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Anyone who has been to a trade fair, as those taking place usually on weekends in villages, small towns and some big cities, would know the kind of treasure goods one can find there: woodcraft decorative figurines (e.g., animals), dolls and puppets, handmade kitchenware, glassware (sculptures, vases etc.), knitting and embroidery articles, fashion accessories, and much more (including some local food products). A great part of the products sold in the fair are handicraft made by local and regional residents who present their creations to visitors. Often it is possible to find in such fairs also vintage items from years past (e.g., cameras, radio sets, coins). Now, consider shopping, or hunting, these kinds of treasures in an online marketplace.

Etsy offers an online marketplace similar in concept as described above: it is a special type of e-commerce website for handcrafted and vintage goods, where the sellers are small and independent entrepreneurs who interact directly and sell their merchandise to buyers in the virtual marketplace of Etsy, and then ship the sold goods to their destinations. So a buyer will not find there food products (e.g., homemade jams or local cheese) but he or she can find on Etsy.com a great variety of handmade and vintage goods beyond what is usually presented in any single physical fair (e.g., larger items of furniture that are more difficult to bring to a physical fair). It is not the same experience as strolling between counters in a physical fair, looking for ‘treasures’, but browsing handcrafted and vintage goods in an online marketplace like Etsy offers its own advantages and opportunities in  (almost) immediate access.

Etsy hosts 2.3 million active sellers (all must be registered members) and 47.2 million active buyers (membership is voluntary) as of the end of June 2019 (an increase of 17.7% and 19.3%, respectively, from same period last year). On Gross Merchandise Sales (GMS) of $2.1bn made in its marketplace in the first half of 2019, Etsy has generated a revenue of $350.4m (74% revenue from marketplace fees and 26% from seller services). While GMS increased by 20% from H1/2018, revenue increased by almost 40% (Etsy, Press Release, 1 August 2019). The company provides a platform for a community of sellers to trade their handcrafted creations or vintage goods worldwide. The ‘community’ is a cornerstone of its whole activity. Etsy also cherishes interactions between people (“connecting humans”) as the basis for commerce — its headline calling is to “Keep Commerce Human”. While the company is aiming to maintain the intimacy, reliability and convenience customers expect from a community, it wants to provide these benefits with the efficiency of a large corporation [Fortune: A; Etsy: About]. Making those ends meet seems like a non-negligible challenge.

Shopping for handmade products or vintage products has a special motif: it often gives consumers the feeling of treasure hunting. The pleasure in finding sought-for products as such only increases as they become less common in the world of modern (automated) production and marketing. The product item has to be useful, yet an emotional appeal can be further more important as a driver for buying the product.

Handicrafts are desired for being perceived authentic and genuine. People value the talent, skills and effort invested in their making. They like the human touch in both making the product and personally selling it to them by the person who made the product. Moreover, many of the handmade products are artisanal (e.g., woodwork, glasswork) and may exhibit an exceptional quality. Buying such a product is often considered a gesture of appreciation and a way of making a contribution to the creator.  Vintage products (especially from 1920s to 1960s) may hold a somewhat different attraction: They are associated with the past period of time they originate from (e.g., nostalgia, personal memories from childhood); different, possibly higher standards of quality; different ways of doing things (e.g., listening to music, cooking, taking photos); and vintage ‘treasures’ are also likely to be much less available in the market and even being rare. Vintage products may be handcrafted but that is neither a requirement nor their main source of value to the prospect buyers. (Note: Handcrafted artefacts may be made using just low-tech machinery and tools).

The pages on the website of Etsy appear spacious and bright. Items (text bodies, pictures) are placed over a white background, and the pages do not seem to be condensed and crowded with them. Some areas may be painted in pastel colours (e.g., as background for text on the homepage). This design endows the website with a soft and light feeling, and makes it easier for the eye to move around and observe product listings, pictures and other information on pages. There are very few product listings with images on the homepage, used for illustration rather than out-right promotion; a ribbon with images of products most recently viewed by the visitor appears on top of the homepage and on other pages, exercising relevance and convenience.

Six main categories are displayed in the top menu: Jewelry & Accessories; Clothing & Shoes; Home & Living; Wedding & Party; Toys & Entertainment; and Art & Collectibles. A drop-down menu with sub-categories can be ‘pulled’ from each of these main category items. However, on category pages the visitor also can see tiles for subcategories with sample images, and a sample of product listings in the category. Visitors can narrow down their search by using a key list on the left-hand side of the screen. For any category and sub-category, a visitor-shopper can choose to see all available products in that class or select to focus on either handmade or vintage products in that class (an additional item on the top menu labeled Vintage allows quick access for those interested only in vintage products).

Three basic information elements appear on each product page: a title describing the product, price, and a photo image. In addition, three more components are noteworthy: (1) Handmade products (e.g., a TV stand with cabinet, mid-century modern, made of oak wood) are accompanied by a description on materials and ways of their application, modes of use, design trend, dimensions, etc. For vintage products (e.g., antique Teddy Bear from the 1930s, Dutch Arthur van Gelden), the viewer may find a background story on the artefact, materials, history, any versions if available, etc. (2) Sellers offering their own handmade goods may provide options for personalisation (e.g., first name, a phrase, and photograph in picture frames and displays) and customization (e.g., type of wood, surface finish- colour and texture , size, and extra features for furniture). Furthermore, additional images may show the product from different angles and in different versions that can be customized to the preference of the prospect buyer. (3) The page is set to include reviews contributed by buyers regarding the product purchased and any aspects of their relationships of exchange with the seller.

The complementary information in words and pictures may fulfill an important role in persuading visitors who view a product page to complete a purchase order. Giving a visitor the flexibility to make adjustments (modest as they may be) to the product to better fit his or her needs and preferences can only strengthen the shopper’s conviction to buy. Victor Yocco (‘A List Apart’, 1 July 2014) well-explains in his article key implications of the central and peripheral routes to persuasion (in the Elaboration Likelihood Model [B]) for e-commerce websites. He stresses the importance of including cues that may be applied at different levels by visitors who browse pages, process and evaluate product offerings through a central route or peripheral route. In the case of Etsy, we may distinguish between visitors who get their impressions and make judgement based on the images and reviews, and perhaps use price also as a cue for quality (peripheral route), and those visitors who extensively and carefully consider the technical details and background of the product offered, and may also inspect the images provided in greater attention (central route).

Etsy enables prospect buyers to engage in conversation with sellers and make queries before a purchase, and it encourages such interactions (e.g., buyers tell in their reviews about satisfying enquiries they have had with sellers who were particularly helpful in their responses). Sellers can use a community forum to consult and discuss any matters that concern their activities from craftmanship to e-commerce. Furthermore, Etsy publishes workshops it offers to sellers in different disciplines of craftmanship, and a special section of the website is dedicated to craft supplies and tools, thus extending its hand to help entrepreneurs-sellers in their creative work. Shipping, however, is in the responsibility of the sellers, and trust between them and their buyers-customers can be particularly crucial at that stage of the exchange.

Some recent initiatives taken by Etsy could be a more delicate matter and a source of friction. For instance, the company started encouraging sellers in the US to offer free shipping in the country. It provides some guidance and assistance in shipping, but a question hangs as to how Etsy actually facilitates and makes it easier for American sellers to offer free shipping (e.g., does it give any ‘subsidy’ to the seller, or should the seller raise the product price, or absorb the extra cost alone?). Without practical support in shipping, the legitimacy of asking sellers to eliminate shipping costs is weak. Etsy has also taken action to improve the payment functionality. At first it was a matter of ensuring to buyers the confidentiality of their payment information. Next, however, sellers were required to use only the payment platform of Etsy. That has allowed Etsy to collect commissions that had previously gone to other payment providers. While this initiative helped in standardizing the checkout procedure and improved customer service, it also led to raising the commission rate sellers are charged from 3.5% of revenue per transaction to 5% [A]. A third initiative involves a new programme of advertising for sellers in co-operation with Google — sellers who join in an advertising plan can get their product offers promoted or prioritised inside the platform (e.g., in displays of product listings) and outside (i.e., in Google search results). This would create two classes of sellers that did not exist before.

Etsy under the leadership of its CEO Josh Silverman (since 2017) is set to put more emphasis on quality over price, reports Wahba in Fortune. At a time when online retail is primarily concerned with low prices and price promotions, it is suggested as remarkable that Etsy succeeded in cultivating loyalty. First, by its focus on handcrafted goods and small businesses, Etsy succeeded in making its marketplace feel like a community, but it still aims to deliver with greater business efficiency. Second, Etsy intends to give greater weight to higher-priced and better-quality products in search rankings (a change from how its search engine worked so far) with an aim to elevate the image of Etsy’s brand to an upscale status. Etsy also expects to encourage shoppers to level-up their purchases with complementary products (e.g., if one wishes to buy a lamp for a desk, consider also buying a desk). [A]

Etsy offers a special type of online commerce: bringing the richness, spirit and originality of a trade fair for handcrafted and vintage goods to consumers’ homes. It is not only the attraction of the goods, but also the experience of browsing collections and finding precious treasures, and the interaction with small businesses of independent entrepreneurs and creators (‘people more like us’ the shoppers might say). Etsy has seen success in improving its business performance since early 2018 and is ambitious to move ahead in strengthening its online marketplace. However, Etsy will have to take extra care not to lose the friendliness and comfort of its marketplace and community, for the pleasure of treasure hunting.

Ron Ventura, Ph.D. (Marketing)

 

Note:

[A] “Crafting a Comeback at Etsy”, Phil Wahba, Fortune (Europe Edition), August 2018 [Global 500], 180 (2), pp. 31-33

[B] “Central and Peripheral Routes to Advertising Effectiveness: The Moderating Role of Involvement”; Richard E. Petty, John T. Cacioppo, & David Schumann, 1983; Journal of Consumer Research, 10 (Sept.), pp. 135-146

 

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Consumers may develop attachment to product objects based on things such as attributes, experiences, or values they share. The emotional attachment comes about due to a personal meaning the product has for the consumer that is unique and special in some way. The concept of product attachment is well known in marketing and consumer behaviour, but it has been a difficult challenge to plan for attachment and to implement during the product design process. The researchers Orth, Thurgood, and van den Hoven (2018) explored the prospects of creating products that are designed to connect with consumers based on their self-identities and life stories [1].

