On the face of it, Intel, Lycra, Teflon, Scotchguard, Visa, MasterCard, VHS, Dolby, NutraSweet and Interflora might not appear to have much in common – but they do. They are all ‘ingredient brands’, the name coined to describe commodities that have created such a strong consumer franchise that their direct customers are forced to incorporate them in their own products because of the enormous value this could add to their own proposition.
In theory, ingredient branding is ‘a win-win situation’. Ingredient brands create perceived added value for which customers are prepared to pay a premium, and sales of the jointly branded product rise. “It’s a case of 2 + 2 = 5,” says Tom Blackett, group deputy chairman of Interbrand and co-author of the 1999 book Co-Branding.
For the suppliers of commodity goods and services, ingredient branding provides an escape route from the downward spiral of price and profit erosion in the face of growing consumer demand for high quality and value for money. “If you can add some element that, at a stroke, ‘uncommoditises’ your business, you are no longer a slave to the price of sugar, or pork belly, or whatever it is you sell,” says Ian Louden, senior consultant at branding agency Futurebrand. Creating a direct consumer franchise gives you significant negotiating clout with customers.”
What’s more, the thin margins on most commodities mean any premiums earned on high-end differentiated products make an enormous contribution to overall profitability. “You can take your product into new vertical or geographical markets with less expense and risk than if you did it on your own,” explains Blackett. “Ingredient branding creates efficient return on investment.”
Growing numbers of commodity businesses are turning to ingredient branding as a way of differentiating themselves in a market where product, price and distribution are so easily and quickly replicated, and are building sustainable competitive advantage as a result.
Textile and fibre company DuPont, for example, has built a whole family of ingredient brands, including Lycra, Kevlar, Teflon and Stainmaster. But the textbook example of an ingredient brand is ‘Intel Inside’ (see box).
However, despite the success stories, ingredient branding is neither cheap nor easy and carries significant risk – and it is certainly not a simple matter of piggybacking a customer’s marketing. “An ingredient brand needs to be founded on some truths and unique benefits, or it will come unstuck,” says Marcus Mitchell, head of strategy for branding and innovation at marketing agency Corporate Edge.
Thus, for example, Intel’s point of difference is its processing speed, Visa’s is its ubiquity – “it’s everywhere you want to be” – Teflon is synonymous with non-stick and Dolby is “the ultimate” surround sound system.
As with all branding, “Marketing may well be more important than the product qualities themselves,” Blackett concedes. “You need a clear point of differentiation, but you use that as a platform to build your story around and steal a march on the competition.”
David Haigh, MD of Brand Finance, points out what a strong defensive position you create with an ingredient brand. “If a better product comes on to the market, your position remains strong because customers know you, trust you and want to keep buying you,” he says. “What’s important is the value customers perceive they are getting.”
But building and defending this position doesn’t come cheap. Intel says it has spent over $7bn since 1991 convincing customers that the best technology has Intel Inside. And it has probably invested a similar sum in brand development and ensuring that its technology remains at the cutting edge.
“If Intel Inside is found wanting, if its performance falters in some way, it has a long way to fall – back to its genesis as a commodity product, a position from which it may never recover,” says John Birnsteel, head of consulting at branding agency Enterprise IG.
All partnerships carry risk, but because of the closely integrated nature of ingredient branding, the risks are magnified for businesses pursuing this strategy. “There are considerable risks to your brand’s financial health and reputation if you choose the wrong brand to partner with or your partner brand suffers any sort of setback,” explains Bob Boad, head of trademarks at BP and also co-author of Co-Branding. “You may benefit from their lustre in the good times, but if they go into freefall they could take you too.”
Choose a compatible partner, Boad advises, with similar values and culture, and which offers clear synergies in consumers’ eyes. You should then draw up a tight contractual agreement, covering all eventualities from a proposed change of positioning or strategy by either side to mergers and acquisitions.
You also need to guard against creating a single hybrid brand, keep a close eye on shifting market attitudes and avoid the kind of careless co-branding that could see your brand degenerate into a generic term.
