34 ❘ M M M a y / J u n e 2 0 0 4

M M M a y / J u n e 2 0 0 4 ❘ 35

To make small brands big, you need to change the rules.

of Challenger Brands

If you can’t win, change the rules of the game—this

has been the strategy followed by many successful

second-tier brands in food and beverages, such as

Stonyfield Farm or Newman’s Own. This need for the

smaller player to be a challenger also seems to be the reason

why many big companies often have trouble growing their

second-tier brands to their full potential.

A look at eight random categories in food and beverages

shows that second-tier brands—brands with revenue any-

where from 20% to 2% of the market leader—will on average

grow more if they are owned by smaller companies than if

they are owned by big companies with total annual revenue in

excess of $1 billion. (See Exhibit 1 on page 36.) Conventional

wisdom has it that smaller brands don’t matter that much for

big companies and that these companies should focus on their

big brands that generate most of their revenue.

B y O ve H a x t h a u s e n

Secrets

36 ❘ M M M a y / J u n e 2 0 0 4

While big, leading brands are critical for large food andbeverage manufacturers, second-tier brands remain importantrevenue generators for big companies in the food and bever-age categories we examined. These smaller brands account foranywhere between 19% and 45% of big companies’ revenue inour eight categories. So what if these big companies were ableto grow their smaller brands just as well as smaller compa-nies? Exhibit 2 on page 38 shows that improving their second-tier brands’ growth performance would significantly improvebig companies’ overall revenue growth in these categories.Clearly, there is a case for big companies to try and grow theirsmaller brands more.

Then what is it that smaller companies are doing with theirsecond-tier brands? And why is it so hard for big companies todo the same? The simple answer is that smaller companies givethese brands all their attention, while for big companies thesesecond-tier brands often have second priority. But a closer looktells a different story: Successful second-tier brands are oftenchallenger brands—brands that change the rules of the game—and it tends to be easier for smaller companies to challengeestablished market perceptions.

Building a challenger brand begins with a different view ofyour category—a new way of segmenting the market. Thisnew segmentation will often be based on trends that are hap-pening outside of the category or on consumer needs thathave been disregarded by major brands. It will lead the chal-lenger brand to develop an offering that is new, typically interms of the product, the positioning, the price, or any combi-nation of those elements to address an untapped need in themarketplace. The process is not always deliberate, however,and many brands may have stumbled on a great idea withouta formal segmentation analysis. Yet this challenger’s view ofthe category is the element that most successful second-tierbrands have in common: They identified a consumer needstate that wasn’t being addressed in their category, and thatchallenger’s vision of the market then drove a consistent exe-cution—from developing a unique brand culture to productdevelopment, advertising and promotion, channel strategy,pricing, and so forth.

Small Brand StoriesLet’s take a look at some specific examples from our eight

food and beverage categories that illustrate how successfulsecond-tier brands have challenged the established wisdom in

their categories. Our first example is Stonyfield Farm and itsorganic yogurt. The challenger’s vision here was based on ageneral consumer trend that had not been leveraged inyogurt—the need for organic food. Stonyfield Farm bet thatconsumers would want to eat organic yogurt just like theydemand other types of organic food, and it has been provenright with consistently increased market share in its category.Stonyfield Farm has also found that most organic yogurt buy-ers are likely to be women, many of whom may suffer from orfear osteoporosis. So they have developed specific initiativesaround “strong women” and osteoporosis. One example ofthese initiatives is the Strong Women Summits, the first ofwhich was held last summer in California.

Now you may argue that Stonyfield Farm is an odd exam-ple given that Groupe Danone—a major international dairyplayer—owns 85% of its stock. But the company started outbeing independent, and Danone has done little to change thecompany’s direction since it started buying shares of the company in 2001. CEO Gary Hirshberg remains in charge and manages the company autonomously from Danone.

Another example of a challenger brand based on a newproduct offering is Carl Buddig and its sliced lunch meats.

