The Sudkurier is a regional daily newspaper in south-western Germany. On average 310,000 people in the area read the newspaper regularly.
The Sudkurier is a regional daily newspaper in south-western Germany. On average 310,000 people in the area read the newspaper regularly.
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Marketing
Management
Note: Solve any 4 Cases Study’s
CASE: I Playing to a new beat: marketing in the
music industry
Good old fashioned rock ‘n’ roll could be
dead. If a mobile phone ringtone in the shape of the vocalizations of the
animated Crazy Frog dominates the billboard charts for months on end, then it
could well signal the death knell for the industry, and how it operates. If
this ubiquitous amphibian’s aurally annoying song, converted from a mobile
phone ringtone, outsold even mainstay acts such as Oasis and Coldplay, why
should music companies invest millions in cultivating fresh musical talent,
hoping for them to be the next big thing, when their efforts can be beaten by
basic synthesizer music? The industry is facing a number of challenges that it
has to address, such as strong competition, piracy, changing delivery formats,
increasing cost pressures, demanding pri-madonnas and changing customer needs.
Gone are the days when music moguls were reliant on sales from albums alone,
now the industry trawls for revenue from a variety of sources, such as
ringtones, merchandising, concerts, and music DVDs, leveraging extensive back
catalogues, and music rights from advertising, movies and TV programming.
The music industry is in a state of flux
at the moment. The cornerstone of the industry—the singles chart—has been
facing terminal decline since the mid-1990s. Some retailers are now not even
stocking singles due to this marked freefall. Some industry commentators blame
the Internet as the sole cause, while others point to value differences between
the price of an album and the price of a single as too much. Likewise, some
commentators criticize the heavy pre-release promotion of new songs, the
targeting of ever-younger markets by pop acts, and the explosion of digital
television music channels as root causes of the single’s demise. The day when
the typical record buyer browses through rows of shelves for a much
sought-after band or song on a Saturday afternoon may be thing of the past.
Long-term success stories for the music
industry are increasingly difficult to develop. The old tradition of A&R
(which stands for ‘Artists & Repertoire’) was to sign, nurture and develop
musical talent over a period of years. The industry relied on continually
feeding the system with fresh talent that could prove to be the next big thing
and capture the public imagination. Now corporate short-term thinking has
enveloped business strategies. If an act fails to be an immediate hit, the
record label drops them. The industry is now characterized by an endless
succession of one-hit wonders and videogenic artist churning out classic cover
songs, before vanishing off the celebrity radar. Four large music labels now
dominate the industry (see Table 1), and have emerged through years of consolidation.
Table
1 The ‘big four’ music labels
Universal
Music
|
Sony
BMG
|
The largest music label, with 26 per
cent of global music market share;
artists on its roster include U2, Limp Bizkit, Mariah Carey and No Doubt
|
Merger consolidated its position; artists
on its roster include Michael Jackson, Lauryn Hill, Westlife, Dido, Outkast
and Christina Aguilera
|
Warner
Music
|
EMI
|
Third biggest music group; artists on
its roster include Madonna, Red Hot Chili Peppers and REM
|
Artists on its roster include the Rolling
Stones, Coldplay, Norah Jones, Radiohead, and Robbie Williams
|
The ‘big four’ labels have the marketing
clout and resources to invest heavily in their acts, providing them with
expensive videos, publicity tours and PR coverage. This clout allows their acts
to get vital airplay and video rotation on dedicated TV music channels. Major
record labels have been accused of offering cash inducements of gifts to radio
stations and DJs in an effort to get their songs on playlists. This activity is
known in the industry as ‘radio payola’.
Consumer have flocked to the Internet, to
download, to stream, to ‘rip and burn’ copyrighted music material. The digital
music revolution has changed the way people listen, use and obtain their
favourite music. The very business model that has worked for decades, buying a
single or album from a high-street store, may not survive. Music executives are
left questioning whether the Internet will kill the music business model has
been fundamentally altered. According to the British Phonographic Industry
(BPI), it estimated that 8 million people in the UK are downloading music from
the Internet—92 per cent of them doing so illegally. In 2005 alone, sales of CD
singles fell by a colossal 23 per cent. To put the change into context, the
sales of digital singles increased by 746.6 per cent in 2005. Consumers are
buying their music through different channels and also listening to their
favourate songs through digital media rather than through standard CD, cassette
or vinyl. The emergence of MP3 players, particularly the immensely popular
Apple iPod, has transformed the music landscape even further. Consumers are now
downloading songs electronically from the Internet, and storing them on these
digital devices or burning them onto rewritable CDs.
Glossary
of online music jargon
Streaming: Allows the user to listen to or watch a
file as it is being simultaneously downloaded. Radio channels utilize this
technology to transmit their programming on the Internet.
‘Rip
n burn’: Means downloading a song or audio file from the Internet and then
burning them onto rewritable CDs or DVD.
MP3
format: MP3 is a popular
digital music file format. The sound quality is similar to that of a CD. The
format reduces the size of a song to one-tenth of its original size allowing
for it to be transmitted quickly over computer networks.
Apple
iPod: The ‘digital jukebox’ that has transformed the fortunes of
the pioneer PC maker. By the end of 2004 Apple is expected to have sold 5
million units of this ultra-hip gadget. It was the ‘must-have item’ for 2003. The
standard 20 GB iPod player can hold around 5000 songs. Other hardware
companies, such as Dell & Creative Labs, have launched competing devices.
These competing brands can retail for less than £75.
Peer-to-peer
networks (P2P): These
networks allow users to share their music libraries with other net users. There
is no central server, rather individual computers on the Internet communicating
with one another. A P2P program allows users to search for material, such as music
files, on other computers. The program lets users find their desired music
files through the use of a central computer server. The system works lime this;
a user sends in a request for a song; the system checks where on the Internet
that song is located; that song is downloaded directly onto the computer of the
user who made the request. The P2P server never actually holds the physical
music files—it just facilitates the process.
The Internet offers a number of benefits
to music shoppers, such as instant delivery, access to huge music catalogues
and provision of other rich multi-media material like concerts or videos,
access to samples of tracks, cheaper pricing (buying songs for 99p rather than
an expensive single) and, above all, convenience. On the positive side, labels
now have access to a wider global audience, possibilities of new revenue streams
and leveraging their vast back catalogues. It has diminished the bargaining
power of large retailers, it is a cheaper distribution medium than traditional
forms and labels can now create value-laden multimedia material for consumers.
However, the biggest problem is that of piracy and copyright theft. Millions of
songs are being downloaded from the Internet illegally with no payment to the
copyright holder. The Internet allows surfers to download songs using a format
called ‘MP3’, which doesn’t have inbuilt copyright protection, thus allowing
the user to copy and share with other surfers with ease. Peer to peer (P2P)
networks such as Kazaa and Grokster have emerged and pose an even deadlier
threat to the music industry—they are enemies that are even harder to track and
contain. Consumers can easily source and download illegal copyrighted material
with considerable ease using P2P networks (see accompanying box).
P2P
Networks used for file sharing
Kazaa
|
Gnutella
|
Grokster
|
Morpheus
|
eDonkey
|
Imesh
|
Bearshare
|
WinMX
|
A large number of legal download sites
have now been launched, where surfers can either stream their favourite music
or download it for future use in their digital libraries. This has been due to
the rapid success of small digital medial players such the Apple iPod. The
legal downloading of songs has grown exponentially. A la carte download
services and subscription-based services are the two main business models.
Independent research reveals that the Apple’s iTunes service has over 70 per
cent of the market. Highlighting this growing phenomenon of the Internet as an
official channel of distribution, new music charts are now being created, such
as the ‘Official Download Chart’. Industry sources suggest that out of a
typical 99p download, the music label get 65p, while credit card companies get
4p, leaving the online music store with 30p per song download. These services
may fundamentally eradicate the concept of an album, with customers selecting
only a handful of their favourite songs rather than entire standard 12 tracks.
These prices are having knock-on consequences for the pricing of physical
formats. Consumers are now looking for a more value-laden music product rather
than simply 12 songs with an album cover. Now they are expecting behind the
scenes access to their favourite group, live concert footage and other
content-rich material.
Big Noise Music is an example of one of
the legitimate downloading sites running the OD2 system. The site is different
in that for every £1 download, 10p of the revenue goes to the charity Oxfam.
The music industry is ferociously
fighting back by issuing lawsuits for breach of copyright to people who are
illegally downloading songs from the Internet using P2P software. The recording
industry has started to sue thousands of people who illegally share music using
P2P. They are issuing warnings to net surfers who are P2P software that their
activities are being watched and monitored. Instant Internet messages are being
sent to those who are suspected of offering songs illegally. In addition, they
have been awarded court orders so that Internet providers must identify people
who are heavily involved in such activity. The music industry is also involved
heavily in issue advertising campaigns, by promoting anti-piracy websites such
as www.pro-music.org to educate people on the industry and the impact of piracy
on artists. These types of public awareness campaigns are designed to
illustrate the implications of illegal downloading.
