)Ml-LIB 541 263 Pal 142

HARVARD IBUSINESSISCHOOL

9·501-023

a£v: IANUAR.V !_3. 1002

RAlIV ~AL

The New Beetle

While the first fr..o cars lI.IJ11 fly out of dealersllips-some nostalgic Beetle buffs have alrtJUiy put dowtldeposils-Ihe tong-term picture for the car is dicty. VW has 0111y tague notions of who migll' buy it, arid a pliny ad blldSd to lout it ... For the agency (and marketing team] creating the ad call1pai81: for the New Beetle, t/w.e's the added clwl/ellge: fOllowing in tile tread marks of the old Beetle ads oj the 1960:; and 29;05; which are widely regarded as some of tilt be5t in history. Put it all togtiher and il seems like a nwrlctter's version of "Mission: Impossible".

-Daniel McGinn, "Neur Legs for II Bug, Newsweek, JanUllf1j 12, 1998

On March 10, 1998 with an h ur to prepare before her mark tin strategy m ting, Liz Vanzura (HBS '90), marketing director for V lksw g n, reflected on the challenge confronting her-one that had been so aptly described in a recent twSWeek axticl as "Mis ion: Impossible." By the end of the day, a team including Vanzura, Charlie Waterhouse, direc r of product development, and Steven K yes, director of public relati ns, w uld have to finalize the marketing plans that would position th Volkswagen's ew Beetle with one (oot in the past and the other on the a celerator heading directly into the future.

Just a (Ct." w ks arlier, on January 5, 1998, Detroit's Cobo Hall had housed the 1998 I orth American International Auto Show-th country's 1 adin automotive press event where Volkswagen 0IW) had unveiled :I dynamic multi-l vel stand that featured its n w lin up of cars. Throngs of journalists and visitors had crowded the lower 1 vel of the display to catch a glimpse of th how's unexpected star, th ew Beetl . Six brightly color d cars mil d out at onlookers from under the spotlights. • One popular model with h at sensitive paint even invited visitors to press its flesh and make different patterns appear on the bodv.' As people walked by, they smiled and touched the char, teristic curves of the car, reminisced about how they had named and painted their "Bug''2 many years ago, and marv led at how the icon of th 1970 and "flower power"! had been transfonned into a car for the new millennium.

I M.rt DeloreruJO, 770t NntJ B<rI~. W&sconsin, MBI Publlshlng CQ(nPMY. 1998, p.55. 2 A n.ickl'am g;.\·m to !he 8eetIe (or its sh.>pt Md insect-ba.sed IWN!.

o.t<:b AMoc:iote NedII PM JiBS • "...,..,..,,,....,.,.. IL~ the supcrv.sion of Pro*- Jt.p. UJ. HIlS .,._ .... ~ .. 1tIy u the

bAs .. for class ~ ea.... .." no. intended 10 serve U ....so_, SOWUS oi P"""'Y ~ or Wuotntiono 01 df«d~~ or antiIecn"" ~

Copyris"1 C lOOO I'rftIdmt """ _. of H.uv&td CoII<s<". To ord..- <opI<o or roqueot penru..iorI '0 repr<><luce ""'r<ri>.b. ClIlIl $lS-768S, wril Hatvat<l IlusIne!o Sd>ool Publl,hing. 80010<1. MA 02163, or &0 to htlJr./lwww.11bsp.harvanl.odu. No pon 01 "'" JNl>bel eon may be ..."tOdu<ed. stor<d rn _ rt1riov>l syotm\. u....s ill A ~ or -'tied In any Ioc:uI or by any ~Gru<. ~ pho.o<o1')'V1S. ....orcbn$. or O~wiIlloul tho ~ 01 Huv&td IkAslIwsI School.

