IMKTG REPORT January 21 2003

al berrios & co. IMKTG REPORT 01.21.03: The Consumer Edition

THIS WEEK'S CONTENTS ARE:
[1] JUST SAY IT: Consumers: Your Most Important Business Partner
[2] BRANDSTRATEGY: Is Safety Valuable?
[3] CONSUMERFOCUS: Consumers Abroad
[4] MEDIA (Guest Writer, Shane Mora): The Convergence of Brands and Entertainment
[5] MANAGEMENT: Conditioning Consumers to Pay Higher Prices

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[1] JUST SAY IT: Consumers: Your Most Important Business Partner

>> "As a general rule, we don't believe the way to introduce new technologies is to have it mandated," said Ford spokeswoman Sara Tatchio. "We believe it should be customer driven" -- in response to the National Highway Traffic Safety Administration announcing to consumers that, based on their most recent study, SUVs are the most dangerous class of vehicles and should not be bought.

Good morning execs,

SUVs are deathtraps. It's disturbing how much information is hidden from the average consumer. But what's even more disturbing is how many consumers don't know they can seek information, nor how to question what they find. Last week, we discussed the state of news as being unsure about what to offer its viewers. Amongst the many topics covered was that people really don't ever question why until it's too late. This week I learned some pretty disturbing facts about the automotive industry's stranglehold of politicians, media, and advertising agencies involved in the widespread collaboration of SUV sales, a vehicle so dangerous, one of it's top designers won't even drive one. In their defense, though, not all cars are deathtraps. However, I continue to be amazed at consumer ignorance when it comes to giving their trust to brands. I have spent years telling executives that consumers can help you by telling you what they want, but because it's easier to control information, why bother asking? In order for consumer feedback to be a basis on which to make business decisions, it is necessary for businesses to trust consumers. This lack of information exchange works both ways. Executives are human, too, and it is almost impossible, whether intentional or not, for them to have a full grasp of every aspect of their company, including why their products don't sell, despite spending $50 million on ads. In this age of information, he who has it, wins. The customer wants it. The executive wants it. And yet, they both hide it from each other in some ironic attempt to never give each other what the other one wants. In the same way in which you and your partner have stayed together to build a home, by not hiding anything from each other, is the way in which you and your customer (your most important business partner), will develop a loyalty that supercedes any ad campaign. The challenge is in finding a viable channel through which consumers can get a transparent view of your brands, and through which you can get a transparent view of the way they think - simultaneously in real time. That channel is al berrios & co.

A consumer-heavy edition today, we're going to discuss the value of safety, strategies for consumers abroad, our take on the continued integration of commerce and content, written by our very own Shane Mora, Director, Media practice, and strategies on getting consumers to pay more money for your brands. Enjoy the rest.

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[2] BRANDSTRATEGY: Is Safety Valuable?

Imagine the chief of a major regulatory body telling consumers that one of your most profitable products can kill them. What do you do? When Johnson & Johnson discovered some madman was injecting poison into their Tylenol, killing consumers, they responded so swiftly, they're still #1. When Coca-colas were killing Europeans, their response was so weak, their former chairman/chief executive lost his job. And now, as Jeffrey W. Runge, head of the National Highway Traffic Safety Administration tells drivers that SUVs are three times more likely to kill them than a standard car, Ford says too bad (claiming that if consumers really wanted safer SUVs, they'd see an increase in expensive safety options available at purchase) and GM says oh well. This follows another recent study showing how fancy gadgets in cars also cause increased percentages of deaths. Dying, it seems, is not as big a consideration as price for the 17 million buyers of new cars last year, especially for GM, who's deep discounts trounced competitors in 2002. So, now that we know auto consumers are actually price sensitive (who knew?), does this mean that the big 3 US auto makers should address SUV dangers by making them safer (and consequently increasing their costs), or continue producing SUVs as is, without any consideration of consumer backlash?

