MARKETING CHALLENGES IN MONOPOLISTIC MARKETS

MARKETING CHALLENGES IN MONOPOLISTIC MARKETS

Monday, 31 August 2009 06:44

One of my clients is a classic success story. Let us call it Brand-I (BI) for the sake of this document. In the short period of 15 years, BI has created and dominated the whole category of instant pasta in Saudi Arabia. Today it commands a 96% + market share, 70%+ trial rate, 100% unaided recall and almost perfect distribution coverage. Numbers, any company would be proud off. The nearest competitor has 2% market share. In short, BI is operating in a near monopolistic market. What do you do with a brand like this which has very little to gain but a lot to lose? The situation is not unique to BI.

It is a serious problem for all brands operating in monopolistic market situations. Monopolistic markets present their own marketing challenges. Some of the key challenges are:

1. Cost of growing the market: In a competitive market the cost of growing the whole market is shared. Assuming there are six competitors in a particular category and each competitor undertakes two initiatives a year, then a total of twelve different initiatives can contribute to growing the overall market in any one year. And the cost is shared. In a monopolistic situation, such as the BI scenario, the entire cost of developing the market lies with one player.

 2. Lack of ideas: The 'big numbers' that monopolistic companies see tends to breed complacency and give a false sense of security. It is assumed what has worked before will work again. Executives draw comfort from the numbers and lose the appetite to experiment. They look at the natural growth of the market and if the product's overall volume grew in correlation to it, they take satisfaction in the overall numbers.

3. True brand strength: Most of the market's development is done using price as the prime lever - either through direct discounting or through volume offers (presented as 'extra value'). Every time BI hits a sales plateau, it has attempted to attract new users by increasing the size of its bulk offering discount eg. a 20 pack carton increased to 30 pack. The price of 20 pack was $20 but the price for 30 pack carton was only $28. Overall price increased but consumers paid less per pack. This strategy has worked to date, but price cannot be reduced indefinitely. The brand needs to be bought on strengths other than just price. The question is - what is the real value of the brand under these circumstances?

4. Lowered defense preparedness: Lack of competition is a very serious marketing issue in monopolistic situations. Since true brand strength is not known or, at best, is assumed (companies generally peg it at a very high level), it leaves them open to attack from a well organized and cash rich challenger. This catches the company unawares.

5. Cash cow effect: Since there is virtually no competition and economies of scale have been reached, companies with such dominant market share are cash cows. Companies have few options at this stage :

a. Company partners/ shareholders start milking the company. This is especially true in partnership companies.
b. Companies diversify into unrelated areas eg. BI trying to leverage its name in pasta sauces.
c. Companies start diversifying into new geographical markets to find new users.
d. Companies using surplus cash from one operation to sustain operations in other markets.

6. Brand building: The company starts exploring ways to increase volume and revenue, rather than looking at building the brand. The focus shifts to trade, rather than the consumer. This is a serious danger, because in this instance marketshare does not automatically translate into a strong brand. The acid test comes when competition enters the market and the monopoly player often sees a dramatic loosening of the bond between its brand and consumers!

The problems for companies in monopolistic markets emerge from two ends:
- Determined competition; and
- A stagnating growth curve even when price is dropped further.

Of the two, determined competition is relatively easier to handle. Let us look at some of the strategies the company may use to fight a determined competitor:

1. Sales and Distribution: This is generally where the response begins because this is where the heat of competition is felt first. The company can:
a. Offer better margins to distributors and retailers
b. Offer bulk discounts
c. Offer loyalty programs
d. Use its distribution strength to muscle out competition from shop shelves

2. Marketing: Only once the market stops responding to sales and distribution tactics, do classical marketing efforts begin.
a. Advertising investment increases;
b. Extra value offers like '15% more' follow, and lastly;
c. Big and costly promotions come in.

