Feedback Effects of Brand Extensions

Table of Contents

1 INTRODUCTION - OBJECTIVES AND STRUCTURE OF THE PAPER

2 HIPP'S CORPORATE IMAGE - PROVIDING THE BASIS FOR CUSTOMER-BASED BRAND EQUITY

3 FEEDBACK EFFECTS OF AN EXTENSION - AN ANALYTIC APPROACH
3.1 The Change in Perception of a Parent Brand Caused by Brand Extension
3.2 Advertising a Brand Extension and its Feedback Effects on the Parent Brand

4 MANAGERIAL IMPLICATIONS FOR HIPP GMBH & CO VERTRIEBS KG

5 EXECUTIVE SUMMARY: “RECIPROCAL SPILLOVER EFFECTS: A STRATEGIC BENEFIT OF BRAND EXTENSIONS” BY SUBRAMANIAN BALACHANDER & SANJOY GHOSE

6 REFERENCES

7 APPENDIX

1 Introduction - Objectives and Structure of the Paper

Even though it may sound strange, the baby food market in Germany has recently been announced to be a mature market. Referring to the Federal Statistical Office the state’s birth rate is decreasing steadily, as in 2006 only 1.331 children per woman in average were born (Statistisches Bundesamt 2007). Hipp GmbH & Co Vertriebs KG has been the market leader in the product category of baby food for over half a century now, representing a strong unique image that combines quality and trust with organic farming (Hipp 2007). Although maintaining market shares and keeping up high brand equity the company has been coping with declining turnover due to reduced market potential in the last years. To solve this problem Hipp expanded to another product category in 2006, using its strong image to break into the baby body care market - with success. But how did this strategic move impact the core brand perception? As little research has been done on extension’s feedback-effects towards the parent brand this paper presents an analytic approach towards this branding issue. After introducing Hipp’s branding strategy and highlighting two issues the company faces in concern to brand extension the paper critically analyzes five scientific articles dealing with feedback effects. In an overall conclusion the findings of these articles are related to Hipp’s branding issues.

2 Hipp's Corporate Image - Providing the basis for Customer- based Brand Equity

Hipp GmbH & Co Vertriebs KG is a family-owned enterprise founded in 1932. Specialized in ecologic baby food the company keeps up a market share of about 46 %, achieving a turnover of about 300 Mio Euro in 2006 (Ecolot 2007). For over 70 years Hipp has established a very strong corporate image. Due to the fact that the company concentrated on a small product mix offering a large depth within the product mix but keeping the breadth very narrow it was possible to transfer strong, favorable and unique values to the entire product portfolio.^[1] Having a look at the Customer-Based Brand Equity Model Hipp has managed to appeal both, the rational and emotional concerns, to provide a strong brand. In the category of baby food in Germany Hipp is the most recalled brand (brand salience), being perceived to offer healthy, Hipp’s Corporate Image - Providing the Basis for Customer-based Brand Equity ecological food with high quality (performance and imagery). Within Hipp’s advertising campaigns emotional factors are combined with rational ones. The slogan of the company “For the most valuable in our lives” is supported by the CEO Claus Hipp, who backs up the brand credibility performing in every TV spot stating “this is where my name stands for.”

But although Hipp has gained strong brand resonance it recently has to cope with decreasing revenues due to its position in a mature market. To avert danger of perishing in the market the company pursued a market development strategy trying to approach a new market segment in 2005. [2]According to an internal survey every fourth glass of baby food is bought by households having no children. Therefore Hipp launched a new campaign targeting at women in their thirties (Marketing und Trendinformationen 2006). But as women either felt to be linked traditionally to baby food products or not, the campaign failed and did not show remarkable improvements of shares. Then, in the beginning of 2006, Hipp extendeded the breadth of the product mix by expanding to a new product category. Hipp Babysanft consisted of 11 products within the range of body care product for babies. By using the positive corporate image the company was able to achieve 5 % market share within the new product category by August 2006 although little promotional effort has been made. The company even gained the brand reward of the best brand extension in 2006 (Fachverlag 2007). But in how far does the extension effect the perception of the parent brand, which is the brand being extended? As little research has been done on reciprocal effects of an extension on the parent brand, this paper deals with these transfer effects for Hipp baby food. In the following these two core questions provide the basis for analysis:

(1) In respect to Hipp Baby Food, did Hipp benefit from extending to a new product category? Did the company choose the right way to do this?
(2) How did the promotional campaign of the extension influence the parent brand? Did Hipp effectively allocate the advertising budget?

3 Feedback Effects of an Extension - An Analytic Approach

Launching new products to a market can be a very difficult operation as most products fail within the first months. To ensure successful product introduction a common strategy is to apply a well-known brand name to a new product and benefit from the established brand

Feedback Effects of an Extension - An Analytic Approach image. Besides increasing effectiveness and cost-efficiency marketers thus have the opportunity to reduce the consumer’s perceived risk and easily obtain a strong product image. There are two general forms of brand extension: category extension and line extension. While the former defines an extension to a totally new product category, the latter relates to a variation within the same product group of the parent brand (Keller 2007, p. 491).

Although facilitation of launching the extended product is generally seen as the central argument, positive feedback effects to the extended product are increasingly taken into consideration. Especially for products within a mature market extensions may create excitement and revitalize the brand image. But at the same time an extension can confuse customers and even dilute the parent brand’s image (Zimmer and Bhat 2004, p. 37).

The next chapter contributes to the question in how far and under which conditions an extension influences, either positive or negative, the perception of its parent brand. On the basis of two articles, different approaches towards this problem will be illustrated and censored. As the two articles refer their research to the trial and presentation of the extensions no implications for advertising are given. In the following, chapter 3.2 provides two more articles which contribute to the influence of extensions on the parent brand by focusing on promotional efforts. In the end of chapter three a last article reviews the mentioned aspects and gives general approaches for managerial implications.