In thinking about self-identity, we can apply different means by which we perceive and define ourselves as persons (“who I am”). The process of construing one’s identity may start with his or her personality traits (i.e., self-image), but it can be expanded by adding beliefs, goals and values in life, an overall view of life and a look for the future (identity may also be expressed through salient group affiliations: social, professional etc.). When a good match of a product with any of those aspects is found, it may become the foundation for a consumer’s attachment with the product. However, there is another avenue for forming product attachment by means of connecting through episodes and elements in one’s life story or narrative — experiences and special moments (memories), people, places, and other objects (e.g., ties to existing possessions).  Orth, Thurgood and van den Hoven follow this avenue to look for opportunities to create product objects that designated individuals would meaningfully connect with. They state their objective as “purposefully create meaning by evoking meaningful associations” from one’s life narrative or sense of self.

In a marketing context, brands rather than products per se would be the appropriate targets for attachment. Brands identify products. Yet furthermore, a brand, as an intangible entity, may hold associations beyond attributes linked directly to the physical product that the brand name is assigned to; the associations can extend to brand personality traits, values, heritage, and more. The quality of an attachment may be assessed by (a) the brand-self connection that is built (i.e., how well the brand’s associations agree with and corroborate an individual’s self-identity to the extent that the brand becomes part of one’s definition of his or her identity); and (b) the prominence of brand associations in memory (e.g., how significant they are, that is, they come instantly and automatically to mind) [2]. Orth and his colleagues, who focus on product design, do not step-up from the product- to the brand-level, although they do refer to aspects underlying attachment that extend beyond the materiality of the product.

The researchers applied a three-stage methodology: 

Inspiration is derived from the life stories of consumers through in-depth semi-structured interviews (with three participants) —  participants told the researchers about their life stories, including people and places that were involved, memorable experiences they have had, possessions they cherish, as well as their views on physical product properties such as colour, texture and materials.

Creation of artefacts (products), designed to capture associations linked to valued and meaningful experiences, people, places, etc. in the memories (life narrative) and sense of self of the consumers-participants. Two artefacts were especially designed and made for each participant. The objects stayed with participants for two weeks.

Evaluation of the meaning, value and emotional tie each consumer-respondent ascribes to those two artefacts, designed-to-fit associations from each one’s life experiences and self-identity (note that the participants were not told that the objects were ‘designed-to-fit’ personally for them). As a reference, each respondent was also asked about his or her perceptions of and emotional ties to an artefact designed for another participant and to possessions they own which they regard as significant to them.

The results obtained by Orth, Thurgood, and van den Hoven were mixed. With at least one product-artefact they successfully captured the expected match in associations for forming an attachment; for other artefacts they partially captured the associations that would predicate an attachment (e.g., an attachment was formed but based on associations different from those expected); and in the case of at least one artefact, the design was evidently inadequate in forming an attachment (i.e., practically being a miss). The results testify to the difficulty of identifying and anticipating associations that will serve as the meaningful bridge for forming an attachment, even when quite detailed  information about the consumers to draw from is available.

Louise was offered a transparent candle cover (‘Diramu’) with silhouette of native Australian trees; the candle had a scent of smoky campfire.  It was intended to be reminiscent of her childhood in an area surrounded by bushland in Australia, where she had played frequently, but there was concern it would bring up less pleasant, disturbing memories of the struggle to keep bushfires away from her family’s home. Nevertheless, the designed Diramu managed to capture a ‘soft spot’ in the memories of Louise for bushfires (i.e., the bushfire was pleasant, not scary, and the candle’s scent had a feeling of home).

A partial success was obtained in cases as these: (a) Alex liked a porcelain decanter (‘Kiruna’) designed for him due to its fine aesthetics (attractive, elegant) and delicacy that he appreciates and favours.  But the decanter reminded him of the colours of Greece (white and blue) rather than his winter activities and skiing vacations with his children as intended. (b) Karen received a pendant necklace (‘Crater’) with a shiny anthracite coal that would resemble a gemstone. She found it ‘quite nice’ and she ‘quite liked it’. However, she grew no attachment to the object in spite of her affectionate memories of her father as a coal miner in England. The cue of coal failed to transfer the emotional significance regarding her father to the Crater artefact. The researchers admitted that they missed the completely functional attitude and emotional indifference of Karen towards objects, as they discovered it only in the evaluation stage.

The special world clock device (‘Globe’) prepared for Alex in conjunction with his many travels did not meet the expectations. Alex started developing a passion for travels during childhood in Australia and extended it to travels overseas in adulthood through his work; he likes connecting with people in different countries and collecting souvenirs (e.g.,  refined art objects, books and paintings). The Globe was made to show the names of places around the world (e.g., cities) at the time each location, according to its time zone, enjoys a Happy Hour for evening drinks. However, the name title of places turned out to be too weak as a cue to link to specific experiences. Alex commented that while many of the cities mentioned reminded him of some wonderful memories from his being there, “that thing doesn’t reflect those”. The clock design apparently also did not appeal to Alex (e.g., too simplistic, not to his aesthetic standards, and even stopped functioning after a while), leaving a negative impression on him.

The names as cues were probably too general and vague to trigger meaningful associations from the respective places; perhaps photographic images would have helped, but they too should prove personally relevant to Alex. Neither the informational cues (names) nor the design of the Globe artefact corresponded meaningfully with memories and associations of Alex from his travels, and thus according to Orth et al., it can be argued that the artefact was lacking authenticity for Alex.

  • Fournier (1998) studied the life narratives of consumers through in-depth interviews, though in her research the aim was to trace anchors for developing relationships between consumers and brands. That is, she learned from the products-in-use in the lives of three research participants about the roles that the brands of those products played in their lives and how bonds could be created with the brands based on the rich meanings they received [3]. The contribution of Orth and his colleagues is special in their attempt to leverage the information obtained about the life narratives of consumers into actual product objects designed specifically for those same consumers.

Realistically, companies cannot gather so detailed and personal information from too many consumers to enable them to design a product that will fit particular aspects from the life narrative or self-identity of each consumer. Orth, Thurgood and van den Hoven spoke to just three consumers and they had varied levels of success in anticipating the associations upon which attachment would be formed.

One direction they suggest, borrowing from previous research, is to create a set of optional product designs (versions) that would confer meaningfully to different target groups of consumers. In other words, each design could contain cues that any particular consumer may connect through to his or her idiosyncratic associations so as to develop an emotional attachment to the product object. This may suggest the importance that prevails in studying the lifestyles, values and psychographics of consumers (using surveys) in order to create the knowledge base necessary for designing personally meaningful product models. Nevertheless, this kind of information may never be as intricate and deep as the life stories studied by Orth and his colleagues. Finding personal meaning in products (and brands) could remain in the domain of the consumers based on what they know about themselves and their past experiences in life.

Another direction is to give consumers an active role in self-designing a product customised for each individual consumer who takes part in such a scheme. The consumer first has to choose what type of product is wanted; then he or she can choose features or properties (e.g., aesthetic-visual, functional) that may be perceived by each one as effective cues to trigger meaningful associations. The aim of self-designing a product in this context is self-expression and connecting to one’s experiences and self-identity, not strictly satisfying one’s utilitarian preferences. In typical schemes of mass customization consumers are constrained by the capabilities and willingness of companies to make the products of their designs. But in the age of 3D printing, consumers may gain greater authority, freedom and flexibility to design and create products to fit more closely the way they perceive and feel about themselves. Orth et al. put it this way: “Advancements in custom manufacturing technologies such as 3D printing provide growing opportunities for bespoke design practices such as those presented in this paper as an alternative to traditional mass production processes” (p. 101).

Orth, Thurgood and van den Hoven set two conditions for designing objects (products) with meaningful associations: (1) Cueing Meaning —  the product object has to cue an aspect of identity of the consumer that is personally significant or meaningful (e.g., the Kiruna made of porcelain related to an aspect of identity, ‘ceramics man’, not significant enough to Alex whereas the Diramu representing bushfires connected to an aspect of experience of ‘a pleasant bushfire’ uniquely meaningful to Louise); (2) Authentic Embodiment —  the consumer has to perceive the way a product object cues an association as authentic for it to elicit its personal meaningfulness (i.e., the consumers “must perceive the object to successfully embody the associated source”, hence establishing an authentic linkage between the object and source) (e.g., the Globe failed in relating authentically to the travels of Alex).

Product designers, with the help of design researchers, can go quite a long distance towards consumers in designing products that will be more meaningful to them, but they have to know and respect their limits in approaching consumers close enough. The difficulty is mainly in anticipating the associations that will be perceived by an individual consumer as relevant and significant to be the basis for forming an attachment, and then capture it in an authentic way. As Orth, Thurgood and van den Hoven phrase it, designers should acknowledge that they are “limited to creating possibilities instead of certainties in any attempt to design for product attachment” (p. 100). The task of finding a meaning in a product neither has to be relegated fully to the consumer. It should be a shared endeavour in which the designers recommend products and provide sufficient informed cues to meaningful associations, whereon consumers can detect and choose which ones in a product design truly matter to their self-identity and life experiences; and if technology allows, the consumers may be given even a more active role in creating such design cues meaningful to them.

Ron Ventura, Ph.D. (Marketing)

Notes:

[1] “Designing Objects with Meaningful Associations“; Daniel Orth, Clementine Thurgood, & Elise van den Hoven (2018); International Journal of Design, 12 (2), pp. 91-104. (Images of the artefacts can be seen in the article here).