Small independent music labels view P2P
networks differently, seeing them as vital in achieving publicity and
distribution for their acts. These firms simply do not have the promotional
resources or distribution clout of the ‘big four’ record labels. They see P2P
networks as an excellent viral marketing tool, creating buzz about a song or
artist that will ultimately lead to wider mainstream and commercial
appeal. The Internet is used to create
communities of fans who are interested in their music, providing them access to
free videos and other material. It allows independent acts the opportunity to
distribute their music to a wider audience, building up their fan base through
word of mouth. Savvy unsigned bands have sophisticated websites showcasing
their work, and offering free downloads as well as opportunities for
audio-philes to purchase their tunes. Alternatively major labels still see that
to gain success one has to get a video on rotation on MTV and that this in turn
encourages greater airplay on radio stations, ultimately leading to increased
purchases.
Table
2 The major legitimate
online music provider
Name
|
Details
|
Pricing
|
Apple iTunes
|
Huge catalogue of over 750,000 songs;
compatible with Apple’s very hip iPod system; offers free single of the week
and other exclusive material
|
79p per track, £7.99 per album
|
Napster
|
The now-legitimate website offers over
1,000,000 songs; offers several streaming radio stations too
|
Subscription based—subscribers pay
£9.99 a month to stream any of the catalogue, plus another 99p to download on
to a CD
|
Sony Connect
|
over 300,000 songs from the major
labels; excellent sound quality but compatible only with Sony products due to
proprietary file formats
|
From 80p- £1.20 per track, and £8- £10
per album
|
Bleep.com
|
Small catalogue of 15,000 songs with a
focus on independent music labels; high-quality downloads due to media files
used
|
99p per track, £6.99 per album
|
Wippit
|
UK-based service; 175,000 songs to
download; gives a selection of free tracks every month
|
From 30p to £1 to download;
alternatively, users can subscribe to the service for £50 a year to gain
access to 60,000 songs
|
OD2 System, used by: Mycokemusic.com
HMV.com
MSN.com
TowerRecord.co.uk
Big Noise Music
|
These online sites use the OD2 system
for music downloads; they look after encryption, hosting, royalty management
and the entire e-commerce system; provides access to nearly 350,000 tracks
from 12,000 recording artists
|
Varying product bundles, typically 99p
for track download, and 1p for streaming
|
For traditional music retailers the
retailing landscape is getting more competitive, with multiple channels of
distribution emerging due to the Internet and large supermarket chains now
selling music CDs. Supermarkets are becoming one of the main channels of
distribution through which consumers buy music. These supermarkets are stocking
only a limited number of the best-selling music titles, limiting the number of
distribution outlets for new and independent music. Only charts hits and
greatest hits collections will make it on to the shelves of such outlets.
Now consumers can buy albums from
traditional Internet retailers such as Amazon.com, and also on websites that
utilize access to grey markets such as cdwow.co.uk, as well as through
legitimate download retailers. This has left traditional music retail
operations with a severe conundrum: how can they entice more shoppers into
their stores? The accompanying box highlights where typical shoppers source their
music at present.
Where
do people buy their music?
Music stores (like HMV, Virgin
Megastore)
|
16 per cent
|
Chains (like Woolworth, WHSmith)
|
16 per cent
|
Supermarkets (like Tesco, Asda)
|
21.6 per cent
|
Mail order
|
3.9 per cent
|
Internet sales (like Amazon.com)
|
7 per cent
|
Downloads
|
Not yet measured
|
The issue of online music retailers using
parallel importing, such as CDWOW (www.cdwow.co.uk) is a concern. These
retailers are taking advantage of worldwide price discrepancies for legitimate
music CDs, sourcing them in low-cost countries like Hong Kong and exporting
them into European countries. Prices for music in these markets are
considerably lower than the market that they are exporting to, and they don’t
even charge for international delivery. Yet technological improvements have led
to revenue opportunities for the industry. Development such as online radio,
digital rights management, Internet streaming, tethered downloads (locked to
PC), downloads (burnable, portable), in-store kiosks, ring-tones, mobile
message clips and games soundtracks are great potential revenue sources. In an
effort to unlock this potential the major labels have digitized their entire
back catalogues. In the wake of these dramatic environmental changes the
industry has had to radically adapt. The ‘big four’ music labels are consolidating
even further, developing a digital music strategy, and re-evaluating their
entire traditional business model. Mobile phones are seen as the next primary
channel of distribution for digital music. High penetration levels in the
market for mobile phones and the inherent mobility advantages make this the
next crucial battlefield for the music industry.
The Internet may emerge as the primary
channel of distribution for music, and the music industry is going to have to
adapt to these changes. The move towards the online distribution of
entertainment is still in its infancy, with more investment into the
telecommunications infrastructure, such as greater Internet access, increased
access to broadband technology, 3G technology and changing the way people shop
for music will undoubtedly take time. The digital revolution will fundamentally
change the way people purchase and consume their musical preferences. In
forthcoming years the digital format will become more mainstream, leading to a
proliferation of channels of distribution for music. However, as with most new
channels of technology, catalogue shopping, Internet shopping likewise, and
‘video never really killed the radio star’… but will the Internet kill the
record store?
Questions:
1.
Discuss
the micro and macro forces that are affecting the music industry.
2.
Based
on this analysis, what strategic options would you recommend for both music
publishers and music retailers in the current marketing environment?
3.
Discuss
the advantages and disadvantages associated with online distribution from a
music label’s perspective.
CASE: II The Sudkurier
The Sudkurier
is a regional daily newspaper in south-western Germany. On average 310,000
people in the area read the newspaper regularly. The great majority of those
readers subscribe to its home delivery service, which puts the paper on their
doorsteps early in the morning. On the market for the last 35 years, the Sudkurier contains editorial sections on
politics, the economy, sports, local news, entertainment and features, as well
as advertising. The newspaper is financially independent and its staff is free
of any political affiliation. Management at the Sudkurier
would like to bring the paper into line with the current needs of its readers.
For this purpose, the management team is considering the use of market
research.
Management would like to have information
about the following.
1.
What
newspaper or other media are the Sudkurier’s
main competitors?
2.
Do
most readers read the Sudkurier
for the local news, sports and classified ads, and should these sections
therefore be expanded at the expense of the sections on politics and the
economy?
3.
Should
the Sudkurier’s layout be
modernized?
4.
Do
mostly lower levels of society read the Sudkurier?
5.
Into
what political category do readers and non-readers the Sudkurier?
6.
Which
suppliers of products and services consider the Sudkurier
especially appropriate for their advertising?
7.
What
advertising or information dot the readers think is missing from the Sudkurier?
You are an employee of the Sudkurier who has been instructed to
obtain the requested information and to prepare your findings for the
decision-makers. You are in the fortunate position of receiving regular reports
about the people’s media use from the Arbeitsgemeinschaft Media-Analyse e.V.
