ENTRY INTO ADJACENT PRODUCTS / CATEGORIES - Marakon

ENTRY INTO
ADJACENT
PRODUCTS /
CATEGORIES

LESSONS FROM THE
CONSUMER PRODUCTS
SECTOR

Christine Delivanis, Laura Gutowski
January 2014

Management consulting at Charles River Associates

Entry into Adjacent Products / Categories: Lessons from the Consumer Products Sector

Introduction primarily due to ineffective balancing of Marketing
“ambition” with General Management “business
Growth is central to the strategic agenda in all pragmatics and economics.” This dynamic
consumer products companies. As the growth in manifests itself in many ways inside businesses:
core product markets slows down, companies
across sectors as diverse as luxury, brewing, skin Lack of clarity on the core objective
care, beverages, and grocery look for growth
potential in adjacent areas. Companies wishing to take an existing brand into
new product or category markets are often unclear
Marakon reviews the key challenges faced, lessons on whether the adjacency play is expected to
learned, and implications. deliver material growth to the business or simply a
new, profitable, but niche position with substantive
Adjacencies – Definitions effect on existing brand equity.

Adjacencies are new business areas that most Entering an adjacency for the purpose of delivering
often build from a company’s established assets. material growth usually involves marrying existing
In the branded consumer products sector, a consumer brands with products or categories that
company’s brands are often its most critical assets. will inherently have mass appeal. This kind of play
Existing brand assets can be applied to adjacent requires the usage of brands with strong existing
areas in different ways: equity, as the adjacency plays by their very nature
will be leveraging and “harvesting” the existing
1. Existing brands introduced to new geographies equity. Marakon calls these instances “brand equity
– E.g., Burberry, LVMH, and other luxury harvesting” adjacencies. Given their size and wide
goods players entering China target audience, getting into brand equity harvesting
adjacencies often involves significant, relatively high
2. Existing brands sold through new channels risk, up-front investment, sometimes in the form of
– E.g., SABMiller selling its Peroni Lager capital expenditure if the new product / category
beer through branded pop-up stores requires a different manufacturing process than the
core product range, and almost always in the form
3. Existing brands marketed and sold to new of a major marketing campaign. The resulting
consumers financial profile of these opportunities thus most
– E.g., L’Oreal launching a line of men’s skin often looks like a standard J-curve and their risk /
care products return profile is high / high.

4. Existing brands applied to new categories and Brand equity building adjacencies, on the other
products hand, are entered as a way to build a small,
– E.g., Coca-Cola licensing its brand to incrementally profitable business, while
apparel manufacturers considerably strengthening brand credentials.
These kinds of adjacent areas often have
In this commentary, we address the challenge of associated A&P costs that are much lower than for
taking existing brand assets into adjacent category brand equity harvesting adjacencies. Their most
and / or product markets. While this type of typical investment profile is that of a small
adjacency can on the surface appear relatively investment and quick, step-wise uptick in top-line,
simple to effect successfully, businesses we work with a subsequent flattening as the niche position is
with and observe often face material challenges. established. The majority of the benefit is seen on
the brand equity building side, and their risk / return
Key Challenges Faced profile is low / low.

The strength of an existing brand proposition is not Illustrative profiles of the two most common types of
a sufficient condition for success in adjacent brand to product / category plays are shown on the
category and product markets. Our experience next page:
suggests that 8/10 initiatives of this type fail,
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Entry into Adjacent Products / Categories: Lessons from the Consumer Products Sector

Brand Equity Harvesting Brand Equity Building
Investment / Return Profile Investment / Return Profile