The. ew BUlle

end of World War D, most Americans were cautious about buying imported cars. With a shortag of parts and costly repairs, for ign cars were a luxury C w could afford, 7 In additi n, products from Germany had an additional image problem that limited demand. Despite these pres ur , Volkswagen's sales gT w and by th end of 1954" a total of 8,913 Vo1kswagens were traveling America's str ts,

In 1955, th company was incorporated and officially became Volkswagen of America, a subsidiary of Volkswagen AG. Dr. Carl H. Hahn, then head of Vo wagen of America decided that the company needed a unified corporate image and began an advertising campaign to market th Volkswagen brand. The first advertisement appeared in th eu York Times in the spring of 1959. Th full-page photo depict d a scene from a ew York Volkswagen dealership: a customer, sitting in an armchair with a cup of coffee in hand, watching his Beet! being servic d.s The ad becam distinctive for its message-not about selling cars but rather, its focus on th quality of service a Volkswagen owner could expect from his deal T. The print copy marked the inception of a unique and effective advertising campaign. produced by Doyle, Dane, Bembach, (nc.,9 which would h Jp Volkswagen ventually become one of the b t known car brands in the United States.IO

In addition to his marketing initiativ ,Hahn, a.fter visiting VW dealers nationwide, decided to organiz nationally rather than within smaller geographic regions," By 1962, a n w national Volkswagen of America organizati n was created and dealerships expanded into a nati nal n.etwork.u On October 18th of that me year, the compan opened i headquarters in Eng) wood Cliffs, New Jersey and the one-millionth Volkswa en arrived in th Unit d States.13

Beginning in the lat 1950s, Volkswagen experienced a string of single-product CCe5$eS in the U.S. mark t. The Beetle, which achie ed almost cult status among US. consumers in the 1960s, was followed by the Rabbit (which ultimately became the Golf) a fu l-ef cent car that enjoyed instant popularity among energy-conscious American consumers (Exhibit 1).14 By 1968, with the h Ip of other mod Is such as the Volkswagen "Microbus" and th Karmann Gia sport coupe, Volkswagen was selling over a half million cars annually in the United States.

Over the next sev ral years, a series o{ events brought th company's booming sales to a halt.

During th 19705, th appreciation of the D utsch Mark against the d Uar threatened to price VW' most of which were low or mid range mod Js-out of the mark t. In early 1975, VW was losing money on n arly very car sold in the United States and falling sales threatened to break-up th company' U.S. d.istribution network as deal rs began d ~ ting, particularly to n w Japanese

1 "VolJ<sw g<::> C !ebr;,u" SO YeatS on Amerlan Roads," VW Company RA:

8lbid.

9 Doyle, Dane, 8embach. Inc (DDS) was the pred • r to 'ew York .;eIv rtising ..gene), DDB Needham which w Volksw. en'. ~ency in IhI! Unit Sl~1 W\till99S.

10 "VoUcsw gen Celebrates SO Ye~ on American Road&, - vvo.' Company PteS$ Release. 11 Ibid.

Ulbid.

13 Ibid.

N The two oentel'lce preceding {OOlnOt· 1iIt~ (rom ms ~ Cordon, lind Shap'tI), Helen. "Volkswagen de Mexico's North Amman Str.ltt!g)' (A),~ HIlS Pubbshlng Case 9·794-1~ 1994, p. 2.

3

•

The ~w 'Bfftle

When we hired Arnold" we gave th m the task of making the Volkswagen brand important again and relevant to th '90s car buyer. We knew that the heritage of G rman engineering and th C3J"' more fun, pleasurabl driving experienc wer powerful strengths o{ the brand. Surely, these strengths could be better 1 v rag d with consumers. However, we also knew th brand had som rious weakn to overcome, Despite our continuous marketing {forts, th brand's image h d been slowly eroding. and there was a perception in the minds 01 consumers of poor quali and reliability. Even our recent Farfegnugen campaign had done very little to srrengthen our brand quity. And our weak sales had also eroded confidence among our dal r organization.

