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January 12, 2009

Brand Dilution

This is the third installment in a series of posts sharing business lessons learned from the movie, AMERICAN GANGSTER.


3_branddilution

Setting the Scene:
Frank Lucas’ “Blue Magic” heroin became the market leader in New York City. Rivals said he had “upended the natural order of things” by selling heroin that is twice as good for half as much. Competitors left the heroin market because “nobody wants to compete with a monopoly.”

To accelerate growth of the “Blue Magic” business, Frank arranged wholesale distribution agreements with other drug lords and mafia families. This shift in business strategy made competitors part of the “Blue Magic” family, with Frank Lucas as the all-powerful CEO and Chairman of the Board.


Never Dilute a Brand
Nicky Barnes competed with Frank Lucas and the success of “Blue Magic” hurt the financial viability of Nicky’s operation. Grudgingly, Nicky signed on as distributor of “Blue Magic.”

In an effort to increase profits of his “Blue Magic” sales, Nicky began diluting the purity of the heroin to increase his inventory and his margins. He sold the diluted heroin as “Blue Magic.” Frank Lucas wasn’t pleased and addressed his concerns just like a top-notch Chief Marketing Officer would to any rogue field marketing manager, maverick product manager, or renegade franchisee.

Follow the encounter from this modified script snippet...

Redmagic_script_3

Businesses “chop down” their products all the time. In the quest to maintain profits or possibly, grow profits, businesses make strategic decisions to dilute their offerings. And if done inconspicuously enough, customers will hopefully never notice.

Frito-Lay chopped down its 12-oz bag of chips to 10-oz. bags. Price remained the same.

Hellmann’s chopped down its 32-oz. jar of mayonnaise to 30-oz. Price remained the same.

Dial chopped down its soap bars from 4.5-oz to a 4.0-oz size. Price remained the same.

Bounty chopped down the number of towel sheets per roll from 60 to 52. Price remained the same.

Kellogg’s chopped down its Fruit Loops cereal package size from 19.7-oz. to 17.0-oz. Price remained the same.

Iams chopped down its 6-oz. package of cat food to a 5.5-oz package. Price remained the same. [SOURCES: USA Today ; New York Times]

However, customers have noticed all this chopping down. According to a Consumer Reports study, 75% of shoppers surveyed said they have noticed smaller package sizes from their favorite brands. And, 71% of shoppers believe the package downsizing is a clear attempt by brands to hide price increases. It's interesting to note, 50% of shoppers prefer brands stop chopping down their products and instead, keep their old package size and simply raise the price. [SOURCE: Consumer Reports]

The takeaway lesson is simple … when a business decides to dilute its products, it runs the risk of drawing ire from customers.

The action step is also simple … if you find yourself saying or thinking, “A customer will never notice that.” Chances are, they will. Be prepared to deal with their reaction.


That's just one angle to this "Brand Dilution" lesson from Frank Lucas. I'm sure you can think of other lessons. Share them in the comments.

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Comments

It's always the kiss of death for a business, but I feel it's related to the lack of understanding of overall demand both for the product, and within the industry segment. All of the products you mentioned have one thing in common, they were all in the maturity stage, or declining, in their respective product segment. Becoming a commodity is always a possible risk when you fail to invest in your brand in the growth stage.

The American Gangster example is a poor analogy to a pack size change.

In the American Ganster example Nicky is not changing pack size (which is effectivley nothing more than a price increase). Nicky is changing the potency of the product. He's actually changing how "quality" of the heroin product. It would be like...

Frito-Lay using lower quality ingredients

Dial using a cheaper and inferior fragrance in its soap

Bounty using weaker paper in it's paper towels

...all in an effort to improve profit with a reduction in quality of the product.

Reducing the pack-size in this economy is probably a good move. It's a cost savings, whichout impact on quality.

MSF ... valid point. Obviously, I went a different direction with the "chop down" analogy.

agree, john -- chopping down pack size is a bad move -- not only will customers notice and be unhappy with the price increase, but also they will resent a move that seems disingenious -- consumers want brands to respect them -- not treat them as if they're too stupid to notice a pack size change

This is the reason G.M. is in so much trouble. A few years ago due to tax changes made a lot more profit. Rather than put it into product development, the accountants who are the CEO and COO decided to give it to shareholders. Obviously, a very poor decision.

That was one of my favorite parts of the movie because it was so cognitively dissonant. Frank is a ruthless gangster and he is lecturing his colleague on branding.

Another example of brand dilution is when Starbucks puts coffee stands in grocery stores, (in the northwest it's Safeway) which are staffed by grocery store employees. The product is about the same quality, but the experience is much worse.

Here's a comical one:

A famous underwear Brand (Hanes)which does alot of advertising saying how wonderful it is
changed it's sizing (at certain discount retail stores)
from every other size 32,34,36, 38, 40, 42 etc.
to Small, Medium, Large, Extra Large.

Do they value the people with the in between sizes less or do they think people won't notice?

In either case, it's not good for the Brand Loyal customers who may have been using their product for 20 years. Perhaps they should have tried a pricing strategy instead of a product strategy.

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