Research shows that smaller brands owned by bigger companies deliver significantly less

growth than independent smaller brands. Part of the problem is that smaller brands need to

challenge the “rules of the game” in their category and develop radical new offerings based on

a different view of their market. Big corporations tend to be more averse to risk, so it’s often hard for a smaller brand to

challenge the very principles that drive the success of the company’s major brands.

EXECUTIVEbriefing

■ Exhibit 1Small companies manage second-tier brands better than big companies

5.9 6.54.0

0.6

(0.2)

3.10.3

(8.4)(9.3)

0.0

(10.3)

14.7

9.0

(1.9)

10.020.2

Brands owned bysmaller companies

2002-2003 Retail Sales Growth of Second-Tier Brands* (%)

Natural Lunch Salad ColdCheese Yogurt Meat Beer Juice Dressing Ice Cream Cereal

Brands owned bybig companies**

Sources: IRI; Fletcher Knight Analysis * Big companies have total annual revenue exceeding $1B** Brands with retail revenue between 2% and 20% of the category leader

M M M a y / J u n e 2 0 0 4 ❘ 37

Carl Buddig has successfully challenged the general percep-tion that healthy food can’t also be tasty food. The idea thatmany consumers are looking for tasty, low-fat lunch meat in awide variety of flavors has been critical to Carl Buddig’s mar-ket share gains in sliced lunch meats. And Carl Buddig hasacquired a strong reputation with consumers for providinghigh-quality, tasty lunch meats in a wide variety of flavors. Inthe “Buddig Original” line alone, the brand offers nine distinctflavor varieties, and Carl Buddig also offers a premium line of95% fat-free meat in six different flavors. Last year, CarlBuddig leveraged the convenience trend that is becomingincreasingly popular in lunch meats by launching “Snack-Buds.” These single-serve lunch meats are soldin a pack with four individually perforatedpouches and two different varieties are offeredso far.

Newman’s Own salad dressing is an exam-ple of a challenger brand developed around anew positioning. Newman’s brand is based ona combination of observations: People likecelebrities, like to participate in philanthropicprojects (especially if they can get some benefitout of it as well), and like a quirky, fun food

brand with products using quality, natural ingredients. PaulNewman built his brand on this combination, donating 100%of his profits after tax to educational and charitable purposes.“It started as a joke and got out of control,” as Paul Newmanputs it on his Web site. While donating 100% of profits to phi-lanthropy clearly is not a “for-profit” business concept, thepoint is that Paul Newman has built a powerful challengerbrand in salad dressings by developing a new positioning insalad dressings, rather than a new product.

Cheap can be trendy sometimes, as beer brand Pabst BlueRibbon has discovered recently. The cheap beer that tradition-ally has catered to a male, middle-aged, blue-collar East Coast

audience is now hip with young trendsetting members of theskateboarding and mountain biking countercultures. This isan interesting example of how an old brand that is well-estab-lished in an unexciting segment, where it has been slowly los-ing market share, can be revived in another segment with avery different positioning. This opportunity is particularlyrelevant for more fashion-driven categories, such as beer andliquor. While Pabst wasn’t at the origin of the trend—skate-boarders were precisely looking for a brand that was out offashion with the mainstream—the brand has been careful tomaintain its positioning, avoiding mainstream advertisingand promotions campaigns, sponsoring relevant bicycle races,and giving away T-shirts at targeted events. Pabst has alsoleveraged the trend to get into trendy bars that are popularwith this young, hip crowd and has achieved double-digitgrowth in a category growing at 2.5% yearly.

Malt-O-Meal has challenged the cold cereal category bybeing a successful low-price player. This small independentbrand has grown in a category controlled primarily by largefood manufacturers. Malt-O-Meal makes cold cereals that arebagged rather than boxed and command a lower retail pricethan boxed cereals. While major players such as PepsiCo’sQuaker brand have seen their bagged cereals business sag-ging—Quaker even sold that business to Malt-O-Meal in2002—Malt-O-Meal has been successfully building its baggedcereal franchise, with products such as Tootie Fruities, Mateys,and Dyno Bites. The insight behind Malt-O-Meal’s success isthat there is a need for cheaper cereals that are bagged ratherthan boxed, but still are marketed in a fun fashion, with attrac-

It tends to be easierfor smaller companies to

challenge established market perceptions.

tive product names and colorful bags. Malt-O-Meal has done agreat job executing on this vision by redesigning its packaginglast year and launching the “Profit Plus” program with itsretailers. It offered consumers 50% more high-quality cereal forthe same price as boxed cereal brands, while delivering higherprofit margins to retailers. And from a supply standpoint, theacquisition from Quaker helped Malt-O-Meal increase thenational coverage of its products.