Relevant excerpts from the most recent survey are shown here as Tables 3 and
Table 4
Table
3 Media analysis of readership structure
Range in Circulation Area (1)
|
Readers per edition of SUDKURIER
|
National
average
in %
|
|||
|
RANGE
|
Total in %
|
|||
|
in %
|
Absolute
|
|||
Total
|
|
53.5
|
310,000
|
100.0
|
100.0
|
Gender
|
Men
|
55.5
|
150,000
|
49.0
|
47.2
|
|
Women
|
51.6
|
160,000
|
51.0
|
52.8
|
Age Groups
|
14-19 years
|
51.8
|
20,000
|
8.0
|
7.2
|
|
20-29 years
|
41.0
|
50,000
|
15.0
|
19.1
|
|
30-39 years
|
52.1
|
50,000
|
16.0
|
16.4
|
|
40-49 years
|
61.8
|
50,000
|
16.0
|
15.2
|
|
50-59 years
|
61.1
|
60,000
|
19.0
|
16.5
|
|
60-69 years
|
53.6
|
40,000
|
13.0
|
13.5
|
|
70 years and older
|
57.4
|
40,000
|
13.0
|
12.2
|
Educational
Level
|
Secondary school without apprenticeship
|
49.4
|
60,000
|
18.0
|
17.6
|
|
Secondary school with apprenticeship
|
50.8
|
100,000
|
31.0
|
39.6
|
|
Continuing education without Abitur
|
60.8
|
110,000
|
36.0
|
27.0
|
|
Abitur, university preparation, university/college
|
49.7
|
50,000
|
15.0
|
15.8
|
Occupation
|
Trainee, pupil, student
|
44.7
|
40,000
|
11.0
|
11.0
|
|
Full-time employee
|
54.6
|
160,000
|
50.0
|
51.7
|
|
Retire, pensioner
|
57.3
|
70,000
|
23.0
|
21.8
|
|
Unemployed
|
52.4
|
50,000
|
16.0
|
15.5
|
Occupation of main wage earner
|
Self-employed, mid- to large business/Freelancer
|
63.8
|
20,000
|
5.0
|
3.1
|
|
Self-employed, small business,/Farmer
|
59.9
|
30,000
|
10.0
|
7.1
|
|
Managers and civil servants
|
58.6
|
30,000
|
9.0
|
8.7
|
|
Other employees and civil servants
|
49.3
|
120,000
|
40.0
|
42.9
|
|
Skilled staff
|
57.6
|
100,000
|
32.0
|
32.5
|
|
Unskilled staff
|
38.7
|
10,000
|
4.0
|
5.6
|
Net Household Income/month
|
4500 and more
|
62.7
|
100,000
|
31.0
|
23.9
|
|
3500-4500
|
52.7
|
60,000
|
19.0
|
20.8
|
|
2500-3500
|
54.9
|
80,000
|
26.0
|
25.9
|
|
to 2500
|
44.1
|
70,000
|
23.0
|
29.3
|
Number of wage earners
|
1 earner
|
45.4
|
100,000
|
33.0
|
40.4
|
|
2 earner
|
56.5
|
130,000
|
41.0
|
42.6
|
|
3 earner
|
62.7
|
80,000
|
25.0
|
16.9
|
Household Size
|
1 Person
|
41.8
|
50,000
|
14.0
|
17.9
|
|
2 Persons
|
55.5
|
90,000
|
29.0
|
31.8
|
|
3 Persons
|
59.5
|
70,000
|
22.0
|
22.4
|
|
4 Persons and more
|
54.8
|
110,000
|
35.0
|
27.9
|
Children in Household
|
Children less than 2 years of age
|
52.7
|
10,000
|
4.0
|
3.8
|
|
2 to less than 4 years
|
38.4
|
10,000
|
4.0
|
5.4
|
|
4 to less than 6 years
|
45.8
|
10,000
|
5.0
|
5.2
|
|
6 to less than 10 years
|
43.8
|
20,000
|
8.0
|
8.5
|
|
10 to less than 14 years
|
54.1
|
30,000
|
10.0
|
9.2
|
|
14 to less than 18 years
|
57.7
|
50,000
|
16.0
|
13.7
|
|
No children under 14
|
54.9
|
250,000
|
79.0
|
77.4
|
|
No children under 18
|
53.6
|
210,000
|
67.0
|
68.1
|
Driving Licence
|
yes
|
55.2
|
250,000
|
80.0
|
73.0
|
|
no
|
47.3
|
60,000
|
20.0
|
27.0
|
Private Automobile
|
|
55.5
|
270,000
|
86.0
|
80.0
|
Garden
|
own garden
|
60.4
|
240,000
|
76.0
|
57.0
|
|
without garden
|
39.8
|
70,000
|
23.0
|
43.0
|
Housing
|
own house
|
62.1
|
180,000
|
58.0
|
46.0
|
|
own apartment
|
45.9
|
10,000
|
3.0
|
3.0
|
|
rent house or apartment
|
44.7
|
120,000
|
38.0
|
49.0
|
Electrical Appliances
|
Freezer/Deep freeze
|
59.6
|
200,000
|
62.0
|
51.0
|
Last Holiday Journey
|
Within the last 12 months
|
55.1
|
190,000
|
62.0
|
n.a.
|
|
1-2 years ago
|
51.0
|
40 ,000
|
14.0
|
n.a.
|
|
More than two years ago
|
48.6
|
50 ,000
|
16.0
|
n.a.
|
|
Never
|
55.4
|
30 ,000
|
9.0
|
n.a.
|
Last Holiday Destination
|
Germany
|
57.4
|
70 ,000
|
23.0
|
n.a.
|
|
Austria, Switzerland, South Tyrol
|
48.7
|
60 ,000
|
20.0
|
n.a.
|
|
Elsewhere in Europe
|
53.4
|
130,000
|
42.0
|
n.a.
|
|
Country outside Europe
|
51.4
|
20 ,000
|
5.0
|
n.a.
|
|
Did not travel
|
56.4
|
30 ,000
|
9.0
|
n.a.
|
1) Entire circulation area 310 ,000 readers per edition
Example:
53.5% of people older than 14 years in the circulation of the
Sudkurier daily
55.5% of all men older than 14 years and 51.6% of women
older than 14 read the Sudkurier
daily; that is 150 ,000 men and 160 ,000 women.
|
Table
4 Reader behaviour
What purchasing information is used?
Media purchasing information
for medium and long-term acquisition
(11 product areas; Basis: total
population)
Daily newspaper 61%
Posters on the street 9 %
Leaflets 36 %
Television 24%
Radio 13%
Magazines 27 %
Free newspapers 49%
|
Credibility of advertising in the media
Advertising in… is generally believable
and reliable
(Basis: broadest user group in each
case)
Regional newspaper 49%
Television 30%
Public radio 20%
Privately-owned radio 14 %
Magazines 15%
Free newspaper 23%
|
Advertising in… is most informative
(Basis: broadest reading group)
Regional newspapers (subscription) 62
%
Television 47%
Public Radio 29%
Privately-owned radio 26%
Magazines 27
%
Free newspapers 36
%
|
Time spent reading daily newspaper
(Basis: broadest user group)
less than 15 minutes 7 %
15-24 minutes 21 %
25-34 minutes 28 %
35-65 minutes 34 %
more than 65 minutes 10 %
|
I often consult/depend on advertising
in…
(Basis: broadest user group in each
case)
Regional newspapers (subscription) 27 %
Television 11%
Public Radio 89%
Privately-owned radio 6%
Magazines 7 %
Free newspapers 18
%
|
|
Source: Regional Press Study,
Gfk-Medienforschung Contest-Census
Questions:
1.
Explain
how you will methodically go about compiling the requested information covered
in the seven questions for management. Include in your explanation an estimate
of the expense involved in obtaining the information.
2.
Develop
a 10-question questionnaire for the purpose of making a survey.
CASE: III Unilever in Brazil: marketing strategies
for low-income customers
After three successful years in the
Personal Care division of Unilever in Pakistan, Laercio Cardoso was
contemplating attractive leadership positioning China when he received a phone
call from Robert Davidson, head of Unilever’s Home Care division in Brazil, his
home country. Robert was looking for someone to explore growth opportunities in
the marketing of detergents to low-income consumers living in the north-east of
Brazil and felt that Laercio had the seniority and skills necessary for the
project. Though he had not been involved in the traditional Unilever approach
to marketing detergents, his experience in Pakistan had made him acutely aware
of the threat posed by local detergent brands targeted at low-income consumers.
At the start of the project—dubbed
‘Everyman’—Laercio assembled an interdisciplinary team and began by conducting
extensive field studies to understand the lifestyle, aspirations and shopping
habits of low-income consumers. Increasing detergent use by these consumers was
crucial for Unilever given that the company already had 81 per cent of the detergent
powder market. But some in the company felt that it should not fight in the
lower cost structures struggled to break even. How could Laercio justify
diverting money from a best-selling brand like Omo to invest in a lower-margin
segment?
Consumer
behavior
The 48 million people living in the
north-east (NE) of Brazil lag behind their south-eastern (SE) counterparts on
just about every development indicator. In the NE, 53 per cent of the
population live on less than two minimum wages versus 21 per cent inn the SE.
In the NE, only 28 per cent of
households own a washing machine versus 67 per cent in the SE. Women in the NE
scrub clothes in a washbasin or sink using bars of laundry soap, a process that
requires intense and sustained effort. They then add bleach to remove tough
stains and only a little detergent powder in the end, primarily to make the
clothes smell good. In the SE, the process is similar to European or North
American standards. Women mix powder detergent
and softener in a washing machine and use laundry soap and bleach only to
remove the toughest stains.
The penetration and usage of detergent
powder and laundry soap is the same in the NE and the SE (97 per cent).
However, north-easterners use a little less detergent (11.4 kg per years versus
12.9 kg) and a lot more soap (20 kg versus 7 kg) than south-easterners. Many
women in the NE view washing clothes as one of the pleasurable routine
activities of their week. This is because they often do their washing in a
public laundry, river or pond where they meet and chat with their friends. In
the SE, in contrast, most women wash clothes alone at home. They perceive
washing laundry as a chore and are primarily interested in ways to improve the
convenience of the process.
People in the NE and SE differ in the
symbolic value they attach to cleanliness. Many poor north-easterners are proud
of the fact that they keep themselves and their families clean despite their
low income. Because it is so labour intensive, many women see the cleanliness
of clothes as an indication of the dedication of the mother to her family, and
personal and home cleanliness is a main subject of gossip. In the SE, where most
women own a washing machine, it has much lower relevance for self-esteem and
social status. Along with price, the primarily low-income consumers of the NE
evaluate detergents on six key attributes (Figure 1 provides importance
ratings, the range of consumer expectations, and the perceived positioning of
key detergent brands on each attribute).
Competition
In 1996 Unilever was a clear leader in
the detergent powder category in Brazil, with an 81 per cent market share,
achieved with three brands: Omo (one of Brazil’s favourate brands across all
categories) Minerva (the only brand to be sold as both detergent powder and
laundry soap with a more hedonistic ‘care’ positioning) and Campeiro
(Unilever’s cheapest brand). Proctor & Gamble, which had recently entered
the Brazilian market, had 15 per cent of the market with three brands (Ace,
Bold and the low-price brand Pop). Other competitors were smaller companies
(see Figure 2).