BOTTOM LINE: Whether you're keeping track or not, consumers have been trending towards smaller, more fuel efficient autos, especially younger consumers. SUVs just don't do it for them. The big 3 have known this, but refuse to accept it (GM Vice Chairman and design chief Bob Lutz was recently quoted as saying that GM's research actually shows young consumers loving and buying SUVs.) However, since manufacturers and their dealers don't advertise the dangers and inefficiencies of using their products, consumers may not be entirely informed of their shortened life expectancy or higher lifetime costs when purchasing an SUV. What if consumers knew? Perception, my friends. Even if they knew, would they care? Have you ever gotten inside one of these monster SUVs? They feel like they can intimidate the heck outta puny cars. And in fact, not only are these characteristics hyped in ads and at retail, but car drivers in collisions with larger SUVs are three times more likely to die than the SUV passengers. Consumer perceptions of the dangers inherent in something as reliable as a US automobile is difficult to alter with news coverage. It takes two significant things: 1) massive advertising spending (similar to that being pursued by anti-tobacco marketing) and 2) a massive change in culture, such as the aging of SUV fans, and the growing up of a younger generation not completely impressed by owning an SUV. Even with the incredible incidents involving Ford and Firestone tires, massive anti-SUV advertising hasn't taken off (although some fringe groups are currently making attempts), so don't count on that happening. But a change in culture is happening. Everything from how consumers consume media to the preferences in simpler material possessions, Americans have changed. al berrios & co. has been tracking all these changes and recommends to the Big 3 to 1) improve options pricing strategies, 2) improve tracking of emerging consumer trends and incorporate it into design, not just advertising, and 3) improve tracking and management of consumer risk, particularly reactions to safety and fuel efficiency concerns.

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[3] CONSUMERFOCUS: Consumers Abroad

How do you effectively do business with consumers in another country when the government 1) won't protect your intangible assets and piracy runs amok, 2) seizes your factories, or 3) is so corrupt, it allows local competitors to monopolize your market? There is no easy answer. Lobbying that government is slow and cumbersome, while your competitors are stealing your profits. Illegally conducting business is not even a consideration. Perhaps the answer lies in understanding the value of your brand to those consumers.

BOTTOM LINE: By decreasing the value of your brands (i.e. lowering prices, limiting innovation and choice, minimizing utility of your brands), piracy may decrease, governments won't really have a reason to seize your assets, and competitors will leave your brands relatively alone as you don't pose serious competition. So why bother entering a market if it's not to make money? What many companies don't realize is that in emerging, brand-starved, economies, too much of a good thing can be disastrous. These consumers may not be accustomed to choices, and when you enter a market with your brand-new, flashy products, it can easily gain all of the attributes of value, even though it's a household product in your native country. By tailoring your brands more to local brands, perceptions remain relatively unaltered, until such time you have an opportunity to safely introduce higher margin products.

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[4] MEDIA (Guest Writer, Shane Mora): The Convergence of Brands and Entertainment

This past year the word "product placement" has been somewhat of a buzzword in the ad world. Product placements have been seen in movies, reality TV, sitcoms, video games, and even cartoons with one premise: expose your brand to a captive audience when their eyes are surely glued to the screen. For some old dogs, this is no new trick:

> In 1982, Reese's Pieces negotiated an appearance in "E.T." and managed to boost sales by 65%;
> In 1990, Budget salvaged a suffering truck rental business when John Candy and his band cross-countried in "Home Alone";
> In 1993, Gene Hackman advises Tom Cruise to "grab a Red Stripe," and sales increase by more than 50% in weeks;
> In 1995, the BMW Z 3 appeared in "Goldeneye" making it one of the most successful new car introductions ever;
> In 1997 cartoon makers drew a Chanel perfume shop in the Fox Animation of "Anastasia";
> In the 2002 release of "Spiderman" in which Cingular Wireless had a prominent billboard in the Times Square scene.

