Buying stakes in "alternative" brands is all the rage for multi-national companies these days. Roger Cowe looks at why.
British sandwich eaters are still recovering from the traumatic day in 2001 when the pure-and-pricey Pret a Manger chain agreed to sell a third of the business. It was bad enough having an outsider muscling in on the touchy-feely purveyor of clean, green (and tasty) nosh. But that outsider was at the extreme opposite end of the commercial spectrum -- McDonald's, surely many Pret customers' least favorite eatery.
The deal, which injected about $25 million into the sandwich business, was described in some quarters as a Faustian pact. But Pret founder and chairman Julian Metcalfe insisted that McDonald's money would not be accompanied by fries and Happy Meals or any other transformation of the British chain, except its expansion abroad.
Four years later, that expansion has stalled but his reassurances seem far from hollow. Pret’s food still seems the tasty, healthy, natural combination it always was. In fact it is McDonald’s that is moving in the healthy direction rather than the other way round.
In the meantime a clutch of other brands that might be described as "alternative" have been eaten, or at least nibbled at, by mainstream multinationals. A couple of months ago Pepsi swallowed P&J Smoothies (Pete & Johnny's), and only this month Cadbury bought Green & Black's organic fairtrade chocolate company, having held a 5% stake since 2002. A couple of years ago Rachel’s Dairy, pioneering organic UK producer, sold out to the US dairy company Dean Foods.
Indeed, wander down the supermarket aisles these days and the labels that give you that nice warm feeling are likely as not owned or controlled by one of the big multinationals: Go Organic and Ben and Jerry’s (Unilever), Seeds of Change (Mars), Back to Nature (Kraft), Earth’s Best, Rice Dream and Linda McCartney (Heinz), and Small Planet Foods (General Mills). Add to that the launch by the big coffee companies of fairtrade-style products, and it looks like the world is turning upside down.
So what’s going on? Do the people who created and grew these alternative brands have to sell because they don’t have the guts, stamina or money to carry on? Are the big brand owners really converting to the new wave of natural, sustainable healthiness or are they just hoping for some of the green glow to rub off on their established brands?
Overcoming Cynicism
Michael Willmott, consumer trendspotter and author of Citizen Brands, says a certain amount of cynicism is probably in order, but the big brand owners are keen not to miss out on what could be an important market development. "I am a terrible cynic, but I think these big companies have really understood that this [corporate responsibility] is a really important issue. That’s why they’re getting involved."
Willmott cautions against getting carried away about the conversion of the multinationals, and warns that it’s possible the likes of PJs will just be "sucked in, chewed up and spat out". But he suspects not. He says: “It could be a badge they’re just buying in. At one level it’s a rather cynical way of leaping on the bandwagon. But I think they sort of understand and that’s why they’re taking it a bit more seriously. So it’s possibly a more long-lasting development than I initially thought.”
He also suggests that it is difficult for a big brand owner -- especially one with a somewhat tarnished reputation -- to launch its own “green” product. “There’s so much cynicism about the big brands,” he says.
Craig Smith, senior fellow in marketing and ethics at London Business School, agrees that it may just be a matter of good strategic marketing, establishing a presence in what could turn out to be attractive sectors, in the most cost-effective way. Smith says: “My guess would be that they’re hedging their bets at relatively low cost. It can be extremely expensive to create brands like these, and here’s an opportunity to acquire ready-made brands with the right sort of brand values, a presence in the market and an existing consumer franchise.”
He says it’s hard to know how well such deals will work for the acquirers. “There may be inconsistencies because the brands they acquire don’t sit well with their existing product line in the minds of consumers.” In other words, Pret customers won’t like the link to McDonald’s.
On the other hand, people could become better-disposed to Heinz, say, because of its growing stable of “alternative” brands through its 20% stake in Hain Celestial. Smith describes this as a potential “halo effect.”
That can only work, however, if the link to the new brands is trumpeted, and on the whole that doesn’t happen. There has been no sign of the golden arches at Pret, no hint of Cadbury’s purple intruding on the Green & Black’s chocolate brown. Likewise General Mills keeps its Cascadian Farms organic line well away from the traditional brands such as Cheerios.
And Kraft is currently mixing its Rainforest Alliance certified coffee in with other beans in its mainstream brands, apparently with little marketing ambition (see case study, below).
Perhaps, as Smith says, the multinationals are hedging their bets, waiting to see how the market segments develop. But what of the entrepreneurs who built the alternative brands these giants are gobbling up? When they sold out financially, did they also sell out morally, as Lizzie Vann of Organix suggests (see case study, below)?
Selling Out Does Not Have to Mean Selling Out
Smith says a brand’s values can be sustained even when it is sold. “There should be some cause for concern, but not too great. On the other hand there’s a much better chance of a product achieving a substantial level of sales in the context of a larger company.”