To obtain a more in-d pth und rstanding of consumer and dealer perceptions, the Arnold team undertook its own research and conducted tensive consumer interviews, visited 95 of the top 100 dealers, and drove Volkswagens [or over 50,000 mil to experience the cars for th mselves. Fran K lly (HBS '83), chief marketing officer at Am Id Communications, ummarized what they uncov red about th Volkswagen consumer:

From a standard demographic ana.lysis, w found that Volkswagen consumers were younger, Slightly more affluent, and more educated than th average car purchaser. But more interesting were the attitudes of these consumers. We found that Volkswagen owners enjo ed a more active role in driving. They enjoyed driving on chaJlenging windin roods, didn't always ob y speed limits, and 53W the car as more than just a way to get from place to plac . We also found that these consumers had a uniqu attitude towards life. WclJ-infonned, more adventurous, cr tiv, confident, self-sufficient, xperin enters, Volkswagen drivers seemed to want to make nd take the most out of their lives.

5

Our interview' also highlight d how the brand was perceived versus the competition. In comparison to other European brands such as BMW and Mercedes, Volkswagen was perceived its namesake the "people's car" and found appealing lor its aHordability. It also offered a mor unique, individualistic, driving experience versus Japanese cars such as Honda and Toyota.

Wjth this fresh insight about th target market, the Arnold team r commended a new product positioning and brand essence that would become th foundation (or th Drivers Want d campaign. Kelly recalled the presentation:

Th b ,d essence stat ment tured th rational and emotional ben fi;s

that Volkswagen provided its consumers. We knew that be' tinct and appealing in a highly competitive mark tpl c , we had to take advantage f h w peopl both thought and felt about th brand. The rati nal benefit of Volkswagen was that it was th only brand that off r d the benefits (Genna.n engineering a.ff()Tdably. Emotionally, the car represented a completely different driving experience-more connected to the road-and a diHerent way of living-more connect d to th world.

And as we thought about our positioning, we gav consid ali n to not only what we wanted to stand for but also what we did not want to stand lor. For example, we wanted th Volkswagen brand to be invitational and approachable lIot exclusionary like s me i th oilier European car brands. We wanted to sell our ec urn rs on VW's uniqu driving experience nol just on th cars ability to get

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SOl.()23

praised th car's styling and heralded the brand a a real contender in the mid-size car market. although man quesri ned whether Vol wagen had th image to market a car that was priced over 520,000. But despite a limited marketing budget and the high r price lag, th w Passat help d to strengthen VW's imag whil improving profits for both Ih manufacturer and d alers-who old more cars at a higher margin.

By the end of 1997, Volkswagen was selling 137,885 car, a 178% increase from It nadir of 1993 sales. It appeared that VW was b ck on track in the U.s. mat I. But the event of th first few month of 199 woul t st the su tain bility of this comeback and answ r the question of wh ther the '90s would be the tart of a new era for olkswagen in th United States.

The Beetl Phenomenon

•

The Original Beetle

Th Volkswag n Beetle was bom in the mid 19305, when F rdinand Porsch b gan drawing up plans [or "Volksauto," a people's car.22 Built in a plant located in Wolfsbur -a town midway between Berlin and Hamburg-the car was conscripted into World War D and tv d as G rmany' equivalent to th Jeep during th late 1930 and early 19405. Although originally nam d the Krn durd: Freude or "Strength through Joy" car, people quickly adopt d th car's mor endeanng

appellation, th Beetle. when one the prototypes was so dubb d by th e'W York Times in 1938.23