3. Product Development: While the marketing war is on, the company also starts looking into product enhancements and new product launches. This is generally the last option because it is the most expensive and time consuming option. Catch-up and real innovation can prove difficult and product development takes time. Further there is no guarantee that innovation that gets the company really excited will get consumers excited. Innovation is always a risky business.

A stagnating growth curve is a more difficult issue to handle. Some of the key reasons for stagnating demand can be as follows:

There are no more users: This is generally not true. There are always new users. The question is, what is the cost of getting them? Let us look into the case of BI. 28% of the population has not tried BI. This looks like a potential market. It could be! Let us look into it a little deeper. In this 28% there will be:
a. People who do not like the very idea of pasta
b. Lapsed users - who have outgrown the taste of instant pasta
c. Users of competitor's products (4%)
d. People not reached by distribution coverage
If we take out these four segments, what is left is a very small potential of new users. So the issue boils down to.what is the cost of converting them?

People are not consuming enough: This is most probably true. Let us dip into the case of BI once more. The average consumption of BI is 24 packs per annum per person, or 2 packs per person per month. Is this consumption low, high, or just enough? A very difficult question to answer. As marketers, our aim is always to increase consumption of a particular product. This is especially the case in a monopolistic situation, where share cannot be gained from competitors - increasing consumption is the only option for growth.

Let us try to tackle these two situations in their respective order:

New users: If we agree, in principle, that new users are always there, let us look into some ideas for acquiring them.

1. Increasing distribution: In a typical FMCG operation, sales and distribution is the single biggest cost center. Every additional mile the company has to cover to reach consumers increases its costs. Some of the typical costs that go up are freight, fuel, vehicle wear and tear, salesmen overtime etc. This directly impacts upon the bottom line. One can pass some of these costs onto wholesalers and distributors. If the product is really fast moving, distributors may cover these costs with their margins, but if not and more likely - distributors will demand that these costs be covered. Whatever the case, if the company does decide to increase distribution, it is likely to lead to a cost increase.

2. Exports: With the emergence of WTO and various regional trade agreements, exporting becomes an attractive option - as long as quality standards are adhered too. Though an expensive way to get new users in the short run (sales & distribution costs as well as marketing expenses can be really high), it can prove highly profitable in the long run. As volumes build up, costs go down and revenue increases. It opens up new markets, encourages the company to invest in new product development and may provide tax advantages.

3. New uses:

4. If we look at the above matrix, any experienced marketer will agree that getting existing consumers to move to new uses is a huge task. Consumers do not like to move out from the comfort zone they develop with a product. The first task with new users is to try to get them to use the product for its original use. Consumers will often associate products with a particular use, so where a company tries to attract new users by repositioning its product for new uses, it must be careful not to alienate existing users.

Increasing consumption: Now let us look into some options for increasing consumption.

1. New uses: New uses are the first option that any marketer looks into. It is assumed that if we give consumers new ways to consume the product, it will lead to increased consumption. Well in certain cases it does. Programs like recipe clubs work wonderfully for food related categories.

2. Packaging innovation: This is one area that has been perfected by soft drink companies. Sodas were traditionally available in glass bottles. By putting sodas in cans and self service dispensers, soda companies were able to increase the consumption. Sodas started being consumed even at times when they were traditionally not being consumed. Today automatic self service dispensers can be found in almost every nook and corner of big cities. BI also increased the consumption by putting the instant pasta in bowls and cups. This lead to an increased out-of-home consumption of instant pasta. Though both the examples are from different category, packaging innovation does lead to increased consumption. This is also something simple to do because most of the variants are under the company's own control.

