Hindsight is 20/20, or so they say, but some folks stay the course no matter how much evidence comes in to the contrary. With respect to the business world, and even governments for that matter, we have endless examples that make this case.
Every government or empire that has chosen a path of being all things to all people has eventually collapsed or become a weaker, fainter shadow of its former self. The business world is no different. Many companies, driven by the quest for profits and growth, go the way of line extension. Line extension is really nothing more than trying to be all things to all people, or in this case, all things to all customers. The cost of this quest for total market share destroys brand identity and will likely force practitioners to eventually leave the category or marketplace all together.
In the grocery industry, 85 percent of all new products introduced are line extensions. In the distant past, if your company had the hottest product with the strongest brand, the demand for your product would be great. Rampant line extension practices in the grocery business have changed the game.
Today, the power role in that industry has shifted from suppliers to the retailers. Suppliers are frequently forced to pay costly slotting fees and expensive trade promotions just for a seat at the table. This doesn’t come with any guarantees; it’s simply the common cost of doing business in the grocery industry today. The market attrition for these supply businesses is off the charts. Sound somewhat familiar?
What causes line extension practices?
When a company has 50 percent market share, it is considered outstanding. That‘s about as much as can be maintained assuming normal competitive forces are in play.
Sometimes the holder of 50 percent market share isn’t satisfied and will try to raise revenues or gain even more market share. They may try to employ new efficiencies, but the temptation of line extension can be too much to resist. It may look good in the short run, but the cost or sacrifice will be made in brand perception and category domination. The disastrous results from this won’t be immediate, but they will come. With the leader’s brand now eroding rapidly in the mind of the customer, competitors and new entries to the market space can have a field day.
Las Vegas has changed its brand, too, significantly in the last several decades. My first trip to Las Vegas came in 1981. It was my first real job and I was given the chance to join as support staff on a business trip that started out in St. Petersburg, Fla., for a board meeting for the association I worked for. The next two stops on the trip were San Francisco and Las Vegas to meet with the conference sales folks at the Moscone Center and the MGM.
Las Vegas, by a long shot, impressed me the most. Hotel rooms, dining, shows and nightlife were remarkably inexpensive. The pricing package we could offer our conference goers allowed us to dramatically increase attendance. The city itself was a huge part of the draw. It was a winner all the way around.
That was almost 30 years ago. Since then, a lot has changed in Las Vegas, but most significantly so, its brand identity. If you had to sum up Las Vegas in a word in 1980 and today, would those words be quite different? I think so.
The difference is the category that Las Vegas owns today is different than 30 years ago. In the past, Las Vegas was quite recession-proof. The demand for what it offered was elastic, meaning the demand remained relatively constant. Today, the aggregated product that Las Vegas provides is highly inelastic because it’s a different total product than it was in the past. A growing share of the offering is the very thing consumers will forego in difficult economic times. Whether it’s a worthwhile change is debatable, but one should note what is occurring in the gaming marketplace.
I understand that I mixed demand elasticity and brand identity concepts together and they are different things, but they do have a relationship. Line extension impacts brand, brand impacts category and category impacts the elasticity of demand. It’s important that when we toy around with brand, we spend time looking down the road to better understand how we might be impacting our position in the market place.
Peter E. Mead
Casino Enterprise Management