[2] “Brand Attachment and Brand Attitude Strength: Conceptual and Empirical Differentiation of Two Critical Brand Equity Drivers”; C. Whan Park, Deborah J. MacInnis, Joseph Priester, Andreas B. Eisingerich, & Dawn Iacobucci (2010); Journal of Marketing, 74 (November), pp. 1-17

[3] “Consumers and Their Brands: Developing Relationship Theory in Consumer Research”; Susan Fournier (1998); Journal of Consumer Research, 24 (4), pp. 343-373

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Online shopping in digital stores and shopping in brick-and-mortar stores offer different forms of experiences. It starts from the environment or setting in which the shopper is situated — being present in a 3D physical retail space or viewing a 2D screen of a computer or mobile device. It is the difference between how much and what specifically a shopper can see and absorb when looking around in a physical store compared with looking at a screen. The difference in setting may have a further impact on behaviour, like how shoppers find products and how they inspect them.

Imagine a shopper, Dan, entering a large fashion store. Dan’s head immediately turns around as much as 180 degrees scanning the scene. Just a few steps in front of Dan there is a low desk with shirts, and another desk with sweaters to the left; to the right Dan observes shirts hanging on a rectangle-shaped stand, and he notices how their designs differ from those on the desk; along the walls are more shirts and trousers, etc. Dan decides to approach first the shirts to the left because they have multiple colours, lifting one or two to look more closely at them; later he also turns to the wall to see trousers and tries to match them with shirts. As Dan’s shopping trip advances he may enter deeper into the store to check on some accessories or another variety of shirts. Very early in the visit the shopper can figure out what may be found in main sections of the scene. Then starts a sort of discovery tour that may be guided by a master goal but progresses as the shopper identifies relevant and visually attractive items (stimuli). The scene is ‘updated’ as the shopper goes deeper into the store, or into adjacent halls, and details that were more distant and vague before become sharper and clearer.

A different kind of shopping process usually occurs in online website stores: first of all because much fewer products (stimuli) can be observed in a relatively short glimpse of the screen-scene. The way merchandise in the online store is located and explored is much more gradual.  An online store actually encourages a more goal-driven search process (e.g., choosing names of categories from a menu, selecting attribute options to narrow down the search to a relevant selection of products). Then starts a back-and-forth process of exploration of different items (e.g., by clicking on item titles or images and entering product pages), and visiting additional major categories of products. However, the experience of search and exploration is so different: whereas in the physical store the shopper can ‘wash the eyes’ with shapes, designs and colours of products, and follow the eyes through the shopping trip, it is much harder to do so in an online store where one has to go step-by-step or in a piecemeal manner. Nevertheless, online shoppers have more flexibility and a wider span of possibilities for viewing product options simultaneously on the screen of a desktop or laptop computer than on the screen of a smartphone.

Certainly there are more clever and creative e-commerce or store websites that are able to generate an improved experience of exploration and inspection of products. For example, there are online stores that show grids composed of tiles of images representing major categories and sub-categories of products. The images are more lively, and some of them exhibit motion as well. With some images, hovering with a mouse on the product photo (before clicking) changes the angle in which a garment or handbag, for instance, is shown. On product pages, some options may be selected that immediately affect the product image (e.g., colours, dimensions, designs); products may be rotated dynamically or by selecting from a line of static thumbnail images under the main frame.

A large majority of shoppers enquire about products online before visiting a physical store. According to a Google/Ipsos survey (‘Omnichannel Holiday Study’, Nov. 2017-Jan. 2018), 78% of US holiday shoppers searched products before going into a store; the online search helps shoppers in planning their shopping trip to the store, narrow down the options they should be seeking at the store, but it also ‘inspires the purchase’ (thinkwithgoogle.com, October 2018). In another research by Publicis (‘Shopper First Retailing’, 2018), an even higher proportion of shoppers, 87%, report that they begin searches in digital channels (online, mobile), up from 71% in 2017 (RetailDive.com, 15 August 2018). Searching the Internet is regarded as a productive method to look for directions and learning about product options, as preparation for making purchase decisions. Shoppers do not feel obliged also to make the purchase online, even if they browse the e-commerce website of an online-only retailer (‘e-tailers’) or of a mixed retailer that operates both a website store and physical stores. Consumers like especially to consult reviews of peer users who have already had experience with products they consider.

This learning process seems functional and goal-driven where shoppers need some guidance to put order into their shopping journey. Online sources, including e-commerce websites, seem to provide an efficient solution for this purpose. The process may indeed inspire shoppers with ideas, perhaps to the extent of helping the shopper to focus on viable and worthwhile purchase options and avoid wandering too long clueless in a store. In such a case in particular, visiting the online store of a mixed retailer can prove most useful before arriving to one of its physical store locations — and this makes the website an even more effective tool for the retailer.

However, retailers that operate physical stores would not want shoppers to come too prepared with their minds pre-determined what to buy. While shoppers usually have a general plan of what they are looking for, final purchase decisions are still made mostly in-store. Hence it is so important for physical stores to be designed and arranged in an appealing and stimulating manner — to allow consumers to complete successfully their shopping trip in-store, and furthermore encourage and induce them to purchase a few more ‘treasures’ they discover in the store.

It may be relevant to consider here two scenarios:

For retailers that operate physical stores in multiple, even numerous locations, there should be a stronger incentive to leave their customers with enough reasons to conclude their shopping in-store rather than on the website store. Thus, the online store has to be visually attractive, user-friendly and informative, but it does not have to be fully equipped with features that convince customers to complete their shopping and purchasing online. The website should not go all the way in effort to draw shoppers from physical stores. Whereas the online store may provide more functional, productive experiences (e.g., efficient, time-saving), the physical store would be more capable in creating pleasant emotional experiences (e.g., excitement, thrill, joy). The positive emotions invoked should not be taken lightly because they drive purchases.

For e-tailers with no physical stores there should be greater need to invest in the quality and feel of experiences they can provide in their e-commerce websites. The introduction of shoppers to the online store should be more delightful as well as informative and user-friendly. Visual elements and interactive features have to be inviting and helpful in guiding the visitor into different sections of the store — on the ‘main stage’ of the screen estate and not just through the menu and search engine.

The latter applies, nonetheless, also to mixed retailers that have stores in just a few locations (e.g., major cities) and wish to reach much greater numbers of customers that do not have a store near them. It may also be relevant when targeting customer segments who for any reason have little time free to travel to a store, and in regions where shoppers are reluctant to go out during harsh weather conditions (e.g., steaming hot and dusty or freezing cold and snowy). [Note: Location data might be used to channel a reduced or enhanced version of a store website according to whether the user is in vicinity of a physical store by the retailer, a form of ‘geo-fencing’].

Delicatessen in Gstaad

The brick-and-mortar stores remain very much in demand. According to a Google/Ipsos online survey (‘Shopping Tracker’, US, April-June 2018), 61% of American shoppers prefer shopping with brands that also have physical stores than ones that are online only. Key benefits suggested for shopping in physical stores are the immediacy in which shoppers are likely to obtain the products they require; getting hands-on — seeing and interacting with products before buying; and being more fun than shopping online (35% feel so) (thinkwithgoogle.com, John McAteer, November 2018). The Publicis study indicates more generally that 46% of shoppers prefer to buy in physical stores (vis-à-vis 35% who prefer shopping using their laptops and 18% on mobile phones) (RetailDive). Apparently, shoppers are not blind to benefits and advantages of shopping in physical stores over online stores, and many are not ready to leave them to fade out.

It is not suggested that online stores necessarily have to be made to appear like physical stores on the screen — mimicking the scene of a brick-and-mortar store may be perceived as just artificial, awkward and inconvenient (though retailers who also have physical locations can integrate actual store images into relevant sections of the online store). On the one hand, the retailer (or e-tailer) should take advantage of the strengths of the digital medium in organising, displaying and tracing information in the online store. On the other hand, online stores may have to breakaway in some degree from rigid structures of tables, lists and matrices. Grids of image tiles make a good start. Yet, more versatile visualisation possibilities have to be considered to provide visitors of store websites (or mobile apps) a more stimulating presentation of the variety of products the store has to offer. The interactive presentation should expose visitors to an array of products available (e.g., by type, use purpose, or brand), and lead their way from there into sub-categories and specific product models or brands.

  • Virtual Reality (VR) technology may be used to emulate a view of a store in 3D space, but the equipment needed to create a truly compelling experience is not in reach of most consumers, at least not yet. The more crucial question is: why should consumers prefer an imitation or illusion when almost everyone can visit real physical stores and shops. At least one aspect VR is unlikely to provide adequately is the social experience.

Instead of treating online shopping and shopping in physical stores as substitutes competing with each other, the more sensible approach for mixed retailers is to create ways in which they can combine and complement each other. The connection can be a two-way street, especially given that shoppers use mobile devices more frequently during store visits (71% of shoppers according to Publicis study cited by RetailDive). From online to store, for example, a mobile app of the retailer used in-store can help the shopper navigate and find the way to the places of products that he or she detected and learned about in a preliminary search and study online (e.g., Home Depot). From in-store to online, the shopper may use the app of the retailer in-store to find more information about products found in the store by scanning a barcode for the product of interest (e.g., Sephora [cosmetics] allows access to product reviews, order history of the shopper, and more) [examples adopted from McAteer in thinkwithgoogle]. More technologies that help in bridging between the virtual and physical domains of shopping include beacons and augmented reality (AR).

  • There are other areas not covered above in which online shopping is distinguished from in-store shopping and require more attention, such as customer service, specifically providing advice and assistance to shoppers, and the fulfillment of orders (a ‘click-and-collect’ programme is another way of linking the physical and online stores).

The physical and digital (virtual) domains have each their strengths in creating different forms of shopping experiences. Physical stores and shops have built-in advantages in evoking emotional experiences while shopping — they are tangible and more direct, can provide good personal care, and may attract and excite shoppers by means of interior design and visual merchandising in their physical spaces. Furthermore, beyond vision, physical stores allow shoppers to enact other senses (e.g., touch, smell) that cannot be experienced in the digital domain. It is unsure how much a store website (or app) can give rise to a similar emotional experience and attachment in shoppers, yet there are aspects that can be borrowed into the digital domain that would make it seem not just functional but also more appealing and immersive. Nonetheless, mixed retailers may have the best opportunity to combine the strengths from the physical and digital domains and link them to produce shopping experiences that are more productive and enjoyable altogether.