The Brazilian fabric wash market consists
of two categories: detergent powder and laundry soap. In 1996 detergent was a
US$106 million (42,000 tons) market in the NE. In 1996 the NE market for
laundry soap bars was as large as the detergent powder market (US$102 million
for 81,250 tons). The NE market for laundry soap is much easier to produce than
powdered laundry detergent. Laundry soap is a multi-use product that has many
home and personal care uses. Table 5 provides key information on all powder and
laundry soap brands (packaging, positioning, key historical facts, and
financial and market data).
Table
5
Brand
|
Packaging
|
Positioning
|
Key
Data
|
OMO
|
Cardboard pack:
1 kg & 500g.
|
Removes stains with low quantity of
product when used in washing machines, thus reducing the need for soap or
bleach.
|
S: 55.20
WP: 3.00
FC: 1.65
PKC: 0.35
PC: 0.35
|
Minerva
|
Cardboard pack:
1 kg & 500g.
|
|
S: 17.60
WP: 2.40
FC: 1.40
PKC: 0.35
PC: 0.30
|
Campeiro
|
Cardboard pack:
1 kg & 500g.
|
|
S: 6.05
WP: 1.70
FC: 0.90
PKC: 0.35
PC: 0.20
|
Ace
|
Cardboard pack:
1 kg & 500g
|
|
|
Bold
|
Cardboard pack:
1 kg & 500g.
|
|
|
Pop
|
Cardboard pack:
1 kg & 500g.
|
|
|
Invicto
|
Cardboard pack:
1 kg & 500g.
|
|
|
Minerva
|
Plastic pack with 5 bars of 200g.
|
|
|
Bem-te-vi
|
Plastic pack with 5 bars of 200g or
single bar of 200g.
|
|
|
Figure
1 & 2 Market Share and wholesale
Price of Major Brands in the Laundry Soap and Detergent Powder Categories in
the Northeast in 1996
Decisions
Robert Davidson, head of Unilever’s Home
Care Division in Brazil, and Laercio Cardoso, head of the ‘Everyman’ research
project aided at understanding the low-income consumer segment, must re-examine
Unilever’s strategy for low-income consumers in the NE region of Brazil and
make three important decisions.
1.
Go/no go. Should Unilever divert money from its
premium brands to invest in a lower-margin segment of the market? Does Unilever
have the right skills and structure to be profitable in a market in which even
small local entrepreneurs struggle to break even? In the long run, what would
Unilever gain and what would it risk losing?
2.
Marketing
and branding strategy. Unilever already has three detergent brands with
distinct positionings. Does it need to
develop a new brand with a new value proposition or can it reposition its
existing brands or use a brand extension?
3.
Marketing mix. What price, product, promotion and
distribution strategy would allow Unilever to deliver value to low-income
consumers without cannibalizing its own premium brands too heavily? Is it just a
matter of price?
Product
Unilever could produce a product
comparable to Campeiro, its cheapest product, but would it deliver the benefits
that low-income consumers wanted? Alternatively, Unilever could use Minerva’s
formula but it might be too expensive for low-income consumers. If they could
eliminate some ingredients, Unilever’s scientists could develop a third formula
that would cost about 10 per cent more than Campeiro’s formula. The difficulty
would be in determining which attributes to eliminate, which to retain and
which, if any would actually need to be improved relative to both existing
brands.
Larger packages would reduce the cost per
kilo but could price the product out of the weekly budget range of the poorest
consumers. Unilever could use a plastic sachet, which would cost 30 per cent of
the price of traditional cardboard boxes, but market research data had shown
that low-income consumers were attached to boxes and regarded anything else as
good for only second-rate products. One solution might be to launch multiple
types and sizes.
Price
Priced significantly above Campeiro and
Minerva soap, the product would be out of reach for the target segment. Priced
too low, it would increase the cost of the inevitable cannibalization of
existing Unilever brands. Should Unilever use coupons or other means to reduce
the cost of the product for low-income consumers? Or should it change the price
of Omo, Minerva
and Campeiro?
Promotion
In the low-income segment, lower margins
meant that volume had to be reached very quickly for the product to break even.
It was therefore crucial to find a radical ‘story’, one that would immediately
put the new brand on the map. What would be the objective of the communication?
What should be the key message? Low-income consumers might be reluctant to buy
a product advertised ‘for the low-income people’ especially as products with
that kind of message are typically of inferior quality. On the other hand,
using the classic aspirational communication of most Brazilian brands could
confuse consumers and lead to unwanted cannibalization.
In regular detergent markets Unilever had
established that the most effective allocation of communication expenditure was
70 cent above-the-line (media advertising) and 30 per cent below-the-line
(trade promotions, events, point- of-purchase marketing). The advantages of
using primarily media advertising are its low cost per contact and high reach
because almost all Brazilians, irrespective of income, are avid television
watchers. One alternative would be to use 70 per cent below-the-line
communication. At US$0.05 per kg, this plan would require only one-third of the
cost of a traditional Unilever communication plan. On the other hand, it would
lower the reach of communication, increase the cost of per contact, and make a
simultaneous launch in all north-eastern cities more difficult to
organize.
Distribution
Unilever did not have the ability to
distribute to the approximately 75,000 small outlets spread over the NE, yet
access to these stores was key because low-income consumers rarely shopped in
large supermarkets like Wal-Mart or Carrefour. Unilever could rely on its
existing network of generalist wholesalers who supplied its detergents and a
wide variety of products to small stores. These wholesalers had national
coverage and economies of scale but did not directly serve the small stores
where low-income consumers shopped, necessitating another layer of smaller
wholesalers, which increased their cost to US$0.10 per kg. Alternatively,
Unilever could contract with dozens of specialize distributors who would get
exclusive rights to sell the new Unilever detergent. These specialized
distributors would have a better ability to implement point of purchase
marketing and would cost less ($0.05 per kg).
The Sudkurier is a regional daily newspaper in south-western Germany. On average 310,000 people in the area read the newspaper regularly. |
Question:
1.
Describe
the consumer behaviour differences among laundry products’ customers in Brazil.
What market segments exists?
2.
Should
Unilever bring out a new brand or use one of its existing brands to target the
north-eastern Brazilian market?
3.
How
should the brand be positioned in the marketplace and within the Unilever
family of brands?
Case 4
Ryanair: the low fares airlines
The year 2004 did not begin well for
Ryanair. On 28 January, the airline issued its first profits warning and ended
a run of 26 quarters of rising profits. On that day, when the markets opened,
the company was worth €5 billion. By close of business, its value had shrunk to
worth €3.6 billion, as its share price plunged from worth €6.75 to €4.86.
Investors were dismayed by the airline’s admission that it was facing ‘an
enormous and sudden reduction of 25 to 30 per cent in yields’ (i.e. average
fare levels) in the first quarter of 2004 (the last fiscal quarter of 2004).
This was on top of an earlier fall of 10 to 15 per cent in the first nine
months.
In April 2004, Chief Executive Michael
O’Leary forecast a ‘bloodbath’, an ‘awful’ 2004/2005 winter for European
airlines, amid continuing fare wars, with a shakeout among the many budget
airlines. ‘We will be helping to make it awful,’ warned Mr O’Leary, as he
announced an 800,000 free seats giveaway. The most difficult markets were
predicted to be Germany and the UK regions where many new carriers, which were
‘losing money on an heroic scale’, had entered the arena. O’Leary anticipated
that the company’s 2004 profits would decline by 10 per cent, while 2005
profits would increase by up to 20 per cent with a 5 per cent drop in yields.
However, if yields were to fall by as much as 20 per cent, the 2005 outcome
would be break-even, at best.
Yet, by 31 May 2005, on Ryanair’s 20th
birthday, the carrier was able to announce record results for the year ended 31
March 2005. Both passenger volumes and net profits grew year on year by 19 per
cent to 27.6 million from 23.1 million and €268.9 from €226.6 million
respectively. The all- important passenger yield figure (revenue per passenger)
grew by 2 per cent, partially offsetting the 14 per cent yield decline in
2003/2004. Ancillary revenues were 40 per cent higher, rising faster than
passenger volumes, which resulted in total revenues rising by 24 per cent to
€1.337 billion. Operating costs rose 25 per cent, fractionally more than
revenue growth, due principally to higher fuel costs. The 2005 results
announcement was followed by a 3.4 per cent jump in the company’s share price,
to close to €6.46 on the day.
Ryanair’s adjusted after-tax margin for
the full year at 20 per cent compared very to figures for Aer Lingus, British
Airways, easyJet, Lufthansa, Southwest and Virgin, with margins of 8, 1, 3,
minus 5, 7, .1 per cent respectively (2003/2004 results). Despite the dire
warnings and the temporary dip in fiscal 2004, Ryanair had arguably come
through its crisis with flying colours. How did it manage this?
Overview
of Ryanair
Ryanair, Europe’s first budget airline,
with 229 routes across 20 countries at of May 2005, is one of the world’s most
profitable, fastest-growing carriers. Founded in 1985 by the Ryan family as an
alternative to the then state monopoly carrier Aer Lingus, Ryanair started out
as a full-service airline. After accumulating severe financial losses, finally,
in 1990/91, the company came up with a survival plan, spearhead by Michael
O’Leary and the Ryans, to transform itself into a low-fares no-frills carrier,
based on the model pioneered by Southwest Airlines, the Texas-based operator.