From i humble beginnings. the olkswagen Beetle would soon become the mo t successful car model ever, lling over 21 million automobiles (E hibit 5).2<1 Amen ans first saw th car in 1 49 and the Beetle quickly began to attract a cult-lik following. With its distinctive round hape, face-like front end, and low price, the cat stood out from the cooki -cutter stylin of th over-sized overpric d domestic cars and app al d to a new generari n of Amen an . For many, th Beetle wa their first car. It was particularly popular with students who w TC budget-min d as \V II drivers who

sought 1 e pre their individuality and p rsonal tyl through th car.lS And d spite lh

inconvenien e f an air cooled engin that could not gen rat nough heat to k p the windows from frosting inside, or the choi between cooling off th car or climbing hills, Beetle own r were int n I loyal to th it "bug ."16 These owners found the car's flaw to be end anng And tories about "Beetle-stuffing" contests-to ee how many peopl could II into a Beet! and cross-country road-trip where "H rbiev" serv d as car, home, and Iri d, wer < bundant. A on owner once describ d, "(The car is] a member of the family that just ha pens to liv in Ih garage.~28

22 Thurow. Roger. "PC$1 Script: VollcsWll en Beed . The UbiqUItous Bu Turns SO' 1M WallStrttt 1011,,,,,1, Octob r I ,1985. 23 Oeloreru:o, p. I .

24 Thurow, Roger. ~POSI Scnpr. Vol w g n Beetle: 'Tht! Ubiquit ~ 8US Turns 50."

2S Meredith, Robyn. "8eede-,ulcro Vol w~g n Hopes to Recapture love Qf Ori ina I Bug." TlI~ ForI Wo"h SIQ,-Td''l1Mm, ) nuary 4, 1998

16 ibid.

V i arne of the m.l~lial8eet! ~ tured in a ~ of Disn y movies, -Hem thoe love aug.- 18 Thurow, Roger. "POSt Senpu Volbw~gen 8eetl . The Ubiquilou Bug Turns 50."

7

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SOl·023

very curve, every memory. Not just the evolutions of a cherished cia sic, but the continuation of a worldwide love affair that began 21 million cars ago. Innovation embodied in tradition. A flew Volkswagen concept. On look, and it all comes back. But then, it never really left. The legend r born. A friendship rekindl d.3J

Following th show, Cflicago Tribune automotive reporter, Jim Mateja, wrote a letter to Dr.

F rdinand Piech in his February 13, 1994 column that appropriately captured the enthu iasnc reception the car had received and directly called for the car's prompt production.

Dear Dr. Piech,

What are you waiting for Doc? Bring back th Beet]. And hurry.

In case you haven't noticed, VW has been in th latrine since you stopped selling the Beetl in th nited Stales. Unless you come up with a new, small, d p ndable, inexpensive car like the old Beetle real quick, you'r going to find that Volkswag 1'1, once a hou ehold word, i 001'1 going to be the answ rIO a Trivial Pursuit question.

You have the opportunity to get what mo t p ople in life don't-a second ch nee to regain the fortun you once enjoyed wh n th VW Be tIe was one of th most popular cars in the universe despite being butt-ugly, cramp d, and lacking most of the essentials of vehicle motoring. ir m gas gauge to radio.

So take a do e look at the Concept 1 car that was shipped from your Simi Valley, California d ign studios. Then let the board of directors give it a glance b fore you call for the formal vote-All in favor say "jawohl!" and get on with it, People are waiting.

Waterhous too remembered the strong reactions from the public and press:

This was a car that was never meant 10 be. But from th day it d but d, consumers really linked emotionally 10 the car and were the force in bringing it to the market. In Detroit, it was louted as the automotiv darling of th how. At the same time, the industry press did qu tion if thi was a "real" driveable car and whether lh r tro 10 k would be totall passe by the time the car came 10 market. We took all th feedback and made some significant changes to the original design. We knew we had 10 get il right because the ev B tIe would b crucial to tuming around the company's image in the world' largest automotive market.

With thi introduction, there was no turning bade. The outpouring of emotion and the enthusiastic reception from Pf1., d alers, and th gen ral public was mos encouraging. Vol wagen of Am rica e ecurives and Ih board member in charge of th orth Am rican region, Dr. [ens i umann, a visionary who recognized th pow r and pot ntial of the car, convinced VW's management in Germany to make a real car out of the concept.

