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 / Spring 2004 / Issue 34(originally published by Booz & Company)


Research Notes

On packaged-goods marketing, peer-to-peer networks, leading by listening, and other topics of interest.

Secrets of Competition in Packaged Goods
Bart J. Bronnenberg ([email protected]), “Multi-market Competition in Packaged Goods: Sustaining Large Local Market Advantages with Little Product Differentiation,” The Anderson School at UCLA. Click here.

Photograph by Opto Design
Many consumer goods, in the United States in particular, are physically almost identical. They are differentiated in the minds of consumers only by the brand. However, conventional theory predicts that where national brands are in direct competition, local differences and consumer preferences will erode over time. Research by Bart J. Bronnenberg, an associate professor of marketing at the John E. Anderson Graduate School of Business at UCLA, concerning branded commodity goods markets challenges this assumption.

Consider the U.S. market for salsa, for example. It is dominated by two manufacturers: Campbell Soup Company/Pace Foods, which owns the Pace brand; and Frito-Lay Inc., a subsidiary of PepsiCo Inc., which owns the Tostitos brand. Both the Pace and Tostitos brands hail from Texas and are associated with a range of products. Although they compete side by side across the U.S., Tostitos dominates the East coast, whereas Pace is the market leader west of the Mississippi River. In its Western strongholds, Pace has up to 75 percent market share, and Tostitos languishes at 9 percent. Yet, along parts of the eastern seaboard, the market leadership position is reversed, with Tostitos enjoying almost 50 percent market share and Pace falling back to 9 percent.

This pattern, which has been consistent over time, is repeated for other commodity packaged goods, such as ground coffee, margarine, and mayonnaise. Professor Bronnenberg notes it is not uncommon for two packaged-goods brands to divide the U.S. domestic market between themselves in this way. In the absence of meaningful differentiation, conventional wisdom suggests the initial advantage of the first brand will diminish over time. In fact, relative market positions are often sustained.

This phenomenon, Professor Bronnenberg says, can best be explained by two special characteristics of the packaged-goods market: multimarket contact and high positioning costs. Multimarket contact describes the situation in which two brands compete side by side in multiple geographic markets. In other words, the same two brands jockey for the top position in many separate local markets. (Each local market is discrete; it has its own distinct set of consumers whose perception is not affected by price or brand positioning elsewhere.)

High positioning costs, as the name suggests, occur where there are high costs associated with distributing and positioning a brand in a market. Acquiring shelf space and consumer awareness is likely to be more expensive when retailer pricing and shelf space allocation reinforce perceived differences between brands. This is often the case with packaged goods, where shelf space allocation is a cue for purchase decisions, and brand differentiation is often accompanied by a price markup. Taken together, these factors mean that, counterintuitively, when two products are physically undifferentiated but strongly branded, they are more likely to be perceived differently in local markets.

This leads to two surprising conclusions about the marketing of consumer packaged goods. The first is that when products compete side by side, profits in undifferentiated products are typically higher than in moderately differentiated ones. Second, selling goods through expensive retailers may actually work to the advantage of packaged-goods manufacturers. This is because the high positioning costs they impose act as a deterrent to similar brands seeking equal market share with the leader.

Professor Bronnenberg’s analysis suggests that “firms selling undifferentiated goods should focus on defending their strong markets, and stay away from attacking in markets where a competitor leads.” This means that firms stand to gain most by defending their position in markets where they have a historical advantage, accepting that they are disadvantaged in markets where they do not have a long history.

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