EBITDA A&P Investment EBITDA A&P Investment

High Investment / Low Investment /
High Risk / Low Risk /
High Return Low Return

A&P

Time A&P
Time

In our experience, consumer products drive real consumer preference. This may be the
manufacturers are frequently not clear enough on features of the product itself, the emotional equity of
what they expect their adjacencies to deliver, and the brand, the brand-product-price combination,
therefore what a desirable or expected investment greater distribution than the competition, or all of the
profile and acceptable level of risk should be. At a above, but an adjacency will only be successful if
minimum, this lack of clarity on the core objective of the company has a material source of differentiation
the adjacency play can confuse the dialogue and competitive advantage.
between NPD / Marketing teams and General
Management on whether or not to consider a In 2007, cereal giant Special
certain adjacency play. It can make business cases K launched Special K20, a
appear either unrealistic or unattractive, senior range of flavoured bottled
executives with a good intuitive sense of what is waters with added protein, to
likely to work in a market nervous, and marketing / position the brand in the
NPD teams disappointed because their “best ideas” rapidly growing flavoured
do not receive the financial backing they need. water category. But Special K
had no tangible competitive
Lack of material competitive advantage in advantage in the heavily competed water space vs.
the adjacency existing players (e.g., Vitamin Water). Resulting low
sales led to an early product exit.
Companies are often convinced to enter
adjacencies due to the sheer size of the opportunity. Lack of alignment with existing brand image
They see large markets, high growth rates, and
other companies finding success there – in other Marketeers tell us to protect a brand’s image above
words, they observe a lot of “headroom” and believe all else, but companies often forget this basic lesson
fast entry will allow them easier access to that when attempting to take brand assets into adjacent
headroom before others come to the game. categories or products. Again, they often get caught
up in the size of the opportunity, and do not think
Unfortunately, looking at headroom alone is not deeply enough about how the adjacency relates (or
enough. Companies must instead look at accessible not) to the core “truths” behind their brand assets.
headroom i.e. headroom they could actually win, This can be particularly dangerous – consumers
because they would be bringing something may not purchase the new product, but the core
substantially differentiated to the market that will business may also be eroded if consumers lose

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Entry into Adjacent Businesses: Lessons from the Consumer Products Sector

overall trust in the brand as a result of the However, the equity of their core brands was slowly
adjacency play. beginning to erode, consumers were documented
as feeling the brand was “staid” and “not delivering
Sharwood’s, the Chinese and anything new” to the market, and smaller,
Indian food producer, innovative players were entering the market and
launched Wrap Kits in 2012, starting to carve out profitable niches. Business as
allowing consumers to eat usual trumped adjacencies every time, until the
their Asian cuisine in the style company observed that the lack of front-footedness
of a Mexican burrito. The was having a detrimental impact on their brand
play harmed the brand’s assets and market position with consumers.
ethnic credentials, resulting in
decreased loyalty from existing consumers on the Lessons Learned and Implications
core offer.
Clear ingoing objectives help set expectations
Smoothie maker Innocent has a strong brand and financial framework
proposition around delivering natural, delicious and
healthy food. In 2003, the brand launched Juicy Brand equity harvesting adjacencies have a very
Water, a range of flavoured waters with six different investment and return profile than do brand
teaspoons of sugar in every bottle – a far cry from equity building adjacencies, and it is important for
the brand’s healthy image. Loyal consumers felt companies to recognize which type of adjacency
alienated, and Innocent had to spin off the range a they are pursuing in order to make more informed,
few years later. confident decisions on which adjacency to pursue,
how much money to invest behind it, and what kind
While “brand equity harvesting” is clearly a way to of return profile to expect. Companies must have
generate growth, if the brand is stretched too far, realistic expectations. When pursuing brand equity
the positive impact can quite easily be diluted or harvesting adjacencies companies must be patient
even be dangerous to the core business. – they are not going to help the bottom line
overnight. Equally, a brand equity building
Lack of material progress on adjacencies due adjacency is not going to be a financial game-
to organisational constraints changer, but it might be worthwhile to pursue
nonetheless because of its effect on the brand.
As discussed above, there are certainly many
dangers in having unclear expectations regarding Jack Daniels, the Tennessee whiskey
the financial profile of product / category maker, launched a line of barbecue
adjacencies. There are also obvious dangers in sauces in 2006. Many consumers
launching in the “wrong” adjacencies. Equally already used the company’s liquor in
however, there can be dangers in not doing enough. their homemade sauce recipes, and
Jack Daniels leveraged that fact and
A popular cooking sauce company structured its their existing brand equity to enter the
organisation in a way that made no separation of rapidly growing sauce and marinade
resource between its core business and proposed market. Given this adjacency’s novelty,
adjacencies. As a result, adjacencies were never significant upfront A&P investment
pursued properly, as the team spent over 95% of was required to create awareness and drive trial.
the time focused on fire-fighting in the day-to-day Significant returns did materialise, but the whiskey
business. Additionally, senior management was not maker needed to be patient.
prepared to allocate financial resource to ideas with
long, often uncertain delivery profiles, especially Conversely, Jack Daniels launch of Tennessee
when trading those off vs. incremental resource into Honey in 2011, the brand’s first flavoured variation,
the core business, with an inherently shorter allowed the company to enter the inherently smaller
delivery profile. but higher margin area of flavoured liquor.

