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Brand Extension for Reducing Risks - Essay Example

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Brand Extension for Reducing Risks

This dilemma has long stared the food industry in the face, this sector being made up mostly of small and medium-sized companies each with 20 or so employees. (The likes of McDonald's, Kentucky Fried Chicken and Kenny Rogers are the few notable exceptions.) Even so, the food sector is perhaps the most profitable and widely distributed industry in the world with, it is said, one food establishment to be found in every street corner. Economists have come to think of this industry as uniquely recession-proof, catering as it does to the most primal urge of man - the appeasement of hunger. During an economic crisis, people may forego acquisition of cars, appliances and cut back on their expenses for clothes and the like but food establishments will always draw them in. As a gold mine rich in business opportunities, it is said that all the food companies have accomplished at present is scratch the surface of this bottomless industry.
Because of the food companies' size, the food sector has been described as a low-tech industry, with the lowest research-and-development to sales ratio. The industry's R&D to sales ratio is pegged at an average of only 1 per cent as against 12 per cent for the drug industry, 8 per cent for electronics and 4 per cent for motor vehicles (MAPP Working Paper 38, EU Concerted Action). This leaves much to be desired since R&D is crucial to achieving success in innovation, which in turn is necessary for making any company competitive. The said European Union study noted that a modern supermarket carries about 10,000 to 15,000 products at any given time with a yearly turnover of 10 per cent. One United Kingdom food retailer alone successfully introduced 1,500 new own-label products in 1993 to place the company ahead of its competitors. The conclusion is that introduction of new products is an "essential element of competition between food companies" and that innovation definitely gives them a competitive edge.

Still and all, food companies operating on the economy-of-scale basis simply cannot afford the risks involved in diversification and innovation in the traditional sense. The advent of the brand extension concept gave these companies a way out of their problem by enabling them to develop new products without the attendant risks and extra costs. With brand extension, food companies found an effective strategy to reduce the risks of new product development.

Brand extension is the use of an established brand name for a new product that is intended for another product category or class (Keller & Aaker 1992). Simply put, a brand extension is a product that carries the name of a known brand even as the new product fills a market need different from that of the parent brand. The idea is to ride piggyback on the name established by the parent brand so that the new product avoids the extra costs and risks inherent in coming up with a totally new consumer product. An entirely new product without the "symbolic" meaning of brands (i.e., company prestige, status and personality) to prop it up would be difficult to sell otherwise (Czellar 2003).

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Companies that choose to stay in one place and make do with its signature products, proven moneymakers though they may be, will run into trouble if not go out of business sooner or later. Diversification and innovation are imperative for business growth and expansion, and this means coming up with new products to boost a company's product line…
Brand Extension for Reducing Risks
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