Ron Ventura, Ph.D. (Marketing)

 

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Marketing and consumer researchers have long been interested in revealing and describing differences in the behaviour of consumers that arise from differences in culture between societies, nations and communities. Ignoring such differences can lead companies to making embarrassing and costly mistakes in international marketing. Culture sets ideas, values, norms, symbols and customs that influence and shape the thoughts, beliefs and actions of the people adhering to it; in particular, responses to marketing-oriented stimuli — products, advertising messages, websites, stores etc. — can vary specifically due to cross-cultural differences.

Kastanakis and Voyer (2014 [1]) propose that investigation of the effects of cross-cultural differences on consumer behaviour should look deeper into pre-behavioural processes, namely perception and cognition. Culture conditions perception and cognition, thus affecting how consumers perceive and understand stimuli, which consequently drive behaviour. Consumers develop perceptions and thoughts from the input of stimuli they attend to, but top-down processes set by pre-defined mind-sets, goals and beliefs (e.g., guided by culture) may inversely shape how consumers perceive, interpret and think of the information received from their environment. The researchers review ways in which culture influences perception and cognition in different functions or contexts. Similar to the greater part of research on cross-cultural differences, Kastanakis and Voyer concentrate on differences between Western cultures (individualist, espousing independence) and Eastern [Asian] cultures (collectivist, espousing interdependence).

Western cultures encourage people to see themselves by themselves, that is, developing an independent construal of one’s self-image; Eastern cultures on the other hand encourage people to see themselves as part of a group, that is, developing an interdependent self-construal. Thus, Easterners are predisposed to construe their self-image based on their relations with and similarities to others in a group of affiliation, compared with Westerners who view themselves as individuals independent from others, emphasising their unique traits. The tendency of Easterners to perceive and judge an individual person relative to surrounding others is demonstrated in this example cited by Kastanakis and Voyer: American and Japanese research participants were asked to judge the emotion of a central figure based on his or her facial expression when surrounded by other person figures showing the same or different expressions — “The findings indicate that the surrounding people’s emotions influenced Japanese perceptions but not Americans’ perceptions of the central person’s feelings.” [Based on research by Masuda, Ellsworth and others, 2008.] Contextual information (e.g., feelings of others) seems to matter for judgements in the East more than in the West.

In another implication of the independent-interdependent cleavage, whereas Westerners are mainly focused on achieving their personal goals, Easterners are looking more to help advance goals of the group they belong to, catering to others’ needs or wishes.  The authors suggest as a possible consequence that “Westerners perhaps tend to join groups to serve their own needs, whereas in collectivist societies, people serve the groups to which they belong”. This difference in approach may affect, for example, the way users of social media in North America and Europe participate and interact in these networks, differently from users in Asia (e.g., South Korea, Japan, China). It has been repeatedly argued that social media networks have not helped people in the West to socialise any better, perhaps even to the opposite, and that users engaged in social media may still feel in solitary. A similar discussion may concern also the use of digital platforms in the rising ‘sharing economy’ (e.g., Airbnb, Uber, LendingClub). Gaining true benefits from socialising and sharing platforms is based on collaboration, contributing to others or at least reciprocating helpful actions by others, not quite in line with values and norms taught by the individualist culture of the West (e.g., promoting competition and personal achievement).

The contrast between independence and interdependence further finds an expression in a respective distinction between thinking styles: analytic vs. holistic. Analytic thinking, associated with an individualist culture, is more focused on single objects and the attributes of each; holistic thinking, associated with a collectivist culture, is more attentive to the context or field in which any object is found. Thereby, Westerners following an analytic perspective would be more inclined to observe and judge objects in isolation, whereas Easterners (Asians) following a holistic perspective tend to consider the relations between objects observed and make judgements based on the context of a whole scene. This distinction can have important implications for the perception and evaluation of visual scenes. For instance, a Westerner would focus on a particular exhibit or display of products in a store (e.g., a dressed mannequin) while an Easterner would see the same display against the background of other in-store displays and interior decorations of the store. In front of a shelf display, an Easterner viewing it holistically would be more attentive to the collection of products on display compared with an ‘analytic’ Westerner focusing on each product at a time (note: such a difference may also be applicable to a screen display of products on a webpage).

The difference in perspective is applicable also in viewing photographs of scenes, not just when being physically present on-site. Easterners more accustomed to a holistic view would be more capable at capturing the gist of a photographed scene as it relies on perceiving relations between multiple figures and objects in the scene. Westerners following an analytic perspective, on the other hand, would be more capable at noticing the attributes of particular objects. It should be noted, therefore, that while people in the collectivist East may have the advantage of identifying relations better, people in the individualist West may have the advantage of observing object details better (i.e., could be judging single objects with greater scrutiny). It furthermore appears that people match their aesthetic preferences to their culture-orientated perspective. Kastanakis and Voyer give an example wherein Eastern portrait paintings or photographs “tend to diminish both the size and the salience of the central figure and emphasize the field”.  Such differences in perspective and thinking style should be considered, as the authors advise, in the aesthetic design of advertising materials and other communications as well as in retail sites.

Stronger relational processing has relevance to attributes, and moreover to a perceived relationship between price and physical product attributes used as intrinsic cues for quality. Lalwani and Shavitt (2013) provided ground support for the association between modes of self-construal — independent vs. interdependent — and reliance on a perceived price-quality relationship. The way people look upon their own self-concept vis-à-vis their relation to others radiates to their perceptions and processing of relations between price and quality attributes. Importantly, however, they show that the linkage is mediated by the distinction between analytic and holistic thinking styles. Interdependent (collectivist-oriented) consumers are more capable at processing price-quality relations, where holistic thinking in particular positively predicts greater reliance on such relationships [2].

In addition to visual processing and aesthetics, culture is known to affect perception, processing and preferences of smell and sound. Consumers may be biased to better recognise smells familiar to them in their culture or to better comprehend culturally familiar melodies. The bias occurs, as said by Kastanakis and Voyer, during recall and recognition before the information even enters the attitude formation, judgement, and decision making processes. Consider thereby the mixtures of styles and forms one would find in a country that absorbs immigrants originating from cultures different from each other or from the culture incumbent in the receiving country, for example in music and food. As people borrow from the traditions of communities of other cultural origins and adopt also from those typical locally, they get exposed to and experience mixtures of music melodies or food flavours. Yet, even with years passing certain things do not change — consumers may continue to feel more secure and comfortable with the familiar music genres and food styles they were raised on at home, associated with a given culture.

  • Kastankis and Voyer note a lack in cross-cultural research on taste perceptions; that is unfortunate because food is such a significant domain, but the smell of food may still have a cultural impact on consumers’ reactions.

Furthermore, the language one speaks can determine the perspective, individualist or collectivist, one applies. Immigrants, for instance, may change how they present themselves depending on the language they use: that of their origin or the one adopted in their current country of residence. The language carries the values and norms of a culture it is associated with, such as how people perceive themselves. For example, bi-cultural Chinese-born people refer to their own internal traits and attributes to describe themselves in English but describe themselves in relation to others when using Chinese. Kastanakis and Voyer argue that language is not emphasised enough as an aspect of culture: “language triggers a culture-bound representation of the self”.


Idiocentrism and Allocentrism are views held by people at the individual level in parallel to the individualist and collectivist cultural views of societies, respectively. This reference to individual-level culturally oriented views becomes particularly prominent when the personal view does not match the societal-level view dominant in one’s country of residence: for example, when people of Asian origin living in the United States, a country with an individualist culture, personally maintain an allocentric view.

Dutta-Bergman and Wells (2003) found some interesting differences in values held and lifestyles practised by idiocentrics and allocentrics living in the American individualist culture. For example, idiocentrics are likely to be more satisfied with their financial situation and optimistic than allocentrics; idiocentrics are also more disposed to be workaholic, yet are more innovative. Allocentrics are more likely to be health conscious; additionally, they are more inclined to invest in food preparation and other chores at home and to engage in group socialising than idiocentrics [3]. (Note: Idiocentrism and Allocentrism are approached as individual-level dispositions adopted by people; they are not necessarily contingent on any immigration status or country-of-origin.)


 

The differences between individualist and collectivist cultures may influence human cognition in several more ways explained by Kastanakis and Voyer. Key areas involve self- versus others-related cognitions, self-esteem, and information processing. Briefly mentioning some noteworthy implications: (1) People in Western cultures have a stronger tendency to make dispositional attributions for behaviour (e.g., to one’s personal traits or competencies) and discard situational factors, as opposed to Easterners; (2) Causal reasoning in Eastern cultures tends to give greater consideration to interactions between personal (dispositional) factors and situational or contextual factors than in Western cultures; (3) In Western cultures people will prefer to classify products based on typical functional or physical attributes of categories (i.e., rule-based classification) whereas in Eastern cultures people will rely more on family resemblance and relationships between products (i.e., relational classification); (4) In persuasion, Westerners (e.g., Americans) prefer to take side in conflicts while Easterners (e.g., Chinese) are persuaded more by compromise solutions and are more ready to deal with contradictions.

Readers are reminded additionally of the differences in processing of visual information already described earlier (i.e., between the Western object-focused analytic approach and the context-orientated holistic approach in the East). These differences may be well-connected with the approach consumers take in judging and classifying products visually displayed (e.g., physically in-store, virtually in print or screen images).

Three final comments to conclude: First, as always we have to be careful with generalisations made such as between ‘Western culture’ and ‘Eastern culture’. There are differences in elements of culture between countries associated more closely with either the individualist or collectivist streams of culture. There is furthermore variation among communities and sectors within countries, and some tendencies may also be considered as individual-level differences (e.g., holistic vs. analytic thinking). Second, there is need in the West to explore and deepen the understanding of other streams of culture (e.g., African, Middle Eastern, South American). Third, Kastankis and Voyer address changes in perspective and behaviour of people in Asian nations caused by their growing exposure to the Western individualist cultural orientation. However, a more salient phenomenon prevalent in recent decades seems to be the immigration of people originating from non-Western cultures coming to live in countries of the West. Especially in Europe, the extent of exchange in ideas, values and customs between people with Western-orientation (‘incumbents’) and non-Western cultural orientations (e.g., from Africa and the Middle East) should have great impact on the balance between cultures on the continent (as well as in the UK), and not least the kind of consumer culture that will prevail in future.