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Entry into Adjacent Businesses: Lessons from the Consumer Products Sector

Real competitive advantage is a necessary It is therefore critical that any new adjacency
ingredient for success entered links clearly to the existing brand
proposition.
When a company enters an adjacency where it
does not have a distinct competitive advantage, it Innocent learned from its earlier failure with Juicy
almost always fails. Very rarely is the brand alone Water, and sought to harvest the brand equity and
enough to provide this advantage. Rather, appeal to a larger audience by launching Veg Pots,
consumers must believe that the product or brand is a range of chilled, single-serve meals, all made with
better, or better value for money, or more widely pure, healthy ingredients and no additives. Veg
available and therefore more noticeable. Pots strongly reinforced the brand proposition
around delivering natural, delicious and healthy
Frito-Lay, owner of brands food, and recorded £15m in retail sales in the UK in
like Lay’s, Doritos, Ruffles the first year after launch.
and Tostitos, believes its
brand stands for Diligent evaluation against entrance criteria
convenient and delicious can give an objective read on likelihood of
snacks for enjoyment. In success
the 1980s, Frito-Lay
launched a line of dips that As we saw in the examples above, it is critical for
were specifically created companies to be competitively advantaged in
to harvest the brand equity adjacencies and for adjacencies to align with brand
by complementing its existing chip range (e.g., image, but there are a number of other criteria
Tostitos salsa, Frito’s dip), an adjacency move that which successful adjacencies also need to meet.
has been very successful. The dips range both Ensuring that potential adjacencies meet the below
reinforced the brand’s proposition around delicious list of key criteria greatly minimises the likelihood of
snacks, and successfully leveraged the company’s failure:
distribution advantage in the snack aisle.
 A brand equity harvesting adjacency should
Linking adjacencies clearly to the existing have a material impact on financials (specific
brand, whether equity harvesting or equity minimum size limits should be set)
building, is paramount
 A brand equity building adjacency should make
When consumers think of a well-known brand, a a material impact on brand perception
very specific image and proposition comes to their
mind. When the brand deviates from this image,  The company should have a high degree of
consumers are often confused and disappointed. confidence on ability to implement

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Entry into Adjacent Products / Categories: Lessons from the Consumer Products Sector