Julian Metcalfe has insisted there was no question of selling out when he took McDonald’s money. He argues that a one-third shareholding doesn’t give the burger boys a right to tell Pret how to make its sandwiches, but does give him access to expertise for international expansion. “It was either this or accept the fact that we’d stay a UK company,” he said at the time. And he argued that the biggest danger was scale getting in the way of the company’s customer-service values, regardless of whether that scale came from organic growth or external impetus.
Mark Palmer, marketing director of Green & Black's, also says it is a misconception that a small brand will be smothered and corrupted by a big brand purchaser. Shortly before the deal that took Cadbury from 5% stakeholder to 100% owner this month, Palmer said he had no fears over the impact of any such move.
"They would really understand the reasons why Green & Black's works and the last thing they would want to do would be change a winning formula," he said.
He supports the view that big brand owners get value from investing in these new brands because it gives them exposure to new areas and new approaches -- often mainstream marketing benefits rather than anything to do with corporate responsibility. “It allows the big corporation to get an inside track on how things can be done differently, and how different approaches can be incorporated in their business.”
For example, Green & Black’s has a much more dynamic approach to new product development -- it has launched 38 new products in the past two years. It has more freedom to experiment than a company like Cadbury because manufacturing is contracted out.
So why does this young, dynamic company need Cadbury’s money? Palmer’s answer is similar to Julian Metcalfe’s -- to help it grow. “It gives us access to a pool of resource and marketing information that we wouldn’t otherwise spend money on,” he says.
When company chiefs have slaved away for years building a brand, possibly wrecking their health and personal lives in the process, it must be hard to resist a big brand owner’s millions. But there’s more to it than money -- there’s the ambition to be bigger faster, but also to translate the values on to the grand stage.
“You have to be very brave to continue on your own,” Michael Willmott says. “But these are ambitious people and there are always going to be limits if you remain in a small niche. I wouldn’t criticize anybody who has got as far as they can go for wanting to go further, and doing that better with someone else. It’s a compromise you have to make about getting bigger.”
Here’s the rub -- if you want to change what people consume on a grand scale, you have to penetrate mass markets. And you can’t do that if you’re a small specialist brand stuck in the organic or whole-food niche, even if that means you are on supermarket shelves. It is a familiar dilemma: stay pure and have a big impact on a small scale, or compromise and have a small impact on a grand scale.
Kraft and Sustainable Coffee: Sustainability Equals Quality
Kraft, the U.S. food group that owns mass market coffee brands such as Kenco and Maxwell House, is gearing up to launch its own “sustainable” brand, based on a deal with the Rainforest Alliance that will see the group buying a growing volume of sustainably certified beans.
But Annemieke Wijn, Kraft’s senior director for sustainability programs, says the purchasing commitment doesn’t actually have much to do with marketing. She says the addition of a sustainability element to an established brand may be more attractive to consumers who are not dedicated greens than buying a brand they don’t know, such as Cafedirect. But she suspects that growing conditions will just become a part of the background, like having an airbag in a car.
“I frankly do not believe that it will be a majority of coffee sold, but there could be a market. There are people who are interested without being religious about it. Having additional reassurance about being sustainable will be more attractive for this group of people than a brand they don’t know or which is solely based on sustainability criteria.”
Wijn sets the Rainforest Alliance deal more in the context of quality and the plummeting prices in the past couple of years that have caused havoc on coffee farms. “Agricultural sustainability is quite fundamental for long-term good-quality supply. The downward price spiral means that farmers don’t take good care of their farms, and that affects quality. If farmers begin to work more sustainably they’ll be better off economically in the long-term.
“We are already seeing that once farmers get over their initial investment they will do better economically and will manage their farms better, and be better-prepared for the next crisis.”
Lizzie Vann/Organix: Children Are Not for Exploiting
Lizzie Vann founded Organix in 1992 to put organic baby food on supermarket shelves at prices that made sense for parents buying it as well as the farmers growing it.
The concept has proved a tremendous success, but that has been two-edged. So many parents now buy organic that the big players such as Heinz and Cow & Gate have waded into this sector. And it’s hard for a relatively small business to compete with the scale the giants achieve -- and their relentless search for lower costs.
That has led them to Eastern Europe, where their organic products are made at costs that Vann cannot match. But her values mean she will not follow them. “I absolutely understand the logic. But I think it’s as immoral as colonialism. It’s just as exploitative, even if it helps countries to develop and it means people on low incomes here can afford to buy decent food. I can’t really resolve it. It’s why many small businesses like us sell out. You’re working in a system that forces you to question it.”
But she says she can’t imagine selling out: “I haven’t found a company yet that has got the idea that children aren’t a market to be exploited. If that’s all it is we’re degrading something important and ending up with a dog-eat-dog world where it doesn’t matter what you do so long as you make money out of them.”
Instead she is continuing to fight for healthy children’s food, with a range called Goodies aimed at her previous consumers who have now grown up a bit -- snacks such as fruit puree with biscuit “dippers” and fruit bars that carry a “No Junk Promise”, meaning they are made from organic ingredients and have no added processed sugar or additives.
-------
This article has been reprinted courtesy of Ethical Corporation magazine. It was first published on May 16, 2005.
GreenerBuildings.com