International marketers must keep fully aware of and account for the differences between Western individualist orientation and Eastern collectivist orientation, and more so their multiple facets of manifestation in perception and cognition. Particularly important is paying attention to the differing thinking styles (i.e., analytic vs. holistic thinking) for their possible implications in processing and responding, for example, to persuasive attempts in advertising in online and offline channels, store design and visual merchandising. Extending marketing plans or initiatives across seas and borders, without making consideration for these potential differences, may significantly diminish the effectiveness of the actions taken in new destination markets to the extent of proving utterly precarious.

Ron Ventura, Ph.D. (Marketing)

References:

[1] The Effect of Culture on Perception and Cognition: A Conceptual Framework; Minas N. Kastanakis and Benjamin G. Voyer, 2014; Journal of Business Research, 67 (4), pp. 425-433. (Accepted version is available at eprints.lse.ac.uk/50048/ on LSE Research Online website).

[2] You Get What You Pay For? Self-Construal Influences Price-Quality Judgments; Ashok K. Lalwani and Sharon Shavitt, 2013; Journal of Consumer Research, 40 (August), pp. 255-267 (DOI: 10.1086/670034).

[3] The Values and Lifestyles of Idiocentrics and Allocentrics in an Individualist Culture: A Descriptive Approach; Mohan J. Dutta-Bergman and William D. Wells, 2002; Journal of Consumer Psychology, 12 (3), pp. 231-242.

 

 

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The strength, impact and value of a brand are embodied, fairly concisely, in the concept of ‘brand equity’. However, there are different views on how to express and measure brand equity, whether from a consumer (customer) perspective or a firm perspective. Metrics based on a consumer viewpoint (measured in surveys) raise particular concern as to what actual effects they have in the marketplace. Datta, Ailawadi and van Heerde (2017) have answered to the challenge and investigated how well Consumer-Based metrics of Brand Equity (CBBE) align with Sales-Based estimates of Brand Equity (SBBE). The CBBE metrics were adopted from the model of Brand Asset Valuator (Y&R) whereas SBBE estimates were derived from modelling market data of actual purchases. They also examined the association of CBBE with behavioural response to marketing mix actions [1].

In essence, brand equity expresses an incremental value of a product (or service) that can be attributed to its brand name above and beyond physical (or functional) attributes. Alternately,  brand equity is conceived as the added value of a branded product compared with an identical version of that product if it were unbranded. David Aaker defined four main groups of assets linked to a brand that add to its value: awareness, perceived quality, loyalty, and associations beyond perceived quality. On the grounds of this conceptualization, Aaker subsequently proposed the Brand Equity Ten measures, grouped into five categories: brand loyalty, awareness, perceived quality / leadership, association / differentiation, and market behaviour. Kevin Keller broadened the scope of brand equity wherein greater and more positive knowledge of customers (consumers) about a brand would lead them to respond more favourably to marketing activities of the brand (e.g., pricing, advertising).

The impact of a brand may occur at three levels: customer market, product market and financial market. In accordance, academics have followed three distinct perspectives for measuring brand equity: (a) customer-based — an attraction of consumers to the “non-objective” part of the product offering (e.g., ‘mindset’  as in beliefs and attitudes, brand-specific ‘intercept’ in a choice model); (b) company-based — additional value accrued to the firm from a product because of a brand name versus an equivalent product but non-branded (e.g., discounted cash flow); financial-based — brand’s worth is the price it brings or could bring in the financial market (e.g., materialised via mergers and acquisitions, stock prices)[2]. This classification is not universal:  for example, discounted cash flows are sometimes described as ‘financial’; estimates of brand value derived from a choice-based conjoint model constitute a more implicit reflection of the consumers’ viewpoint. Furthermore, models based on stated-choice (conjoint) or purchase (market share) data may vary greatly in the effects they include whether in interaction with each competing brand or independent from the brand ‘main effect’ (e.g., product attributes, price, other marketing mix variables).

A class of attitudinal (‘mindset’) models of brand equity may encompass a number of aspects and layers: awareness –> perceptions and attitudes about product attributes and functional benefits (+ overall perceived quality), ‘soft’ image associations (e.g., emotions, personality, social benefits) –> attachment or affinity –> loyalty (commitment). Two noteworthy academic studies have built upon the conceptualizations of Aaker and Keller in constructing and testing consumer-based measures:

  • Yoo and Donthu (2001) constructed a three-dimension model of brand equity comprising brand loyalty, brand awareness / associations (combined), and perceived quality (strength of associations was adopted from Keller’s descriptors of brand image). The multidimensional scale (MBE) was tested and validated across multiple product categories and cultural communities [3].
  • Netemeyer and colleagues (2004) demonstrated across products and brands that perceived quality, perceived value (for the cost), and uniqueness of a given brand potentially contribute to willingness to pay a price premium for the brand which in turn acts as a direct antecedent of brand purchase behaviour [4]. Price premium, an aspect of brand loyalty, is a common metric used for assessing brand equity.

Datta, Ailawadi and van Heerde distinguish between two measurement approaches: the consumer-based brand equity (CBBE) approach measures what consumers think and feel about the brand, while the sales-based brand equity (SBBE) approach is based on choice or share of the brand in the marketplace.

The CBBE approach in their research is applied through data on metrics from the Brand Asset Valuator model developed originally by Young and Roubicam (Y&R) advertising agency (the brand research activity is now defined as a separate entity, BAV Group; both Y&R and BAV Group are part of WPP media group). The BAV model includes four dimensions: Relevance to the consumers (e.g., fits in their lifestyles); Esteem of the brand (i.e., how much consumers like the brand and hold it in high regard); Knowledge of the brand (i.e., consumers are aware of and understand what the brand stands for); and  Differentiation from the competition (e.g., uniqueness of the brand)[5].

The SBBE approach is operationalised through modelling of purchase data (weekly scanner data from IRI). The researchers derive estimates of brand value in a market share attraction model (with over 400 brands from 25 categories, though just 290 brands for which BAV data could be obtained were included in subsequent CBBE-SBBE analyses) over a span of ten years (2002-2011). Notably, brand-specific intercepts were estimated for each year; an annual level is sufficient and realistic to account for the pace of change in brand equity over time. The model allowed for variation between brands in the sensitivity to their marketing mix actions (regular prices, promotional prices, advertising spending, distribution {on-shelf availability} and promotional display in stores) — these measures are not taken as part of SBBE values but indicate nonetheless expected manifestation of higher brand equity (impact); after being converted into elasticities, they play a key role in examining the relation of CBBE to behavioural outcomes in the marketplace.


  • Datta et al. seem to include in a SBBE approach estimates derived from (a) actual brand choices and sales data as well as (b) self-reported choices in conjoint studies and surveys. But subjective responses and behavioural responses are not quite equivalent bases. The authors may have aimed reasonably to distinguish ‘choice-based’ measures of brand equity from ‘attitudinal’ measures, but it still does not justify to mix between brands and products consumers say they would choose and those they actually choose to purchase. Conjoint-based estimates are more closely consumer-based.
  • Take for instance a research by Ferjani, Jedidi and Jagpal (2009) who offer a different angle on levels of valuation of brand equity. They derived brand values through a choice-based conjoint model (Hierarchical Bayes estimation at the individual level), regarded as consumer-level valuation. Vis-à-vis the researchers constructed a measure of brand equity from a firm perspective based on expected profits (rather than discounted cash flows), presented as firm-level valuation. Nonetheless, in order to estimate sales volume they ‘imported’ predicted market shares from the conjoint study, thus linking the two levels [6].

 

Not all dimensions of BAV (CBBE) are the same in relation to SBBE: Three of the dimensions of BAV — relevance, esteem, and knowledge — are positively correlated with SBBE (0.35, 0.39, & 0.53), while differentiation is negatively although weakly correlated with SBBE (-0.14). The researchers reasoned in advance that differentiation could have a more nuanced and versatile market effect (a hypothesis confirmed) because differentiation could mean the brand is attractive to only some segments and not others, or that uniqueness may appeal to only some of the consumers (e.g., more open to novelty and distinction).

Datta et al. show that correlations of relevance (0.55) and esteem (0.56) with market shares of the brands are even higher, and the correlation of differentiation with market shares is less negative (-0.08), than their correlations with SBBE (correlations of knowledge are about the same). The SBBE values capture a portion of brand attraction to consumers. Market shares on the other hand factor in additional marketing efforts that dimensions of BAV seem to account for.

Some interesting brand cases can be detected in a mapping of brands in two categories (for 2011): beer and laundry detergents. For example, among beers, Corona is positioned on SBBE much higher than expected given its overall BAV score, which places the brand among those better valued on a consumer basis (only one brand is considerably higher — Budweiser). However, with respect to market share the position of Corona is much less flattering and quite as expected relative to its consumer-based BAV score, even a little lower. This could suggest that too much power is credited to the name and other symbols of Corona, while the backing from marketing efforts to support and sustain it is lacking (i.e., the market share of Corona is vulnerable).  As another example, in the category of laundry detergents, Tide (P&G) is truly at the top on both BAV (CBBE) and market share. Yet, the position of Tide on SBBE relative to BAV score is not exceptional or impressive, being lower than predicted for its consumer-based brand equity. The success of the brand and consumer appreciation for it may not be adequately attributed specifically to the brand in the marketplace but apparently more to other marketing activities in its name (i.e., marketing efforts do not help to enhance the brand).

The degree of correlation between CBBE and SBBE may be moderated by characteristics of product category. Following the salient difference cited above between dimensions of BAV in relation to SBBE, the researchers identify two separate factors of BAV: relevant stature (relevance + esteem + knowledge) and (energized) differentiation [7].

