brand awareness

Brand name

Not at all (%)

Only by name (%)

By experience (%)

Total (%)

24.2 3 1 .3 69.3 54.3 2.3 2.3 4.7 1 3. 3

28.9 25.8 16.5 26.0 1 9.5 1 0.9 23.6 25.0

46.9 43.0 1 4.2 1 9.7 78. 1 86.7 7 1 .7 6 1 .7

1 00 1 00 1 00 1 00 1 00 1 00 1 00 1 00

Come Come Toison d'Or Come Port Royal Daskalides Godiva Leonidas Mon Cheri Neuhaus

Don't know any of brands Come, Come Toison d'Or, Come Port Royal: 22.7%. Know 'by name' or 'by experience' at least one of Come, Come Toison d'Or, Come Port Royal: 77.3%.

Table 2

Brand preferences by situation

Brand Come Come Toison d'Or Come Port Royal Daskalides Godiva Leonidas Mon Cheri Neuhaus Other Total

For self-consumption (%)

For gift (%)

2.4 4. 1 0.8

3.9 3.9 0.8 0.8 29. 1 27.6 5.5 25.2 3.2 1 00

24.4 48.0 2.4 1 2.2 5.7 1 00

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Table 3

Brand image analysis Brand associated most with each attribute (%)

()

COrnel

Corne Toison d'Or2

Corne Port Royal'

Corne Total ( I +2+3)

7.1 1 1 .0 4.8 6.5 6.0 3.3 7.2 8.8 6.5 5.6 6.7 4.0

5.5 3.1 3.2 8.9 9.4 2.5 7.2 7.2 2.4 4.0 8.4 0.8

0.8

1 3.4 14. 1 8.8 16.2 1 5.4 5.8 15.2 17.6 8.9 1 1 .2 15. 1 4.8

is

'