Ryanair, first floated on the Dublin Stock Exchange in 1997, is quoted on the
Dublin and London Stock exchanges and on NASDAQ, where it was admitted to the
NASDAQ-100 in 2002. In June 2005, Ryanair’s market capitalization stood €5
billion, the second highest carrier in the world, next to Southwest Airlines,
and ahead of airlines with vastly greater turnover—such as Lufthansa with
capitalization at €4.7 billion, British Airways at €4.3 billion and Air
France/KLM at €3.5 billion. Its market capitalization was nearly four times
that of easyJet, its UK-based budget airline rival. This was despite easyJet’s
higher turnover, similar passenger volumes and a slightly larger fleet.
Ryanair’s
fares strategy
Ryanair’s core strategy entails offering
the lowest fares, and the airline claims that it generally makes its lowest
fares widely available by allocating a majority of seat inventory to its two
lowest fare categories. In fact, was Ryanair, originally styled as the
‘low-fares airline’, actually becoming a ‘no-fares airline’? Half of Ryanair’s
passenger will be flying for free by 2009, pledged Michael O’Leary in an
interview with a German newspaper. He said that ticket prices would fall by an
average 5 per cent a year over the next five years, as passenger numbers grew
by five million annually. One analyst speculated that Ryanair pronouncement on
free seats ‘is designed to put the wind up potential competitors in the hotly
contested German market. Of course, a balance must be struck between low fares
to attract customers and a sufficient yield to ensure viability.
An integral part of the low fares
strategy is revenue enhancement through ancillary activities, increasingly used
to subsidize airfares in order to improve Ryanair margins to compensate for falls
in fare yields. These include on-board sales, charter flights, travel
reservations and insurance, car rentals, in-flight television advertising, and
advertising outside its air-craft, whereby a corporate sponsor pays to paint an
aircraft, whereby a corporate sponsor pays to paint an aircraft with its logo.
Advertising on Ryanair’s popular website also provides ancillary income.
Despite the abolition of duty-free sales on intra-EU travel in 1999, Ryanair’s
revenue from duty-paid sales and ancillary services has continued to rise. In
2005, ancillary revenues comprised 18.3 per cent of total operating revenue, up
from 16.1 per cent the year before, and the ambition is to grow at twice the
rate of increase in its passenger traffic. The company has outlined plans to
continue raising ancillary revenues through further penetration of existing
products and the introduction of new ones, especially on-board entertainment
and gaming products/services. Ryanair is also considering entering the highly
competitive mobile phone market and has been in talks with various UK operators
with a view to forming a joint venture.
Its low fares policy notwithstanding,
Ryanair was able to realize a 2 per cent growth in yields in fiscal 2005. This
is attributable to a number of favourable factors in the competitive landscape.
Underlying passenger growth volumes returned in the industry as a whole,
reducing the intensity of competition. Mainstream European operators like
British Airways, Lufthansa and Air France/KLM were increasingly abandoning the
short-haul sector, preferring to concentrate their growth on more lucrative
long-run haul routes. Moreover, these airlines reacted to the massive price
rise in the cost of aviation fuel by introducing a fuel surcharge on their
fares. For example, the surcharge levied by British Airways equated to 22 per
cent of an average Ryanair fare.
Another favourable factor was the failure
of the threat of new entrants to materialize. Michael O’Leary’s prophecy of a
2004/2005 winter bloodbath in the European airline industry had been based on
the forecast of many new entrants into the budget airlines sector, thus
intensifying overcapacity. While new rivals continued to enter the fray, at any
one time large numbers were also dying off. Autumn 2004 saw the demise of a
number of budget airlines—for example, Volare, an Italian low-fare and charter
operator, and V-Bird, a Dutch-owned carrier. Yet, new entrants were still
launching. However, it was agreed that the industry could not sustain the some
47low-fares airlines operating as of the end of November 2004, Michael O’Leary
predicted that the anticipated shake-out would be accelerated by rising oil
prices. ‘Many of our competitor airlines who were losing money heroically when
fuel was US$25 a barrel are doomed the longer it stays at US$50. We anticipate
there will be further airline casualties as the perfect storm of declining
fares and record high oil prices force loss-making carriers out of the
industry.
Low
fares require cost savings
To quote Michael O’Leary, ‘Any fool can
sell low air fares and lose money. The difficult bit is to sell the lowest air
fares and make profits. If you don’t make profits, you can’t lower your air
fares or reward your people invest in new aircraft or take on the really big
airlines like BA and Lufthansa.’
According to the company, its no-frills
service allows it to prioritize features important to its clientele, such as
frequent departures, advance reservations, baggage handling and consistent
on-time services. Simultaneously, it eliminates non-essential extras that
interfere with the reliable, low-cost delivery of its basic flights. The
eliminated extras include advance seat assignments, in-flight meals,
multi-class seating, access to a frequent-flyer programme, complimentary drinks
and amenities. In 1997, Ryanair dropped its cargo services, at an estimated
annual cost of IR£400,000 in revenue. Without the need to load and upload
cargo, the turnaround time of an aircraft was reduced from 30 to 25 minutes,
according to the company. It claims that business travellers, attracted by
frequency and punctuality, comprise 40 per cent of its passengers, despite
often less conveniently located airports and the absence of pampering.
In conjunction with the elimination of
non-essential extras, the organization of its operations enables the airline to
minimize costs, based on five main sources.
1.
Fleet commonality (Boeing 737s, like Southwest Airlines):
this results in lower maintenance and staff training costs. In 2005, the
company negotiated a new Boeing deal that takes down its per-seat costs for all
post-January 2005 deliveries to rock-bottom levels. This deal not only
establishes a platform for growth; a younger fleet also enables further cost
reductions through lower fuel utilization and maintenance costs.
2.
Contracting out of aircraft cleaning, ticketing, baggage
handling and other services, other than at Dublin Airport; this is more
economical and flexible, while it entails less aggravation in terms of employee
relations.
3.
Airport charges and point-to-point route
policy: Ryanair uses
secondary airports that are less congested, motivated to offer better deals and
have fewer delays, resulting in increased punctuality and shorter turnaround
times.
4.
Staff costs and productivity: productivity-based pay schemes and
non-unionized staff.
5.
Marketing costs; Ryanair was the first airline to reduce
and finally eliminate travel agents’ fees. In January 2000, Ryanair launched
its www.ryanair.com website. This has had the effect of saving money on staff
costs, agents’ commissions and computer reservation charges, while
significantly contributing to growth. In 2005, Internet sales accounted for 97
per cent of all bookings. Ryanair supplements its advertising with the use of
free publicity to highlight its position as the low fares champion, by
attacking various constituencies that threaten its cost structure. These include
EU regulators, airport authorities, politicians and trade unions. Its per
passenger marketing costs of 60c are considered to be the lowest across the
European airline sector.
The year 2005 saw enormous volatility in
the price of oil, and the global airline industry faced losses of US$6 billion.
Ryanair, which had been unhedged with respect to oil prices since September
2004, announced on 1 June that it was hedging 75 per cent of its fuel needs for
the October 2005 to March 2006 period, at a price of US$47 a barrel. At times,
in previous weeks, the price had stood at US$53-plus per barrel. At the end of
June, the price had hit US$60 and analysts were predicting it would rise to
US$70-plus in the coming months.
Low costs contribute to a low break-even
load factor of 62 per cent, so the airline can make money even if it fills
fewer seats than other budget competitors with higher costs and higher
break-even load factors. For example, easyJet’s break-even load factor is 73
per cent, while that of Virgin Express is 83 per cent. Table 6 shows Ryanair’s
operating cost structure.
Table
6 Ryanair consolidated profit and loss accounts
Operating revenues
Scheduled
revenues
Ancillary
revenues
|
|
Year ended 31 March 2005
€000
|
|
Year ended 31 March 2004
€000
|
1,128,116
|
924,566
|
|||
208,470
|
149,658
|
|||
Total operating revenues—continuing
operations
|
1,336,586
|
|
1,074,224
|
|
Operating expenses
|
|
|
|
|
Staff costs
|
|
140,997
|
|
123,624
|
Depreciation and amortization
|
|
98,703
|
|
98,130
|
Other operating expenses
|
|
|
|
|
Fuel and oil
|
|
265,276
|
|
174,991
|
Maintenance, materials and repairs
|
37,934
|
|
43,420
|
|
Marketing and distribution costs
|
19,622
|
|
16,141
|
|
Aircraft rentals
|
|
33,471
|
|
11,541
|
Route charges
|
|
135,672
|
|
110,271
|
Airport and handling charges
|
|
178,384
|
|
147,221
|
other
|
|
97,038
|
|
78,034
|
Total
operating expenses
|
1,007,097
|
|
803,373
|
|
Operating profit before exceptional
costs and goodwill
|
|
329,489
|
|
270,851
|
Profit
for the year
|
|
266,741
|
|
206,611
|
Customer
service
The airline’s claims of attention to
customer service are encompassed in its Passenger Charter, which embraces a
number of doctrines:
·
Sell
the lowest fares at all times on all routes and match competitors’ special
offers.