Big LessonsThere are many different ways in which smaller brands can

successfully challenge the established wisdom in their catego-ry and achieve strong growth. So why do big companies seemto have such a hard time growing their second-tier brands?The answer seems to lie with the very concept of a challengerbrand. As a major manufacturer, with an organization that isprimarily focused on its major, category-leading brands, it isdifficult to develop smaller brands that will challenge the veryfoundations on which the major brands are based. This is trueup front, when you need to develop a new, different view ofthe market. But it remains true throughout the execution, frombrand positioning and product development all the way toadvertising and promotion, where a challenger brand mayrequire a radically different approach. Within a big food orbeverage manufacturer, it’s not easy to challenge the wisdomthat’s driving the growth of the leading brands and use theunfamiliar, different marketing approaches needed for a chal-lenger brand to succeed. Risk-averse employees generallyhave very few incentives to challenge the status quo.

So is there a way forward for second-tier brands within bigcompanies? The example of Stonyfield Farm is interesting in

that respect. Here is a challenger brand that is allowed to con-tinue its direction, irrespective of the strategy pursued byother Danone brands and with its offices remaining in NewHampshire, away from Danone’s corporate offices. While hav-ing different physical locations for brand teams will often beimpractical and unnecessary, this example illustrates howimportant it is to create different expectations and incentivestructures for people working with second-tier brands. Therehas to be a clear understanding that these smaller brandsshould be allowed and even expected to challenge the “viewof the world” and the operational practices that are drivingthe leading brands. There also has to be a willingness toaccept a higher level of risk with smaller brands. This makessense: Smaller brands account for a smaller part of a compa-ny’s overall business, yet have higher potential for stronggrowth. Therefore, this is where a company should be willingto take calculated risks.

Remember, if you’re not willing to challenge your categoryleadership, somebody else will, so you may have more to losethan you think by not managing your second-tier brands totheir full potential. ■

Author’s Note: I would like to thank Information ResourcesInc., a Chicago-based market research firm, for providing theretail sales data that was used for the brand sales growthanalysis in this article.

About the AuthorOve Haxthausen is a principal at marketing consulting firmFletcher Knight, Greenwich, Conn. (www.fletcherknight.com).He may be reached at ove@fletcherknight.com.

38 ❘ M M M a y / J u n e 2 0 0 4

■ Exhibit 2Second-tier brands matter for big companies

2002-2003 Category Retail Sales Growth of Big Companies* (%)

6.4 6.68.9

1.43.1 3.8

1.8

(0.5)(0.8)

1.3

(2.5)

6.4

2.70.8

5.7

12.8

Natural Lunch Salad ColdCheese Yogurt Meat Beer Juice Dressing Ice Cream Cereal

Pro Forma, assuming second-tier brands** had grown at therate of second-tier brandsowned by smaller companies

Actual

Sources: IRI; Fletcher Knight Analysiss revenue* Big companies have total annual revenue exceeding $1B** Brands with retail revenue between 2% and 20% of the category leader

W H A T ’ S N E X T

in Marketing Management ?

July/August

Our July/August issue will focus on understanding and

managing customers. Topics will include the power of

word of mouth, understanding how customers perceive value,

the employee customer, and more. We’ll look at challenges to

traditional segmentation practices and ask, “How do you

manage your customer loyalty asset?” A sophisticated

approach of measuring, modeling, and managing may pro-

vide the answer. We’ll also cover other key marketing topics,

including a case study on how to listen to your customers.