Any company considering ingredient branding should also repercussions.
The relationship between Diet Coke and Monsanto’s ingredient brand NutraSweet worked well for many years, until Coca-Cola decided it wasn’t prepared to give NutraSweet any more free publicity. But when Diet Coke dropped the NutraSweet branding, people stopped buying it and Coca-Cola was forced to reinstate it.
Given the long-term nature of ingredient branding, it could also cramp either partner’s expansion plans. For example, if Intel ever wanted to start manufacturing computers, it would become a direct competitor of its customers. The competition issue is one currently exercising Thomas Chambers, CFO of Symbian, which makes the operating systems for 2.5G and 3G phones. While Chambers would love consumers to go into Carphone Warehouse and ask for a Symbian Inside handset, he shies away from anything that could be interpreted as a competitive challenge to his customers – who include all the major handset manufacturers. “It’s not always in your best interests to have an up-front logo and, at the moment, we see the 150 or so application developers as our most important target audience,” says Chambers. “We want to develop partnerships to ensure that the applications they write will work on Symbian devices. That way, we will build momentum behind our brand.”
He says it’s a question of where you focus your resources to maximise the value of your brand. “We don’t want the huge marketing departments and ad budgets we would need to create a ‘Symbian Inside’. We get a $5 royalty for every handset sold that incorporates our operating system. Volume generates revenue for us, so we want to position ourselves as a friend of the industry.”
Chambers makes a valid point, but Blackett believes ingredient branding offers heaps of unrealised potential. “It’s a great marketing strategy that hasn’t been discovered yet,” he says. He and Boad are planning the sequel to Co-Branding, which will focus more closely on opportunities in the service sector.
Indeed, ingredient branding in the service sector could well be an idea whose time has come. But, says Birnsteel, exploiting its potential could mean some lateral thinking is needed. Birnsteel believes many utility companies are missing a trick. Since they were privatised, they have been frantically trying to extend their brands by taking over lots of other businesses. “They are all trying to be the bundler of choice, when they should be taking the less well-trodden path of becoming the bundlee of choice,” he says. For example, BT has stretched itself so far – admittedly with the encouragement of the City – that it is almost see-through in some places. A better strategy might have been to focus on what it did best and do it better than anyone else.
Harvard Professor Michael Porter’s recent study on UK competitiveness has revived the old idea of focus on core competencies – and focusing on core competencies is what ingredient brands do in spades. But adopting a more focused approach has to be a major strategic decision, says Birnsteel.
“You may have to give up other opportunities to stretch your brand, but your marketing spend is likely to be as heavy as it would be for a diversified brand, because of the need to sustain your position and perception of excellence.”
THE MAKING OF A CHIP BUDDY
Intel developed the chips which set the standard for personal computing during the 1980s, but competitors rapidly developed the same naming convention, and Intel was unable to protect its 286, 386 and 486 products. It had to become distinctive in what seemed like a confusing commodity market, so it embarked on its transition to a branded products company.
It already had an established reputation among computer manufacturers as a quality producer of microprocessors, but it believed that if it could position its chips as premium products it could justify charging premium prices for them. And manufacturers, too, could benefit by including the branded Intel chip in their own marketing.
This strategy depended on creating brand awareness for Intel chips in PCs among manufacturers’ direct customers – the dealers – and end-users.
In 1991, Intel launched the ‘Intel Inside’ brand ingredient programme with almost 200 original equipment manufacturer (OEM) partners, including premium brands such as IBM and Compaq, conveying the message of quality and reliability. Intel Inside advertised on its own behalf and contributed to the OEMs’ campaigns in exchange for their promotion of Intel.
Intel Inside has proved a phenomenal success. Within a year, awareness soared from 24% to 80% and by 1995 had reached 94% – the level it remains at today. Around 1,000 PC makers are now licensed to use the Intel Inside logo, and some 70% of home PC buyers and 85% of business buyers state a preference for Intel.