 Profit margins should be equal or higher than We see another
the company’s target over time example of
mitigating the
 A direct consumer need should be addressed risk of entering a
new category
 The magnitude and timing of investment should adjacency
fit with the company’s other financial through
commitments licensing in
Special K. The
 The adjacency should carry an acceptable brand is famous for its Special K Challenge, which
amount of risk promises that consumers can lose six pounds in
two weeks by eating the brand’s cereals every day.
Smart “toe in the water” entry strategies can But this promise only holds for people who eat the
help mitigate inevitable risk recommended serving size, and many consumers
had difficulty with portion control, pouring too much
Once companies select adjacent areas to pursue, cereal into their bowls. The company wanted to
they are then faced with the challenge of effectively make it easier for consumers to follow the Special K
managing entry and scale-up while minimising Challenge by selling measuring cups for quick and
financial and operational risk. Rather than going “full easy portion control. However, the company did not
steam ahead” into a new adjacency, companies have the manufacturing capability to produce these
should enter new adjacencies in a manner that in house, and purchasing this equipment before
allows them to in some way judge performance seeing how demand materialized was deemed too
before fully committing substantial financial risky. Instead, Kellogg’s licensed the Special K
resource behind them. Common ways to do this are brand to a partner who could produce the
by using licensing agreements, by outsourcing measuring cups.
production to a partner, and / or by launching in a
small test market to gauge consumer reaction. Over Critical to keep the adjacency funnel fresh
time, if these adjacencies prove successful with
consumers and the financial returns start to look Clearly, the process of generating, screening, and
attractive, manufacturing can then be brought in executing a risk-mitigating market entry in an
house, and / or a broader launch can be executed. adjacent product or category can unfold over a
long period of time.
Wonder Bread, the white
sliced bread beloved by Pressure on growth however is constant, and
children across North companies still need to find ways to be nimble and
America, saw a promising aggressive without taking undue risk. One way to
adjacency in the lunch strike the right balance between ambition, speed to
space. Sandwiches made market and risk mitigation is to work very hard to
with fluffy Wonder Bread keep the early stages of the adjacency funnel fresh,
were often crushed inside so 1-2 ideas are always close to being launched in
children’s lunch boxes, market.
turning off some consumers. To remedy this – and
benefit from added brand placement in the New ideas can be compiled from different sources:
supermarket aisle – Wonder Bread sought to create
a plastic storage container that perfectly fit a  Adjacencies we observe as attractive due to
sandwich made with its bread. However, the changes in consumer tastes or preferences
company did not have the production capabilities to
do so, and the capital expenditure required for this  Adjacencies that represent close substitutes to
was significant. Purchasing the equipment was the products we currently make
judged to be too risky, so instead, the company
licensed its brand to a partner who could make the  Adjacencies that represented product areas
Wonder Bread Sandwich Packer. used in conjunction with our current products

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Entry into Adjacent Products / Categories: Lessons from the Consumer Products Sector

1 2 3 4
Use Set Criteria Further Investigate
Generate Long to Narrow Down 2-3 Most Promising Enter Top Adjacency in
List of Adjacencies to Short List Adjacencies Risk-Minimising Way

1 2 34

 Adjacencies we think our closest competitors Conclusion
may enter or new entrants have already
penetrated Though challenging, it is possible for companies to
develop a strong capability around entering
 Adjacencies we believe may open up given adjacent product / category markets with existing
new technologies or capabilities we have brands. The critical success factor is finding a way
recently acquired to organizationally balance Marketing “ambition”
with General Management “business pragmatics.”
Organisational separation from “business as
usual” activity is a final prerequisite for
success

Adjacencies are new, they are different, and they
should not be managed in the same way or under
the same organisational and resource umbrella as
the core business. As seen in our cooking sauce
example, adjacencies will not receive sufficient
attention and resource if they are run by people
responsible for running the core business.

Marakon believes that 10-15% of total resource
(time, capital, talent) should be parked for the
exploration, testing, and pursuit of adjacent areas.
Individuals working in the earlier stages of the
adjacency funnel (generally Strategic Marketeers or
New Product Developers), should have a skills bias
towards innovation and “out-of-the-box” thinking,
and also be comfortable using consumer research
methods relevant for exploring relatively untested
areas (e.g., conjoint analysis, concept testing). As
long as the final decisions on selection and funding
of adjacencies are made with a general
management mind-set using the criteria and
approach we have discussed at length in this article,
we believe the right balance of “good” risk-taking
and business pragmatics will be struck.

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Entry into Adjacent Products / Categories: Lessons from the Consumer Products Sector

Written by: About Marakon

Christine Delivanis, Laura Gutowski Marakon is a strategy and organizational advisory firm with the
experience and track record of helping CEOs and their leadership
Key contacts: teams deliver sustainable profitable growth. We get hired when our
client’s ambitions are high, the path to get there is not clear (or taking
Christine Delivanis too long) and lasting capabilities are as important as immediate impact.
Europe
[email protected] We help clients achieve their ambitions for sustainable profitable
+44 207 664 3700 growth through:

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We have a joint team delivery approach where client ownership and
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