In more concentrated product categories (i.e., the four largest brands by market share hold a greater total share of the category), the positive effect of brand stature on SBBE is reduced. Relevance, esteem and knowledge may serve as particularly useful cues by consumers in fragmented markets, where it is more necessary for them to sort and screen among many smaller brands, thus to simplify the choice decision process. When concentration is greater, reliance on such cues is less required. On the other hand, when the category is more concentrated, controlled by a few big brands, it should be easier for consumers to compare between them and find aspects on which each brand is unique or superior. Indeed, Datta and colleagues find that in categories with increased concentration, differentiation has a stronger positive effect on SBBE.

For products characterised by greater social or symbolic value (e.g., more visible to others when used, shared with others), higher brand stature contributes to higher SBBE in the market. The researchers could not confirm, however, that differentiation manifests in higher SBBE for products of higher social value. The advantage of using brands better recognized and respected by others appears to be primarily associated with facets such as relevance and esteem of the brand.

Brand experience with hedonic products (e.g., leisure, entertainment, treats) builds on enjoyment, pleasure and additional positive emotions the brand succeeds in evoking in consumers. Sensory attributes of the product (look, sound, scent, taste, touch) and holistic image are vital in creating a desirable experience. Contrary to expectation of Datta and colleagues, however, it was not found that stature translates to higher SBBE for brands of hedonic products (even to the contrary). This is not so good news for experiential brands in these categories that rely on enhancing relevance and appeal to consumers, who also understand the brands and connect with them, to create sales-based brand equity in the marketplace. The authors suggest in their article that being personally enjoyable (inward-looking) may overshadow the importance of broad appeal and status (outward-looking) for SBBE. Nevertheless, fortunately enough, differentiation does matter for highlighting benefits of the experience of hedonic products, contributing to a raised sales-based brand equity (SBBE).

Datta, Ailawadi and van Heerde proceeded to examine how strongly CBBE corresponds with behavioural responses in the marketplace (elasticities) as manifestation of the anticipated impact of brand equity.

Results indicated that when relevant stature of a brand is higher consumers respond favourably even more strongly to price discounts or deals  (i.e.,  elasticity of response to promotional prices is further more negative or inverse). Yet, the expectation that consumers would be less sensitive (adverse) to increased regular prices by brands of greater stature was not substantiated (i.e., expected positive effect: less negative elasticity). (Differentiation was not found to have a positive effect on response to regular prices either, and could be counter-conducive for price promotions.)

An important implication of brand equity should be that consumers are more willing to pay higher regular prices for a brand of higher stature (i.e., a larger price premium) relative to competing brands, and more forgiving when such a brand sees it necessary to update and raise its regular price. The brand may benefit from being more personally relevant to the consumer, better understood and more highly appreciated. A brand more clearly differentiated from competitors with respect to its advantages could also benefit from a protected status. All these properties are presumed to enhance attachment to a brand, and subsequently lead to greater loyalty, making consumers more ready to stick with the brand even as it becomes more expensive. This research disproves such expectations. Better responsiveness to price promotions can help to increase sales and revenue, but it testifies to the heightened level of competition in many categories (e.g., FMCG or packaged goods) and propensity of consumers to be more opportunistic rather than to the strength of the brands. This result, actually a warning signal, cannot be brushed away easily.

  • Towards the end of the article, the researchers suggest as explanation that they ignored possible differences in response to increases and decreases in regular prices (i.e., asymmetric elasticity). Even so, increases in regular prices by stronger brands are more likely to happen than price decreases, and the latter already are more realistically accounted for in response to promotional prices.

Relevant stature is positively related to responsiveness to feature or promotional display (i.e., consumers are more inclined to purchase from a higher stature brand when in an advantaged display). Consumers also are more strongly receptive to larger volume of advertising by brands of higher stature and better differentiation in their eyes (this analysis could not refer to actual advertising messages and hence perhaps the weaker positive effects). Another interesting finding indicates that sensitivity to degree of distribution (on-shelf availability) is inversely associated with stature — the higher the brand stature from consumer viewpoint, larger distribution is less attractive to the consumers. As the researchers suggest, consumers are more willing to look harder and farther (e.g., in other stores) for those brands regarded more important for them to have. So here is a positive evidence for the impact of stronger brands or higher brand equity.

The research gives rise to some methodological questions on measurement of brand equity that remain open for further deliberation:

  1. Should the measure of brand equity in choice models rely only on a brand-specific intercept (expressing intrinsic assets or value of the brand) or should it include also a reflection of the impact of brand equity as in response to marketing mix activities?
  2. Are attitudinal measures of brand equity (CBBE) too gross and not sensitive enough to capture the incremental value added by the brand or is the measure of brand equity based only on a brand-intercept term in a model of actual purchase data too specific and narrow?  (unless it accounts for some of the impact of brand equity)
  3. How should measures of brand equity based on stated-choice (conjoint) data and actual purchase data be classified with respect to a consumer perspective? (both pertain really to consumers: either their cognition or overt behaviour).

Datta, Ailawadi and van Heerde throw light in their extensive research on the relation of consumer-based equity (CBBE) to behavioural outcomes, manifested in brand equity based on actual purchases (SBBE) and in effects on response to marketing mix actions as an impact of brand equity. Attention should be awarded to positive implications of this research for practice but nonetheless also to the warning alerts it may signal.

Ron Ventura, Ph.D. (Marketing)

Notes:

[1] How Well Does Consumer-Based Brand Equity Align with Sales-Based Brand Equity and Marketing-Mix Response?; Hannes Datta, Kusum L. Ailawadi, & Harald J. van Heerde, 2017; Journal of Marketing, 81 (May), pp. 1-20. (DOI: 10.1509/jm.15.0340)

[2] Brands and Branding: Research Findings and Future Priorities; Kevin L. Keller and Donald R. Lehmann, 2006; Marketing Science, 25 (6), pp. 740-759. (DOI: 10.1287/mksc.1050.0153)

[3] Developing and Validating a Multidimensional Consumer-Based Brand Equity Scale; Boonghee Yoo and Naveen Donthu, 2001; Journal of Business Research, 52, pp. 1-14.

[4]  Developing and Validating Measures of Facets of Customer-Based Brand Equity; Richard G. Netemeyer, Balaji Krishnan, Chris Pullig, Guangping Wang,  Mahmet Yageci, Dwane Dean, Joe Ricks, & Ferdinand Wirth, 2004; Journal of Business Research, 57, pp. 209-224.

[5] The authors name this dimension ‘energised differentiation’ in reference to an article in which researchers Mizik and Jacobson identified a fifth pillar of energy, and suggest that differentiation and energy have since been merged. However, this change is not mentioned or revealed on the website of BAV Group.

[6] A Conjoint Approach for Consumer- and Firm-Level Brand Valuation; Madiha Ferjani, Kamel Jedidi, & Sharan Jagpal, 2009; Journal of Marketing Research, 46 (December), pp. 846-862.

[7] These two factors (principal components) extracted by Datta et al. are different from two higher dimensions defined by BAV Group (stature = esteem and knowledge, strength = relevance and differentiation). However, the distinction made by the researchers as corroborated by their data is more meaningful  and relevant in the context of this study.

 

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Ordinarily, Great Britain is not the first country to come to mind when thinking of chocolate. The names of Switzerland and Belgium are more likely to come up first, and then perhaps some other European countries (e.g., France, Italy, Germany, Austria). However, the British upmarket chocolatier Hotel Chocolat may deeply change our perception of Britain in association with chocolate; that is, following of course consumers’ pleasurable associations with the brand Hotel Chocolat. The brand name identifies both the company and its products (i.e., it is a ‘branded house’ of chocolate). Moreover, the company is a manufacturer as well as a retailer, offline and online, of chocolate products of multiple sorts, all under an encompassing brand, Hotel Chocolat.

Britain has been known for chocolate from companies like Cadbury and Thornton. But their products did not really succeed in raising an equivalent alternative that challenges the quality of chocolate from the better known ‘chocolate nations’. Cadbury in particular is most probably the main source for perceptions of British chocolate generated by consumers; in some of its products Cadbury blurs the distinction between true chocolate and chocolate snacks or confectionary. In 2010 the American company Kraft Foods took over Cadbury in an unfriendly maneuver; yet Kraft had a problem in swallowing the business of the acquired British company and just a year later split all of its confectionary arm including Cadbury to a new spin-off company called Mondelez International. Thornton’s already set a standard of higher quality chocolate delicacies in forms like bars and pralines. It also developed a chain of chocolate delicacy and gift shops. However, the enterprise expansion eventually ran into trouble and in 2015 the brand was acquired by the Italian giant Ferrero (well-known for ‘Ferrero Rocher’, also owner of Nutella).

Hotel Chocolat seems to be different, not merely for its positioning as an upmarket brand but in virtue of the fine feel and taste of its chocolate products — one immediately knows it is different when tasting one of the brand’s chocolate products. Drinking their hot chocolate with cocoa-flavoured cream makes a fitting complement to the pleasure of eating the solid chocolate delicacies. The experience of visiting a boutique shop of Hotel Chocolat (e.g., in Covent Garden in London, in the basement) also is an important contributor to conquering committed chocolate lovers.

Appetising Selection of Chocolates at Hotel Chocolat

Tempting chocolates displayed in cave basement of Hotel Chocolat’s Covent Garden shop

 

Hotel Chocolat was co-founded by Angus Thirlwell, CEO of the company, and Peter Harris (Development Director). In an earlier stage of their chocolate business, the co-founders established a company named ‘Express Choc’ as an online retailer of chocolates in 1993 (no doubt an early venture in e-commerce). They opened their first physical shop in the north of London in 2004 after changing the business name — this event practically marks the initiation of the brand Hotel Chocolat.