·
Allow
flight and name changes with requisite fee
·
Strive
to deliver on-time performance
·
Provide
information to passengers regarding commercial and operational conditions
·
Provide
complaint response within seven days
·
Provide
prompt refunds
·
Eliminate
overbooking and involuntary denial of boarding
·
Publish
monthly service statistics
·
eliminate
lost or delayed luggage
·
Ryanair
will not provide refreshments or meals or accommodation to passengers facing
delays; any passenger who wish to avail themselves of such services will be
asked to pay for them directly to the service provider
·
Ryanair
facilitates wheelchair passengers travelling in their own wheelchair; where
passengers require a wheelchair, Ryanair directs those passengers to a
third-party wheelchair supplier at the passenger’s own expense; Ryanair is
lobbying the handful of airports that do not provide a free wheelchair service
to do so.
The company has confirmed that it would
introduce a number of cost-cutting new features on its flights. For instance,
the Ryanair fleet would heretofore be devoid of reclining seats, window blinds,
headrests, seat pockets and other ‘non-essentials’. Leather seats instead of
cloth ones would allow faster turnaround times since leather is quicker and
easier to clean. More controversially, Michael O’Leary hoped eventually to wean
passengers off checked-in luggage, eliminating the need for baggage handling,
suitcase holding areas and lost property. In 2004, Ryanair had one of the
lowest baggage allowances of any major airline, at 15 kg a person, and charged
up to €7 for every additional kilo, one of the highest surcharges in European
aviation.
Successive Annual Reports cite-on-time
performance (defined as up to 15 minutes after scheduled time in UK Civil
Aviation Authority statistics) and baggage handling as of key importance to
customers. On punctuality, Ryanair claims to be the most punctual airline
between Dublin and London. On baggage handling, Ryanair claims less than one
bag lost per 1000 carried, better than even the best US airline, Alaska
Airlines, with 3.48 bags per 1000 lost, and considerably better than its role
model Southwest Airlines with 5.00 per 1000 lost.
Tables 7and 8, and Figure 3 provide some
independent comparisons of Ryanair with other airlines on punctuality and
customer perceptions.
Reporting airport/airline
|
Origin/ destination
|
% early to No. of 15minutes
|
Average delay flights
|
||
|
flights
|
late
|
(minutes)
|
unmatched
|
|
Birmingham—Ryanair
|
Dublin
|
180
|
88
|
6
|
0
|
Birmingham—Aer Lingus
|
Dublin
|
299
|
89
|
7
|
2
|
Birmingham—MyTravel
|
Dublin
|
4
|
50
|
20
|
0
|
Heathrow—Aer Lingus
|
Dublin
|
785
|
71
|
16
|
2
|
Heathrow—bmi British Midland
|
Dublin
|
432
|
71
|
14
|
0
|
Stansted—Ryanair
|
Dublin
|
727
|
79
|
11
|
1
|
Gatwick—British Airways
|
Dublin
|
180
|
82
|
9
|
0
|
Gatwick—Ryanair
|
Dublin
|
298
|
87
|
8
|
2
|
Heathrow— bmi British Midland
|
Brussels
|
354
|
73
|
13
|
1
|
Heathrow— British Airways
|
Brussels
|
452
|
84
|
9
|
2
|
Heathrow— bmi British Midland
|
Palermo
|
8
|
25
|
37
|
0
|
Heathrow—Alitalia
|
Milan(Linate)
|
174
|
63
|
15
|
0
|
Heathrow— British Airways
|
Milan(Linate)
|
178
|
80
|
10
|
0
|
Heathrow— bmi British Midland
|
Milan(Linate)
|
172
|
68
|
13
|
0
|
Heathrow—Alitalia
|
Milan (Malpensa)
|
298
|
48
|
24
|
0
|
Heathrow— British Airways
|
Milan (Malpensa)
|
180
|
80
|
10
|
0
|
Stansted— Ryanair
|
Bergamo
|
172
|
76
|
10
|
0
|
Stansted— easyJet
|
Bologna
|
60
|
70
|
14
|
0
|
Stansted— easyJet
|
Milan(Linate)
|
60
|
42
|
39
|
0
|
Stansted— easyJet
|
Rome (Ciampio)
|
120
|
76
|
12
|
0
|
Stansted— Ryanair
|
Rome (Ciampio)
|
356
|
79
|
9
|
0
|
Stansted— easyJet
|
Edinburgh
|
327
|
60
|
20
|
0
|
Stansted— easyJet
|
Nice
|
120
|
70
|
24
|
0
|
Stansted— Virgin Express
|
Nice
|
1
|
0
|
184
|
0
|
Stansted— Ryanair
|
Montpellier
|
59
|
76
|
14
|
2
|
Stansted— Ryanair
|
Prestwick
|
562
|
87
|
6
|
4
|
Stansted— easyJet
|
Glasgow
|
276
|
87
|
8
|
0
|
Glasgow—Aer Lingus
|
Dublin
|
176
|
80
|
9
|
4
|
Glasgow—bmi British Midland
|
Dublin
|
2
|
100
|
0
|
0
|
On punctuality, it must be borne in mind
that one is not necessarily comparing like with like when contrasting figures
for congested Heathrow with Stansted or Luton, even if all serve London. Also
not counted in the statistics were cancelled flights. Ryanair has been known to
‘consolidate’ passengers by transferring them from their original flight to
later or alternative routing without any notice, if passengers were unfortunate
enough to have originally been booked on a low seat occupancy flight. Ryanair
has announced that it would ignore European Commission proposals stipulating
that passengers whose flight has been cancelled and who have to wait for an
alternative flight should be provided with care while waiting, stating ‘we do
not, and never will offer refreshments’.
Clouds
on the horizon?
Despite its winning performance in its
2005 results, a number of issues faced Ryanair
·
While
the competitive threat of new budget carriers had not emerged, some of the mainstream
carriers were becoming quasi-budget airlines on short-haul routes. An important
instance of this was Aer Lingus, the national state-owned airline of Ireland,
operating domestic and international services, with a fleet of 30 aircraft. The
events of 11 September 2001 were particularly traumatic for Aer Lingus, as the
airline teetered on the verge of bankruptcy. In late 2001, the choice was to
change, or to be taken over or liquidated. Led by a determined and focused
chief executive and senior management team, the company set about cutting
costs. By the end of 2002, Aer Lingus had turned a 2001 €125 million loss into
a €33 million profit, and it improved still further in 2003 with a net profit
of €69.2 million. In essence. Aer Lingus claimed that it had transformed itself
into a low-fares airline, and that it matched Ryanair fares on most routes, or
that it was only very slightly higher. The airline’s chief operating officer
said that “Aer Lingus no longer offers a gold-plated service to customers, but
offers a more practical and appropriate service…it clearly differentiates
itself from no-frills carriers. We fly to main airports and not 50 miles away.
We assign seats for passengers, we beat low fares competitors on punctuality,
even though we fly to more congested airports, and we always fulfil our
commitment to customers—unlike no frills carrier. While Aer Lingus had been an
early adopter, other mainstream airlines like British Airways and Air
France/KLM were also converting short-haul intra-European routes to the value
model offered by Aer Lingus.
·
Further
source of pressure came from the EU. A decision from the EU Commission in
February 2004 ruled that had been receiving illegal state subsidies for its
base airport at publicly owned Charleroi Airport (styled ‘Brussels South’ by
Ryanair). Of course, it was not only the Charleroi decision but also the
precedent it could set that was of concern. Other deals with public airports
would come under scrutiny, although the vast majority of the airline’s slots were
at private airports. Also, it was estimated that Ryanair would have to repay
€2.5 million and €7 million to Charleroi’s regional government. Ryanair
appealed the decision, but also threatened to initiate state aid cases and
complaints against every other airline flying into any state airports offering
concessions and discounts. Airport fees comprised 19 per cent of Ryanair’s
operating costs and were deemed to be an inherent part of the airline’s
low-cost model. Thus, Ryanair warned that there was no mid-cost alternative
model. Nevertheless, two months after the Charleroi verdict, Ryanair confirmed
that it had agreed a new deal there. It would keep flying all its 11 routes
from Charleroi, continuing existing airports and handling charges until the
airport, which accommodated 1.8 million passengers a year at the time, reached
two million passengers a year. The EU Commission was not readily convinced and
initiated an investigation of the new settlement.
·
On
another regulatory matter, the EU had devised fresh rules to cover overbooking
that results in boarding denials to passengers by air-lines. Air travellers
bumped off overbooked flights by EU airlines would receive automatic
compensation of between €250 and €600. Compensation might also be claimed when
flights are cancelled for reasons that are the carrier’s responsibility,
provided the passengers have not been given two weeks’ notice or offered
alternative flights. Ryanair declared that the new rules would not impact its
operations, as it did not overlook its flights, and had the fewest number of
cancellations and the best punctuality record in Europe. It suggested that, it
the EU is serious, it should just outlaw the practice of over-booking entirely.