These past successes do not promise a model for results every time. With the advent of PVRs, digitally inserted images, and ad-skipping technology, there has been a recent aggressive surge of product placements and commercial free programming in the eternal quest by advertisers to saw off that damn opposable-channel-surfing-thumb! The risk you as advertisers face is in not understanding how much forced-fed advertising can a consumer take without backlashing? Inevitably, greed and poor creative executions will manifest in poorly blended product placements. This loss of realism and creativity insults viewers who are increasingly noticing too much advertising in their content. And the more intrusion they perceive in their content, the harder it will be to win them back in the future. Programming and products alike can potentially suffer.

BOTTOM LINE: Annoyed by poor integration, viewers won't stay to watch the programming where your brand is appearing. The risk that viewers will associate negative feelings toward your brand increases. And at that point, you've failed to convince your consumer to buy your product and maybe even forever: "I really liked American Idol, but Coke turned it into a 30 min. commercial, it's so distracting! Now I enjoy Pepsi while I watch Joe Millionaire." Ad Age reports that 52% of today's consumers are worried by commerce-content crossover. However, looking at the past, there seems to be a formula for success in production-based marketing: 1) respect the valuable time viewers give to programming by integrating brands in a tasteful manner; 2) plan your efforts carefully to portray realism; 3) avoid programming that is cluttered with product placements; 4) you can get the most mileage out of your placements by tying them to sweepstakes, contests, and local market promotions. Not being able to please all of the people all of the time doesn't mean you should give up trying. We should never jeopardize the value of a brand.

READ MORE:
http://www.cnn.com/2000/SHOWBIZ/TV/01/25/digital.inserts/index.html
http://www.businessweek.com/1998/25/b3583062.htm
http://www.usatoday.com/tech/techreviews/games/2002/1/30/spotlight.htm

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[5] MANAGEMENT: Conditioning Consumers to Pay Higher Prices

How much is too much? In 2000, New York City theatre chains took the risk of driving consumers away by raising ticket prices 15% to $10.00. In cities like Chicago, a night out on the town has increased as much as 20%. Everything from tipping to clubbing has slowly been increasing their share of consumer's discretionary income. But can brands increase prices at will? Classic economics says that in a perfect economy, with all goods identical in quality, and everyone having the same information, everyone can make money by keeping the price the same. Even a penny increase in price will result in an entire inventory not being sold. And a decrease will result in the exact opposite. But since we're not living in a perfect economy, the only ways to condition consumers to pay higher prices has been monopolizing a market, brand differentiation, industry-wide increases in prices, or inflation. Since monopolies are illegal, and brands rarely control what an entire industry does (Wal-Mart being a notable exception), and inflation can potentially eliminate demand in a product, the best weapon is to increase the perceived value of a brand, consequently convincing certain consumers to pay a premium for it. But here's another possibility: intentional commoditization of your product.

BOTTOM LINE: Let's assume I sell scented candles. A pricey item on any retail shelf, I decide to discount my candles 10% every period. With every price decrease, my sales increase and my production costs decrease. The increase in my inventory offers convenience. And as long as my quality and satisfaction is maintained at a competitive standard, recommendations follow, increasing the perceived value of my candles and consequently decreasing my need for expensive advertising. The lower my costs, the more I discount, until ultimately, my product is so widespread and commonplace, it becomes commoditized, with growth opportunities now attainable during holidays or the product is altered. It is by this strategy, that I can condition consumers to pay more for every additional added benefit to my candles, such as long-lastingness or enhanced scents. My low costs give me competitive advantages and ultimately a greater share of consumers' income. Want more proof? Look no further than Dell Computers. They charge a premium for the choices they offer consumers in the final assembly of their commoditized computers.

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Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

(c) 2001-2005. All Rights Reserved. al berrios & company, inc. Published by al berrios & co. This Report may not be reproduced or redistributed in any form without written permission from al berrios & co., subject to penalty.

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