Over the years the brand has evolved and broadened its concept and it actually extends beyond products, shops and online store (retailing) — it also includes a Tasting Club (pre-launched 1998), chocolate workshops  (School of Chocolate), café-bars, a restaurant in London, and a hotel with restaurant in the Caribbean Islands. The company is proud of being a grower of cocoa for its products, a unique status for either a chocolate manufacturer or a retailer. The co-founders acquired a cocoa plantation in the Caribbean island Saint Lucia (2006), an initiative that brought Thirlwell back to his childhood in that part of the world, an origin of cocoa. In the estate of the plantation they opened their hotel (‘Boucan’) and a restaurant (2011). Their restaurant in London, established a couple of years later (2013) to bring West Indian tastes to the UK combined with modern British cuisine (e.g., ‘Slow Cooked Cacao Glazed Lamb Shank’), bears the name of the plantation and the year it was created (‘Rabot 1745’).

In an interview to BBC News, Thirlwell explained the reasoning behind the name — at start there seemed to be no logical relation to hotels. As for the choice of ‘Hotel’, Thirlwell replied: “It was aspirational. I was trying to come up with something that expressed the power that chocolate has to lift you out of your current mood and take you to a better place“, like going on vacation where one would stay at a hotel. As said above, seven years later and Thirlwell materialised the symbolic idea of Hotel into physical reality. Regarding the French wording ‘Chocolat’, he said that “everybody agreed ‘chocolat’ sounded better than chocolate”, which is hard to argue with, and added that the sound of the word almost suggests the sound of how chocolate melts in the mouth (he used the Latin term ‘onomatopoeia’) (BBC News: Business, 27 October 2014).

As reflected from his interview to the BBC, Thirlwell is a devout chocolatier, completely enthusiastic about chocolate. This impression is also supported in a personal page about Angus Thirlwell on the website of Hotel Chocolat. He continues to taste products every day and approves every recipe the company produces. A guiding principle that appears highly important to him is using more cocoa in chocolate products and less sugar. It is said that people started to crave cocoa long before anyone added a grain of sugar. This principle was practised, for example, in a product called ‘Supermilk’ that contains 65% cocoa, emphasises the ‘smooth creaminess of milk’, and includes less sugar than a dark chocolate — a feel of milk chocolate that is nearly a dark chocolate. In ‘Our Story’ webpage, Hotel Chocolat laments the overemphasis on sweetness in British chocolate: “Today, sugar is 20 times cheaper than cocoa, and a typical bar of milk chocolate contains more than twice as much sugar as cocoa”. Conversely, the mantra of Hotel Chocolat is explicitly: ‘More Cocoa, Less Sugar’.

A notion of this motto is felt very present indeed in a number of chocolate products of Delicious Orange Tangs by Hotel ChocolatHotel Chocolat, and it is probably at the root of the magic of their chocolate, and their business success. Just for instance, take their chocolate shells filled with Salted Caramel Cream, or Orange Tangs (orange-filled chocolate sticks) that are truly special and delicious (based on the author’s experience). It is all about the pleasure of eating genuine and fine-flavoured chocolate.

Formally, according to the website of Hotel Chocolat, the company operates 93 shops as well as cafés and restaurants. The Telegraph (24 January 2018) tells us that in the weeks running to Christmas 2017 and New Year of 2018 Hotel Chocolat opened ten new shops, bringing their total number to 100 across the UK. The store locator on the website (provided with an interactive map) suggests, however, that the company may have an even larger number of establishments in the UK — 153 locations are designated as ’boutique’ (shops). There are specifically 26 locations of café-bars, and the restaurant in London. It should be noted that café-bars are mostly (or always) integrated with shops, and Rabot 1745 is a complex including the restaurant, shop and café-bar. The brand is also represented in concessions (51 in total). The conflicting numbers are confusing and make it hard to determine the true current number of outlets of the company (could be a result of duplication in the counts of location types in ‘Our Locations’, apparently mainly due to concessions counted as boutique shops). Hotel Chocolat also has two stores in Copenhagen, Denmark, and several outlets in Ireland (seem to function mostly as concessions).


  • The revenue of Hotel Chocolat Group in the financial year 07/2016-06/2017 amounted to £105.24 million, an increase of 15.5% year-on-year; the net income in that period was £8.76m, an impressive rise of 114.6% year-on-year.
  • Hotel Chocolat Group was incorporated in 2013 and is listed on the London Stock Exchange since 2014 (the founders exchanged a third of their holdings for cash, receiving each about £20m, while in total raising £55m).
  • In the past six months the share price shifted between 240p and 380p, standing in late January ’18 at 333p; market capitalization: £375.5m.
Source:  FT.com, (Market Data)
Sales received a lift of 15% during the 13 weeks to 31 December 2017, attributed mostly to a special package in advance of Christmas (a gin ‘advent calendar’ package), a 100% cocoa collection, and the introduction of no-sugar milky chocolate range. Hotel Chocolat makes 40% of its annual sales in the run-up to Christmas and New Year (The Telegraph, 24 Jan. ’18).

A clear, well-stated and meaningful vision must have helped Hotel Chocolat considerably in its evolution and expansion. It stands on three values people in the company believe in: (1) Originality — not playing by the rules, rather doing things differently, and being creative and innovative. (2) Authenticity — growing cocoa, making and retailing chocolate, being true to cocoa and using natural ingredients (not letting sugar dull the flavour of cocoa itself and not mask the nuances from other ingredients, in line with the mantra cited above), and developing their own recipes in-house at the factory in Cambridgeshire (award-winning). (3) Ethics — committing to a deep sense of fairness that extends to farmers, customers and future generations (i.e., not spoiling the environment with waste in all stages of production).

The description of these three values or principles seems elaborate and specific enough to offer very clear guidelines for all managers and employees in the company to go by. They are accompanied by two business or marketing goals set by Thirlwell: excite the senses with chocolate and making it widely available. The two goals help to add focus to the mission of the brand: the first seems to pertain primarily to the products, the second underlies the network of retailing through physical shops and an online store. Other activities of Hotel Chocolat (e.g., hotel,  restaurants and café-bars, Tasting Club, School of Chocolate) contribute in enhancing the brand: deliver its message across and strengthen closer relationships with customers.

The business revolves around the brand ‘Hotel Chocolat’ and its development as it is their face and voice to the world. That is how customers and other stakeholders recognize everything they do. The more prestigious image of the brand is expressed through their products and packaging, primarily with their premium collections (‘tables’ — e.g., 86 pieces £65, 179 pieces £100). Pricing is also part of supporting the image, though Hotel Chocolat tries not to be excessive (e.g., one can find small-medium packages and boxes for prices in a range of £5-25). The concept of Café bars is gaining weight in aim to come closer to consumers — creating a venue where they can relax and enjoy a good chocolate drink with something light to eat (e.g., brownies) from Hotel Chocolat. The company may tap on a desire of Britons for high-quality chocolate, having a better own experience with chocolates from countries like Switzerland and Belgium. The founders protect the brand from dilution by avoiding, for example, displaying their products on shelves in supermarkets for sale (but their products are sold through concession in departments stores of John Lewis which fits better their brand image). The brand is taken care of meticulously by the founders to maintain an image they worked hard to instill: “a necessity of life, albeit a luxurious one” (Kate Burgess, opinion column, FT.com, 13 March 2016).

The brand of Hotel Chocolat has built its strength in quality of products and the expanse of its brick-and-mortar shops in addition to online retailing, supported by further activities or services. But attention must be paid to challenges ahead. First, how to balance resources correctly between keeping the quality of products and the expansion of the retail network — not falling to the trap of sacrificing the pleasure from the chocolates to their increased availability in the retail chain. Second, how to manage wisely and responsibly reaching out to other countries. In the interview to the BBC News (2014), Thirlwell concluded: “If you are specialist you have got to be absolutely specialist. There is a lot of competition and we want to be in the driving seat.” Consumers who appreciate and love genuine chocolate would surely hope that Hotel Chocolat succeeds in its mission so they can continue to enjoy their delicacies, and be excited.

Ron Ventura, Ph.D. (Marketing)

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In 2016 General Electric (GE) sold its domestic appliances division to Haier from China. The American company reached a dismal situation wherein it needs to repay a large debt and streamline its businesses. Selling the consumer-oriented business may have seemed to the management, led at the time by previous CEO Jeff Immelt, as a means to relieve the company from a business that is out-of-line with its other mostly industry-oriented business areas. However, that division was an asset whose value could not be measured just in financial terms — it was more than a capital asset. It provided a valuable support to the brand of General Electric, together with the lighting business. The incoming CEO John Flannery is planning even more drastic changes to the company’s composition, but removing the appliances division might turn out as an obstacle to his mission. The industry brand of GE could benefit from its long appraised consumer brand.

General Electric is engaged in a range of business areas. In some of them the company has obtained or enhanced its capabilities through acquisitions during the tenures of CEOs Jack Welch (1981-2001) and Jeff Immelt (2001-2017). The businesses of GE feature: (1)  Additive –advanced manufacturing technologies (e.g., 3D printing); (2) Aviation — engines, components and electric systems for jets, and avionics (e.g., innovative digital pilot dash-boards); (3) Power, including gas, steam and nuclear power; (4) Industrial Connections, including electrification, grid and control; (5) Healthcare — medical technologies such as ultrasound, MRI  & CT, digital integrated care (i.e., data sharing and management), patient monitoring, surgical imaging and more; (6) Renewable Energy, including wind, solar and hydro, and innovative hybrid solutions; (7) Transportation — digital automation and industrial Internet-of-Things (IoT) solutions for  locomotives, marine (drilling) and mining.  The businesses of GE today are directed largely to industrial, commercial, and public clients. The last business that targets consumers at least in part is Lighting, offering advanced LED bulbs (e.g., smart IoT-controlled, HD-quality), linear fluorescents, and other products.

Noteworthy, digital transformation is omnipresent through most of the businesses of the company, entailing advanced computer-based digital systems, interfaces, and mobile applications (e.g., IoT apps developed in co-operation with leading hi-tech companies). Much of the digital activity seems to be originated, planned and developed at the Digital division or unit of the company (e.g., industrial apps serving IoT products, Predix — the online platform applying IoT data and predictive analytics, manufacturing software, as well as cybersecurity). Internet-of-Things functionality applies also to lighting products for consumers; it was supposed to be implemented as well in their domestic appliances. In practice, the appliances may still be reliant on GE for IoT technology even after the transition.