A few days prior to the EU decision on Charleroi, on 30 January 2004, at the Central London County Court, a disabled man won a landmark case against Ryanair after it charged him £18 (€25) for a wheelchair he needed at Stansted to get from the check-in desk to the aircraft. The passenger was awarded £1336 (€2400) in compensation from Ryanair, as the UK-based Disability Commission said it may launch a class action against the airline on behalf of 35 other passengers. Ryanair’s immediate reaction was to levy 70c a flight on all customers using the affected airports. In December 2004, the decision against Ryanair was upheld on appeal, although it was somewhat mitigated when the Court of Appeal decided that Stansted Airport was also answerable and had to pay half of Ryanair’s liability for damages, with interest. In response, Ryanair’s lawyer suggested that the 50:50 split in liability was unclear and unexplained, and ‘could well have been delivered by King Solomon’.
A few days prior to the EU decision on Charleroi, on 30 January 2004, at the Central London County Court, a disabled man won a landmark case against Ryanair after it charged him £18 (€25) for a wheelchair he needed at Stansted to get from the check-in desk to the aircraft. The passenger was awarded £1336 (€2400) in compensation from Ryanair, as the UK-based Disability Commission said it may launch a class action against the airline on behalf of 35 other passengers. Ryanair’s immediate reaction was to levy 70c a flight on all customers using the affected airports. In December 2004, the decision against Ryanair was upheld on appeal, although it was somewhat mitigated when the Court of Appeal decided that Stansted Airport was also answerable and had to pay half of Ryanair’s liability for damages, with interest. In response, Ryanair’s lawyer suggested that the 50:50 split in liability was unclear and unexplained, and ‘could well have been delivered by King Solomon’.
·
Also
in 2004, a disgruntled Ryanair passenger set up a website inviting complaints
about the airline. Ryanair moved to have the website shut down in early 2005,
on the grounds that it contained material that is ‘untrue, unfounded, malicious
and deeply damaging to the good name and trading reputation of Ryanair’, and
that the name and appearance of the site, which resembled that of Ryanair’s
home website could be construed as ‘abusive registration’. However, the site
has reappeared under an ISP provider in Canada, and its number of hits has
increased since the incident was reported in the British satirical magazine Private Eye.
·
On
another front, Ryanair was in dispute against the British Airports Authority
(BAA), as it filed a writ at the High Court in London for alleged ‘monopoly
abuse’ at Stansted. Michael O’Leary warned that the action was only the first
skirmish in what would become ‘the mother and father of a war’. The Chief
Executive of the BAA announced that he did not intend to negotiate further
reductions to Ryanair’s deeply discounted deal on landing charges at Stansted,
due to finish in March 2007. The average charge per passenger would rise form
£3 to £5 at the airport, whose capacity utilization was now so high that it was
running out of slots at peak times. Meanwhile, Michael O’Leary was scathing
about ‘grandiose plans’ to build a second runway at Stansted at cost of £4
billion, ‘when the cost of a runway and even a terminal should run no more than
£400 million.
·
As
if these issues were not enough, a number of Dublin-based Ryanair pilots were
planning to establish their own association, the Ryanair European Pilots
Association with links to the British Airline Pilots Association (BALPA), the
Irish Airline Pilots Association (IALPA) and the European Cockpit Association.
In November 2004, these pilots, supported by IALPA, took a complaint about
victimization against Ryanair to the Irish Labour Court. Ryanair could
potentially face a compensation bill of £44 million if 170 victimization claims
brought by its Dublin-based pilots were to be upheld. The company had out-lined
various consequences to pilots if they joined a trades union: possible
redundancy when the existing 737-200 fleet was phased out, no share options or pay
increases, non promotions and no payment for future recurrent training. The
airline declared its determination to keep out trades unions and to take a case
to the High Court to prove that legislation attempting to force companies to
negotiate with unions was unconstitutional. A ruling favourable to the pilots
in February 2005 by the Irish Labour Relations Commission, ordering that
Ryanair had to attend a hearing dealing with the pilot’ complaints, was
dismissed by Michael O’Leary: ‘It is no surprise that the brothers have found
in favour of the brothers. We will fight them on the beaches, in the fields,
and in the valleys,’ he said. Meanwhile, the airline is also fighting a number
of legal challenges, including proceedings against IALPA, accusing it of
conducting an organized campaign of harassment and intimidation of Ryanair
pilots through a website, warning them off flying the airline’s new aircraft.
Indeed, the carrier claims that specific threats issued on the website are
being investigated by the Irish police. In April 2005, Ryanair abandoned an
experiment in paid-for in flight entertainment, after passengers were reluctant
to rent the consoles at the £5 required to receive the service. Apparently,
market research discovered passengers are unwilling to invest on such short
flights, with the ideal being six-hour flights to longer-haul holiday
destinations. When the experiment was launched in November 2004, Michael
O’Leary hailed the move as ‘the next revolution of the low-fares industry…we
expect to make enormous sums of money’.
Questions:
1.
How
does Ryanair’s pricing strategy account for its successful performance to date?
Would you suggest any changes to Ryanair’ pricing approach? Why/why not?
2.
Is
the ‘no-fares’ strategy a useful approach for Ryanair in the short term? In the
long term?
3.
Do
the issues facing Ryanair threaten its low-fares model?
Case V
LEGO: the toy industry changes
How times have changed for LEGO. The
iconic Danish toy maker, best known for its LEGO brick, was once the must-have
toy for every child. However, LEGO has been facing a number of difficulties
since the late 1990: falling sales, falling market share, job losses and
management reshuffles. Once vote ‘Toy of the Century’ and with a history of
uninterrupted sales growth, it appears LEGO has fallen victim to changing
market trends. Today’s young clued-up consume is far more likely to be seen
surfing the web, texting on their mobile phone, listening to their MP3 player
or playing on their Game Boy than enjoying a LEGO set. With intensifying
competition in the toy market, the challenge for LEGO is to create aspirational,
sophisticated, innovative toys that are relevant to today’s tweens.
History
In 1932 Ole Kirk Christiansen, a Danish
carpenter, established a business making wooden toys. He named the company
‘LEGO’ in 1934, which comes from Danish words ‘leg godt’, meaning ‘play well’.
Later, coincidentally, it was discovered that in Latin it means, ‘I put
together’. The LEGO name was chosen to represent company philosophy, where play
is seen as integral to a child’s successful growth and development. In 1947 the
company began to make plastic products and in 1949 it launched its world-famous
automatic building brick. Ole Kirk Christiansen was succeeded by his son
Godtfred in 1950, and under this new leadership the LEGO group introduced the
revolutionary ‘LEGO System of Play’, which focused on the importance of
learning through play. The company began exporting in 1953 and soon developed a
strong international reputation.
The LEGO brick, with its new interlocking
system, was launched in 1958. During the 1960s LEGO began to use wheels, small
motors and gears to give its products the power of motion. LEGOLAND was
established in Billund in 1968, as a symbol of LEGO creativity and imagination.
Later, in the 1990s, two new parks were opened in Britain and California. LEGO
figures were introduced in 1974, giving the LEGO brand a personality. The 1980s
saw the beginning of digital development, with LEGO forming a partnership with
Media Laboratory at the Massachusetts Institute of Technology in the USA. This resulted
in the launch of LEGO TECHNIC Computer and paved the way for LEGO robots. LEGO
introduced a constant flow of new products in the 1990s, and placed greater
focus on intelligence and behaviour. The new millennium saw LEGO crowned the
‘Toy of the Century’ by Fortune magazine
and the British Association of Toy Retailers. LEGO is currently the fourth
largest toy manufacturer in the world after Mattel, Hasbro and Bandai, with a
presence in over 130 countries.
Challenges
for the traditional toy market
A number of environmental shifts have
been affecting the toy market over the past decade. Some of these are described
below.
·
Kids getting older younger. By the time most kids reach the age of
eight they have outgrown the offerings of the traditional toy market. A central
factor in children abandoning toys earlier in their lack of free time to play.
Children today have a lot more scheduled activities and, with greater emphasis
on academic achievement, a lot more time is spent studying. Faced with more media
and entertainment choices these sophisticated and technologically savvy
consumers are favouring electronic, fashion, make-up and lifestyle products.
The most susceptible group to this age compression are ‘tweens’—children
between the ages of 8 and 12—a US$5 billion market, accounting for 20 per cent
of the US$20.7 billion traditional toy industry.
·
Intensifying competition from the
electronic and games market. As
noted above, today’s young consumer is far more likely to be seen surfing the
web, texting on their mobile phone, listening to their MP3 player or playing on
their Game Boy than enjoying a LEGO set. A survey by NPD Funworld, in 2003,
found that tween boys who played video game spent approximately 40 per cent
less time playing with action figures when compared with the previous year.
Handheld toys with a video and gaming element suit the mobile lifestyle of
today’s tween. As demand for these more sophisticated toys increases,
traditional toy makers are facing more direct competition with the electronic
and video games market.