3.1 The Change in Perception of a Parent Brand Caused by Brand Extension

In the article “Brand extensions: brand concept congruency and feedback effects revisited”, published in the Journal of Product & Brand Management in 2005, Helge Thorbj0rnsen claims brand extension to be the only real option for increasing the return on investment in a mature market. As he assesses feedback effects to be even more important than the extension per se it is crucial to investigate these effects and to determine how the perception of the parent brand changes under what circumstances (Thorbj0rnsen 2005, p. 251). He therefore focuses on two dependent variables, namely congruency and familiarity.

Congruency describes the similarity between the brand concepts of the main brand and the extension in respect to their categorization (functional, symbolic or experiential brand). This means, that an extension is congruent if it is perceived within the same category by the consumers. If incongruent associations are perceived, two models of schema change describe the modification of the former brand image. Referring to the sub-typing model, extensions that diverge from the parent’s brand concept are stored in a separate cognitive category. The book-keeping model, in contrast, claims that the extension will modify the perception of the parent brand (Thorbj0rnsen 2005, p. 252; Supphellen, Eismann and Hem 2004, p. 178). Although these models are more likely to occur with incongruent extensions, Thorbj0rnsen argues that information can be stored according to the book-keeping model in situations where a consumer is high involved. Usually, high involvement can be found if the consumer is very familiar with the brand (Petty, Cacioppo, Schumann, 1983).

Using these theoretical backgrounds, Thorbj0rnsen investigated the correlation between consumer’s attitude towards the parent brand and congruency and / or familiarity by means of a study about the perception of wrist watches after extending in another product category. As the parent brands varied within their categorization and their familiarity, conclusions could be drawn:

(1) Consumers perceive a parent brand more positive after a congruent extension than after an incongruent one
(2) Consumers perceive a parent brand more negative after an incongruent extension when brand familiarity is higher
(3) Consumers perceive a parent brand more positive after a congruent extension when brand familiarity is higher

Therefore, the author claims that feedback effects for more familiar brands will be stronger than for less familiar ones. Although there is more value to gain, familiar brands are more vulnerable because customers are high involved and thus tend to store the extension referring to the book-keeping model. New associations could create confusion, no matter if the extension is successful or not. According to Thorbj0rnsen, balancing the risk and gain of an extension poses the challenge for brand managers (Thorbj0rnsen 2005, p. 257).

A crucial point of criticism is the fact that the author’s findings build on the argumentation of familiarity resulting in high involvement. The elaboration likelihood model, designed by Petty and Cacioppo in 1981, differentiates between a central route and a peripheral route to persuasion (Solomon et al., 2006). According to the authors, high involvement entails central processing. But neither in the referred article by Petty, Cacioppo and Schumann in 1983, nor in other relevant literature there can be found an adequate correlation between familiarity and high involvement.

In the article “The Effects of Experience with Brand Extensions on Parent Brand Knowledge”, published in the Journal of Business Research in 2000, Daniel A. Sheinin arrives at the conclusion, that a high degree of familiarity even diminishes the extension’s feedback effects. Based on a research of extensions within the beverage market the author identifies stable beliefs and attitudes towards familiar brands but cognitive flexibility for unfamiliar ones. As, referring to Sheinin, the perception of a well-known brand is not easy to be changed, consumer tend to associate extension-derived beliefs with the parent brand but do not change initial-brand beliefs (Sheinin 2000, p. 53). While extension-derived beliefs descend from the extension’s category and endow new association towards the parent brand, initial-brand beliefs are those, which change the existing beliefs about the brand (Sheinin 2000, p. 48). Therefore, new associations arising from the extension can be added to the existing brand knowledge, but the overall image cannot be changed. Transferring this argumentation onto the models of schema, in contrast to Thorbj0rnsen, Sheinin claims, that, for familiar brands, the consumer links new associations following the sub-typing model. An extension would thus benefit from the parent brand’s image, but it would not influence the parent’s overall perception, as new associations are stored in a separate cognitive category. This implies, that launching an extension for a familiar brand does not help to reposition the brand or changing consumers’ knowledge about it, but rather leveraging the overall brand equity (Sheinin 2000, p. 53). Nevertheless, Sheinin advises caution when launching extensions, as they might add new associations towards the brand, although not changing the overall image (Sheinin 2000, p. 54).

However, referring to his results, this last statement does not make sense. Within his research he claims familiar brands not to display cognitive flexibility and a change in the consumer’s perception of the brand not to be possible. Consequently, there cannot be a risk in launching an extension, as initial-brand beliefs are not transferred towards the parent brand.

Concluding the results of the two articles it is sure that familiarity does have an impact on the perception of an extended product. Referring to the recent literature concerning feedback effects, the general opinion confirms, that an image of a familiar brand is harder to change, but also bears a lower risk (Keller, 2007; Zimmer, 2004).

3.2 Advertising a Brand Extension and its Feedback Effects on the Parent Brand

In the article “Reciprocal Spillover Effects: A Strategic Benefit of Brand Extensions”, published in the Journal of Marketing in 2003, Subramanian Balachander and Sanjoy Ghose investigate in how far advertisement of a brand extension can effect the parent brand.

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^[1] According to Keller 2007, p. 434 the breadth of a product mix describes the number and nature of different products linked to the offered brands (product categories) while the depth of the product mix defines the product variations. Ansoff’s Growth Share Matrix differentiates between growth strategies that either enter a new market (market development strategy), launch a new product within the same segment (product development strategy) or do both simultaneously (diversification strategy). See also Keller 2007, p. 490.