For many years the Appliances of GE were commonly associated by consumers with quality and durability — having a refrigerator carrying the art-graphic logo sign of GE in the kitchen was taken as a symbol of social status. In 2015 the appliances division generated revenues of $6.34bn, 7.1% of GE’s total revenues. The combined revenues of GE from appliances and lighting, as reported by the company, stood at $8.8bn (an increase of 4.8% from the previous year). Combined profits were $700m, a margin of 7.7% as percentage of revenues (GE 2015 report on financial results, Segment Operations: Appliances and Lighting). GE overall reported a loss in 2015 (see Chart 2). The company first tried to sell its appliances to Electrolux but the deal was objected by the American Department of Justice. A new process for selling the division started with Qingdao Haier, and after six months of negotiations a deal was closed in June 2016 at a price of $5.6bn. The range of appliances in their new ‘home’ includes refrigeration, cleaning (dishwashers), cooking, laundry (washing machines), accessories such as water filters, and air-conditioning.

The division of appliances is now identified as ‘GE Appliances: A Haier Company’. This company is in an interim period of transition, alas outwards its status creates a bit of confusion about who is really in charge. The company’s website is resident at a domain titled ‘geappliances.com’ and the company retains the brand identity of GE. The association with Haier does not seem too committing. For example, whom consumers should expect to be responsible for their appliances? Or, how to distinguish between appliances that originate from GE or from Haier? The headquarters of GE Appliances remains for the time being in US territory in Louisville, Kentucky, under American executive leadership. Recently, the new company announced the creation of appliance connectivity — operation command by voice and through mobile apps (IoT). Yet the technology is reasonably a direct extension of GE’s development of capabilities of Artificial Intelligence and IoT in their businesses for industry.

Haier has thereof received a strategic foothold on US soil, in hope to strengthen its position in the country and establish a long sought market share in the American market; American consumers have refrained from buying appliances of Haier. The Chinese manufacturer rose from a failing refrigerator factory in Qingdao of thirty years ago by instilling over time quality standards that were much higher than those accustomed in China. Zhang Ruimin, leading the transformation, succeeded remarkably in turning the company into a major national appliances manufacturer in China with global extensions. However, the quality standards at Haier remain behind those of developed countries and therefore the company’s efforts to sell in the ‘West’ have been lingering (1). Haier still has a challenge of closing a gap in quality and credibility, which the acquisition from GE is expected to help overcome.  Many consumers in the US as well as in other Western countries will probably remain concerned by ambiguity about the source of their appliances, being of GE (United States) or Haier (China). Haier also gained important American technological know-how (e.g., in AI) from the American company. General Electric apparently gained a financial relief, but one that may be only for a short-term, and the company may have to pay for it in the future.

The new CEO of GE, John Flannery, revealed in an annual ‘Investor Day’ meeting last month (Nov. ’17) the company’s plan to focus on three business areas: power, aviation, and healthcare. It will exit completely some of its existing business operations (e.g., transportation, lighting, industrial solutions, electrification) while reducing its effort and involvement in others. For example, the company will retain its digital unit or division to develop and sell apps to customers for operating and monitoring equipment reliant on Predix platform, yet with a smaller budget. Flannery was less clear on the future of some areas such as renewable energy where the company is not completely willing to leave and some other arrangement may have to be found. Strategically, the plan is to reduce the span of businesses the company engages. In addition, the CEO informed analysts that the company will have to cut in half its dividends.

The share of GE climbed from a level of $25 to $30+ in late 2015 and held its price as high through 2016 with small fluctuations. Then, the price started to slip down continually through 2017. So much for the effect of selling GE Appliances on equity. By August 2017 the share price already came back to $25. Since Flannery entered the CEO office, and subsequently following the announcement of his plan and the harsh cut in dividends, the share price steeply fell to about $18, as low as the band of $15-20 in which the share fluctuated in 2009-2011.

Chart 1 GE Share Price

Analysts were left unsatisfied and critical about the turnaround plan at GE. They complain for instance that the company is too expansive, and that it must increase efficiency and reduce duplicate costs across the organization (Reuters, 13 Nov. ’17). Others express concern in particular about the debt at GE, and that the plan includes insufficient measures to fix problems with the company’s businesses (CNBC.com, 14 Nov. 2017 — also noted, GE share underperformed S&P 500). Part of the cure will have to include exit from some businesses (e.g., where GE entered by acquiring another company or where it did not build a substantial advantage). Nevertheless, increasing efficiency and reducing duplicate costs can be achieved also by merging some associated areas and consolidating them into a new division, though perhaps narrowing the scope of operation in each field. One example for doing so may be in the area of energy: sources, production or distribution (i.e., power, renewable energy, connections). Another area to consider is ‘digital’ — balancing between development of original technologies and solutions in a central unit, and their implementation for specific systems and equipment in the various business divisions. Letting go of the appliances business could be seen as a logical way to free resources for advancing industry-related areas of expertise that remain. But solving problems of over-expansion and inefficiency in the industry-oriented businesses did not have to come at the expense of the consumer-oriented business in which the company developed product and brand advantages over decades.

The company has to come to terms now with damages from excessive expansion-by-acquisition, a strategy led by Welch and followed by Immelt. The ‘elephant in the room’ for the company is GE Capital, the investment bank of General Electric, whose troubles particularly since 2009 inflict on the whole company. Now the company under Flannery plans to heal by letting go of some more of its genuine businesses such as transportation and lighting (Matt Egan, CNNMoney.com, 20 Nov. ’17), that is, in addition to the appliances already shed by Immelt. The company has built an expertise in transportation, especially locomotives, during the past hundred years. Lighting can be regarded as a founder’s asset of the company (i.e., attributed to Thomas Edison); as described by Egan, lighting “symbolizes the company’s history of innovation”. General Electric could find it very difficult to continue after removing parts of its heart and soul.

The intensive occupation of the company with allocation of capital was initiated and developed by Welch but it spiralled out of control under the leadership of Immelt. The latter quadrupled the amount of capital invested in the company (from $42bn in 2001 to $163bn in 2009) which involved a significant increase in borrowing. By 2011 it was recognised as a major problem with the management of Immelt. Geoff Colvin of Fortune described how Immelt as CEO remade the portfolio of GE, for instance by entering new “future industries”  (e.g., healthcare, green energy). However, his aggressive expansion came at a high cost. While the CEO already tried to unburden the company from some businesses (e.g., NBC and Universal Studios), it was seen by analysts as insufficient. The real issue at GE, as Colvin noted, was capital allocation, and it became more so critical at GE Capital (2). The decision to quit the involvement of GE in TV broadcasting and online media (NBC) as well as cinema productions (Universal) sounds very reasonable. Conversely, the claim supported also by Colvin that Immelt was waiting too long to unload appliances (executed only in 2016) and lighting (never completed to-date) from GE should be much less applauded because these business areas made-up a distinct branch at GE with deep roots, and were also carriers of its consumer brand, a valued non-tangible asset.

In a highly critical opinion column in the Financial Times, John Gapper argues that focusing management on capital allocation could kill GE as an industrial company. It would make GE operate more like an equity fund. The company needs to shift because it may no longer be sustainable to run a manufacturing conglomerate as in the 1980s. However, it does not require to treat the business units as equity holdings for capital optimization: “Once efficient allocation becomes the priority, it is hard avoid this cycle.” It cannot be surprising for Flannery to continue this path, following the leadership of Welch and Immelt, considering his long career at GE Capital, up to the latest post he held as head of that division. Culture and a style of management have kept the units of GE stick together like a glue for many years. Without them, Gapper wonders how longer GE can hold together (FT.com 15 Nov. ’17).

The financial figures of GE in 2015 and 2016, as published in the Fortune 500 ranking, show little so far in favour of the impact of exiting from some business activities such as Appliances, measures taken by Immelt to heal the company in his last years in office: The revenues have fallen, but moreover the return on revenues has also decreased from a level of 8%-10% in 2011-2014 to 7% in 2016, after recovering from a loss in 2015 (Chart 2 below). It should be noted nonetheless that the value of assets has already shrunk by 50% between 2011 ($717bn) and 2016 ($365bn).

Chart 2 GE Revenues and Profits

  • General Electric descended from former 6th-9th positions in the ranking of Fortune 500 (US) to 11th place in 2015 and 13th in 2016.

The products of GE for consumers, both appliances and lighting devices, were the ‘face’ of the company to the wide public and a closer form of connection with consumers. Their contribution is in providing stability and longevity to the GE brand, identified by name, logo, and other associated elements. Above all, the brand was represented in products, equipment and devices, in millions of homes, to be useful in the everyday lives of the consumers and make their lives more comfortable. The domestic products also were a channel to implement some of the technological progress and innovation of the company and demonstrate them to a wider public audience. Consequently, exposing consumers (who also happen to be small investors) to GE could help to increase public confidence in the company, especially in turbulent times.

General Electric did not depend on the appliances and may do well without that business. The same may be true for the lighting business. But removing them will not bring the cure either– the selling of GE Appliances apparently has gone wasted so far. Instead, keeping the consumer products would have enhanced the corporate brand. The management could perhaps have gained some peace of mind while reforming their industry-related businesses. In the medium term, making reforms could be a little harder for Flannery and his top-management team to push through. In the longer term, leaving consumer products out of the company — as already happened with the appliances and is expected to repeat with lighting — may remain as a wound, something amiss, in the reputation and brand image of General Electric.

Ron Ventura, Ph.D. (Marketing)

Notes:

(1) “Zhang Ruimin’s Haier Power”, Michael Schuman, Time (Europe), 14 April 2014 (183 (14)).

(2) “Grading Jeff Immelt”, Geoff Colvin, Fortune (Europe), 28 February 2011 (163 (3)).

 

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