·
Fickleness of young consumers. The toy market today is very
fashion-driven, leading to shorter product life cycles. Toy manufacturers are
facing increasing pressure to develop a competency in forecasting market
changes and improving their speed of response to those changes. In an effort to
get a share of the huge revenues generated by the latest hot toy, many toy
manufacturers have left themselves more vulnerable to greater earnings
volatility.
·
Power of the retail sector. Consolidation in the retail sector and
the expansion of many retail chains has placed enormous pressure on the profit
margins of traditional toy makers. Major retailers can exert tremendous power
over their suppliers because of the vast quantities they buy. Many retailers
insert a clause in their supplier contracts that gives them a certain
percentage of profit regardless of the retail price.
Traditional toy makers are struggling to
keep up with these environmental changes. It appears no one is safe, when even
the world-renowned LEGO brand can fall victim to changing market trends. The
cracks first began to show in 1998, when LEGO made a loss for the first time in
its history. This began a major reversal in the fortunes of a company that had
become accustomed to decades of uninterrupted sales growth (see Table 9).
Ironically, it is the success of LEGO that may ultimately have paved the way
for its downfall.
Table
9 : LEGO financial information
LEGO
financial information (Mdkk)
|
2004
|
2003
|
2002
|
2001
|
2000
|
Income
statement
|
|
|
|
|
|
Revenue
|
6704
|
7196
|
10006
|
9475
|
8379
|
Expenses
|
(6601)
|
( 8257)
|
(9248)
|
(8554)
|
(9000)
|
Profit/(loss)
before special items, financial income and expenses and tax
|
103
|
(1061)
|
868
|
921
|
(621)
|
Impairment
of fixed assets
|
( 723)
|
( 172)
|
-
|
-
|
-
|
Restructuring
expenses
|
( 502
|
( 283)
|
-
|
( 122)
|
( 191)
|
Operating
profit/(loss)
|
(1122)
|
(1516)
|
868
|
799
|
( 812)
|
Financial
income and expenses
|
( 115)
|
18
|
( 251)
|
( 278)
|
( 280)
|
Profit/(loss)
before tax
|
(1237)
|
(1498)
|
617
|
521
|
(1092)
|
Profit/(loss)
on continuing activities
|
(1473)
|
(953 )
|
348
|
420
|
( 788)
|
Profit/(loss)
discontinuing activities
|
( 458)
|
18
|
(22)
|
(54)
|
(75)
|
Net
profit/(loss) for the year
|
(1931)
|
(935)
|
326
|
366
|
(863)
|
Employees:
Average
number of employees (full-time), continuing activities
|
5569
|
6542
|
6659
|
6474
|
6570
|
Average
number of employees (full-time), discontinuing activities
|
1725
|
1756
|
1657
|
1184
|
1328
|
What
went wrong for LEGO
According to Kjeld Kirk Kristiansen,
owner of the business and grandson of its founder, following many years of
success the LEGO culture had become ‘inward looking’ and ‘complacent’ and had
failed to keep pace with the changes taking place in the toy market. This lack
of environmental sensitivity was evident in the US market in 2003, where LEGO
failed to predict demand for its Bionicle figures, resulting in two of its
best-selling products from this range being out of stock in the run-up to
Christmas. It appeared nothing had been learned from the previous year, when
also in the run-up to Christmas the much sought-after Hogwarts Castle sets were
out of stock across the UK.
LEGO had also become over-dependent on
licences in the 1990s, for products such as Star Wars and Harry Potter, as its
main source of growth. This left LEGO vulnerable to the faddishness of these
products: the years in which Star Wars and Harry Potter films were released
coincided with profitable years for LEGO, while losses were reported in the
intervening years.
The diversification of the brand into the
manufacture of items such as clothing, bags and accessories was another mistake
for LEGO. The company over-complicated its product portfolio and it ran close
to over-stretching the LEGO brand. Kristiansen, resumed leadership in 2004 to
guide the company out of crisis, is quoted as saying ‘LEGO was so busy chasing
the fashion of the day it took its eye off its core brand.’
He phasing-out of its long-established
pre-school Duplo brand, to be replaced by LEGO Explore, was another error.
Parents were left confused, with many believing the larger-size Duplo brick had
been discontinued. This error resulted in a loss of revenues from the
pre-school market in 2003. Adult fans of LEGO (AFOLs) were also left
disgruntled when LEGO changed the colour of its new building bricks so that
they no longer matched the colour of the old bricks.
While other toy manufacturers have moved
production to low-cost destinations such as China, LEGO has been reluctant to
follow suit. Today it still manufactures the bulk of its product in Billund and
Switzerland. The reasons posited for the company’s reluctance to move include a
strong sense of loyalty to Billund, where one-quarter of the residents work at
the LEGO factory, and concerns that a move would affect its brand image. While
its loyalty to these sites is admirable, and brand image worries
understandable, the question is whether its long-term future is viable without
such a move.
A
new direction for LEGO
In an attempt to turn around its fortunes
LEGO has developed a number of new marketing strategies. These include the
following.
·
A
back-to-basics strategy is seeing LEGO refocus on its core brick-based product
range and place more emphasis on its key target group—younger children. In
2003, LEGO relaunched its classic range of brick-based products and many new
product lines have centred on eternal themes such as Town, Castle, Pirates and
Vikings. LEGO has reinstated the Duplo brand and introduced the Quarto brand,
which consists of larger bricks for children under two. Other new lines include
LEGO Sports, born from strategic alliances with the National Hockey League and
US National Basketball Association. While the traditional audience of LEGO has
always been young boys it has introduced a new range, ‘Clikits’, a social toy
developed specifically for a female audience. Clikits consists of pretty
pastel-coloured bricks, which provide numerous options to create jewellery and
fashion accessories.
·
LEGO
has admitted to over-diversifying its brand. In response to this, LEGO has
withdrawn many of its manufacturing lines, instead opting to outsource these to
third parties via licensing deals. LEGO is also selling its LEGOLAND parks in a
bid to refocus efforts on its core product and improve its financial situation.
·
In
an attempt to create a story-based, multi-channel, LEGO has engaged in a number
of licensing deals, with varying degrees of success, but more importantly it is
now developing its own intellectual property. The Bionicle range, launched in
2001, was the first time LEGO has created a story from the start as the basis
for a new product range. The Bionicles combine physical snap-together kits with
an online virtual world. This toy brand has also been extended into
entertainment in the form of comics, books and a Miramax movie: Bionicle: Mask of light. The range has
proved a major success for LEGO and, building on this success, it has developed
Knights Kingdom.
·
Sub-brands
that LEGO has neglected, including Mindstorms and LEGO TECHNIC, both aimed at older children and enjoyed by
some adults, are being given more attention. With so many adult fans of LEGO,
efforts are also being made to further engage the adult market. The company is
currently considering whether to market its management training tool, entitled
LEGO Serious Play, to a wider adult audience.
·
LEGO
has overhauled its packaging, and the style and tone of its advertising. The
emphasis is now being placed on the LEGO play an educational experience as
opposed to product detail. The strap-line ‘play on’ was introduced in January
2003 to accompany the change. The slogan draws its inspiration from the company’s
five core values: creativity, imagination, learning, fun and quality. LEGO is
also making greater use of more interactive communication tools to promote its
products, which it is believed will encourage consumers to interact more with
the brand. 2005 has seen LEGO invite fans on a tour of the company. Here they
are given the opportunity to meet new product developers, designers and
toolmakers, and learn about the company’s history, culture and values.
·
LEGO
is also taking steps to reverse its insular culture. In an attempt to build a
more market-driven organization, it is spending more time consulting children,
parents, retailers and AFOLs. The company established the LEGO Vision Lab in
2002 to examine how the future will look to children and their families. A
variety of sources are being used to make assessments of future worldwide
family patterns, including anthropology, architecture, consumer patterns and
awareness, culture, philosophy, sociology and technology.
·
Plagued
by supply-chain inefficiencies LEGO has improved production time from concept
to the retailer’s shelf. An example of this is the Duplo Castle, which was
developed in nine months.
Conclusion
Having taken its eye off the ball, LEGO
is fighting back with a new customer-focused strategic approach. Continuous
improvement, in response to changing market trends, is now key if LEGO is to
ward off the many challenges it still faces. It is still involved in many licence
agreements, making it vulnerable to this cyclical market. Its back-to-basics
strategy has been widely praised but it remains to be seen if LEGO can balance
this with its increasing activity in software. With children’s growing appetite
for video games with a more violent content, can LEGO satisfy this target group
while still remaining true to its wholesome ‘play well’ brand values? Will LEGO
succeed in its attempts to target young girls and its desire to target a more
adult audience? Will it succeed in its attempts to reduce costs and improve
efficiencies? Will CEO Jorgen Vig Knudstorp succeed where his predecessors have
failed? Only in the fullness of time will these questions be answered but one
thing is for sure: no brand, no matter how powerful, can afford to become
complacent in an increasingly competitive business environment.
Questions:
1.
Why
did LEGO encounter serious economic difficulties in the late 1990s?
2.
Conduct
a SWOT analysis of LEGO and identify the company’s main sources of advantage.
3.
Critically
evaluate the LEGO turnaround strategy.
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