3. Line Extensions: A company operating in a monopolistic market rarely has an incentive to upgrade its product offering because it is the only player. Cash cow psychology kicks in and companies see no reason to invest. New product development is expensive. But line extensions are relatively easy. Toothpaste, hair dye, cosmetic companies are generally masters of this strategy. They keep on launching new variants. The basic brand values remain the same but every new variant gives incremental sales because of new trials. Though it can be argued that line extension works in competitive environments, it can also work in monopolistic markets. New variants can be used to gain the interest of lapsed users as well as new users. Plus trial by existing users adds to the overall volumes. The problem with line extensions is managing expectations - both that of the company and consumer. New Coke and Pepsi Blue are two excellent examples of products failing to deliver on consumer and company expectations.

4. Competition: Competition is the most successful means of developing markets. If you don't have competition, create competition! Launch a B brand, give it to a separate marketing and distribution teams with separate targets and budgets. Internal competition works because both teams work to out-perform the other. Out performing means more ideas, more initiatives.

5. Long term loyalty promotions: This is something one rarely sees in the FMCG category because of the sheer volume of consumers and the data that one needs to track. The very thought is daunting. But with a little insight and out-of-the-box thinking, this is possible. The key issue with long term loyalty promotions is that rewards need to be of a high perceived value and should change periodically so that consumer interest is kept alive.

6. Repositioning: This is a very complicated exercise for a variety of reasons:

a. Time: It can take a long time to happen. Repositioning is an exercise in subtlety itself. There is a always a high risk that consumers won't accept it. Imagine Red Bull trying to become Pepsi. Red Bull is an energy drink and will remain so in consumers mind. Repositioning it like Pepsi will be rejected by clients.
b. Key Managers: In most professional companies, managers frequently move on because of various reasons like promotions, new assignments, death etc. Movement leads to a knowledge gap and new agendas. New managers have their own way of looking at things. Institutional knowledge and valuable ideas tend to get lost. Unless and until the repositioning exercise is well documented, and roles and responsibilities clearly defined for each participant, consistency of key managers is an area of concern. The flip side of this argument is that new manages bring in new thinking. True.- they do - and this will be valuable if they are also guided by a repositioning document, so that their thinking remains focused.
c. Repositioning against what: This is another crucial issue. Imagine instant pasta trying to reposition itself as a complete meal to compete with regular pasta. In Saudi Arabia the instant pasta market is only 9% of regular pasta market. So it may appear that repositioning instant pasta against pasta will lead to higher growth. But if we dig a little deeper, it might not be so. The only things in common between instant pasta and regular pasta (spaghetti), is that they are both made from flour. Everything else is different. Regular pasta is all about meals, health, nutrition, a housewives involvement in her family's health, entails time to cook, has cheese as one of the key ingredient, has a rich connotation etc. Instant pasta is exactly the opposite. It is all about being instant - nutrition is not a core association in consumer's minds. Rather it is positioned as a snack, takes hardly any effort to cook and above all is cheap. There is a huge perception barrier to overcome to make instant pasta into a meal.
d. Instant results: With the emergence of quarterly results, the focus is on quarterly sales. The focus is on quick fixes. If an idea does not work in one quarter or two at most, it is dropped. Repositioning exercises take a long time to deliver results. Eg. In the late 70's and early 80's shampoos were new in India. People used bar soap to wash their hair. Since volumes were low, prices were high. The communication themes were around "wash your hair twice a week with shampoos". In the 90's as volumes picked up, shampoo usage was promoted as "everyday". Today consumer habits have changed and bar soap usage has become negligible. This is a classic repositioning example in which bar soap was repositioned out of the market, but it took time.

Repositioning can increase volumes over the long term, but it requires stability and commitment over a long period of time.

Conclusion:
For the company operating within a monopolistic market, no one strategy in isolation can guarantee volume growth. A company needs to experiment based on its capabilities and the identified opportunities. After all, the reality is that introducing fresh initiatives within monopolistic companies, is a little like teaching an elephant to dance.

This article was written by Sanjay Kumar, an advertising professional with Oglivy who brings a depth of understanding of the Indian, African and Middle East markets. His interests lie in the area of practical marketing and communication strategies.

Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Keep yourself updated with our FREE newsletters now!