Friday, November 04, 2005

Just how useful is advertising and branding?

This is not to write a thousand word essay on branding, advertising, and the value appropriation opportunities that it allows a company. Instead, here is an example of how branding can build a monetizable differentiator even in a commoditized product line as breakfast cereal:
  • A 250gm box of Kellog's cornflakes costs Rs 75 in a store like FoodWorld or Monday2Sunday. This is Rs 300/kg.
  • A 500gm Mohun Meakins or 'Kwality' box of cornflakes cereal costs Rs 73. That is equal to Rs 146 / kg.
Do the math - by successfully branding itself, Kellog is able to charge a 100+% premium for what is essentially as commoditized and undifferentiated a product as any.

Or take the totally useless snack of potato chips. Lays charges Rs 10 for a 35 gm pack. That is Rs 285/kg. Doesn't even taste that good either. Now take an unbranded pack of 'hot chips' available at a Fabmall or FoodWorld that charges Rs 37 for a 250gm pack - Rs 148/kg (potatoes cost Rs 15/kg in retail stores). Do the math: a 92% premium for potatoes.

Finally, don't even get me started on colas, that actually serve you pesticides (the latest Amir Khan shameless Coca Cola ads notwithstanding).

This insight should make one appreciate the subtelties of value creation and value appropriation that much better :-) All accomplished by the smoke and mirror act of advertising, marketing, positioning, and all the other Ps and Cs and what-have-you.

Update: made some minor edits and corrections

6 comments:

KoPoS said...

hey abhi,

what about the levis jeans for nothing less than 900 and the nike shoes for 1200? nike is made in southeast asian and african countries where the manpower is a cheap commodity...

Abhinav said...

I am not sure whether I am qualified to comment on postings here yet, but here goes -

A few musings :

- Would it be wrong to say that for any manufactured product, manufacturing cost is around 15-20 % of the final price ? Add R & D , operational expenses, etc, and it would probably go to around 40-50 % - Still leaving a profit margin of around 50 %.

- Bausch and Laumb Contact Lenses, which are a medical necessity for most users, retails at around INR 1300-1400. It is available at a wholesale distributor I know for INR 700. 100% increase in cost while going from Wholesaler to Consumer ?

- Mohun's Cornflakes are not the same quality as Kellog's. Of course, the 100% cost increase in exhorbitant !

Abhinav Agarwal said...

I didn't mean to sound harsh or overly critical, because I think advertising and marketing plays an important role in value distribution. It's that sometimes advertising is used to induce distortions that may not be for the good of society. Some people would argue that appropriate controls should be used to prevent such practices, but even censorship of this kind will introduce its own distortions. Ultimately I think better education and awareness is required to counter the ills of advertising. The policy of intervention has to be well thought out, and we in India would do well to learn from the experiences of the west.

Goldy Lukka said...

Very good point.
Frankly, Many times I have a fight with my wife when I see non-sense prices. She argues that the price is for quality and I argue the price is too much to pay for that quality.

As far as food products are concerned, I bet no food/snack/breakfast can compete a home made both in terms of money and health. But thats bit off the track right now.

Coming back to your point, a very important thing to note here is the share of the retailer. Ever wondered why in a place where water is scarce you can easily get a cola?
Ever wondered why the costilest branded products (like Kellogs in this point) is placed more visibly to the shopper's eye?

The forgot to consider the retailer's share in the premium you calculated.

The local soft drinks cost Rs. 5 and colas Rs. 10, still the nearest panw-wala wish to sell cola because of the his higher share (in %).

One more point. You must appreciate the distribution and logistics of these 100+% premium making companies.
They will never let any retailer in smallest of towns run out of their stocks :)

Talky said...
This comment has been removed by the author.
Anonymous said...

Kellog's is a 100 year old leader in the ceral market. They invented and developed cornflakes. Their quality and range is amazing and is beyond compare.

Mohun's may be 50% cheaper but it has pathetic quality. The reason why they are afloat is that they are the primary supplier to the Armed Forces, who eat a lot of cornflakes.

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