By the time Concept I had transformed into the ew Beetle, the car had been thoroughly overhauled from its original old r broth r. Based on th recently re-engineered top of the lin Golf platform, the lew Be tJ housed an ngine that was now in front and water-cooled.P off red front and side airbag and air-conditioning in the tandard package, and emitted music from a ix-speaker

ound sy I m. Ace to the 12 cubic feet of storage space ~ th rear hatch was hidden beneath a

3l1bld. p. 13. lbid..p.15.

:IS In the origlNl ~l~. the engine w reu'moU!lled and air-cooled.

9

The New Beetle

SOl~

• I went on my hon ymoon in a VW ~U 20 Y iUS ago. "Just Married" was scrawled in shaving cream on the side. And a few years go, wh n my wife and I went sailfishing. w found ourselves carting a 7 * foot sailfish in the front-end trunk of anoth r Beetle, one of four we've owned.

• ).1y affection for the Beetle can be traced to my college days at the University of Louisville. I think I was attracted (to th car) because I saw them as an underdog, and J

like underdogs." -

While the younger generation did not have past exp riences to draw from, the car's strong heritage enabled them 10 have an emotional connection to the New Beetl~

• My job is very conservative, but that's not really the way I am. Everybody thinks 'Gee this guy is conserv tive-h works in Finance, he's boring: But when I get out of work, I'm not that. I mean it's fun, it's a fun cat.

• J see myself in it without having to justify it to anybody. 1 s it for someon who is unique-who knows th y will attract attention without bein pretentious. There is no sense of snobbishn about it, but it's fot som n who is daring enough to step out .... yes, they have confidence.

• The person is not going to make (i,e., dew ) that car-th car' d finitely going to make the person .... My clients would laugh at me.

Using product photography and miniature models, designers also offer d unique insight into th importance of the shape and design of the car:

Through th research w uncovered people's love of round shap in ur world. Circular shapes represent human f rms, su as eyes, faces, and heads. Also, unlike square and triangles, circles are invitin and friendly du to the fact that no sharp edges exist. Finally, circular bj represent a completeness, whelen that many pie were drawn to. The

ev Beetle' sh p embodied many of these qualities and in doing 0, evoked many feelings associated with cirdes.-U

What do u want to be seen in? It' about h w I present myself to the world. It's not only about h w I feel behind th teering wheel but it's also about how peopl look at me when they pass by when 1 am itting I a tra£fi light. We need to design a that people will want to be seen in-feel good to be seen in.~

Finally, th sociologist that was intervi wed provided an in-depth understandin of and connection that Am ricans ha e with the Beetle:

history

In the 60s, it took on added meaning that the "Bug" was seen as the counn r-culture car.

One of th things that emerged from that tim was "small is beautiful" and th B tJ was seen as a beautiful car. Today, in American society, on on hand tiler is this move to standardizing erything and on the other hand, you have this quest for individuality. For many drivers, this

40 Ibid. ~Ilbld.

012 From Arnold Communleu;ion lnu:rn..l

c Study.

013 From Utte-rvi "ws in VW Snnd Essence company ,-ideo.

11

SOl-023

To improve relationship with the dealers, Volkswagen had undertaken two organizational efforts. In September 1997, th company had flown i entire base of dealers to th company headquarters in Wolfsbwg G rmany.oI5 Th trip allowed dealers 0 hear German management's vision (or Volkswagen, 10 visit the plant and technical faciliti ,and to see the new line-up of Volkswagen cars to 00 introduced in the United States. In addition, th dealers were included in a company-wid training session at the Disney Institute in a.dy spring 1~8, which was design d to help Volkswag n employees understand the value of creating a total brand experience for consumers.

On the h ls of these efforts to build loyalty to the franchise, the launch of the ew Beetle wouJd

test the company' relationship with its dealers. Most dealers wer cit d about the n w car and

ncouraged by the number of pre-orders they had received. However, dealers also qu tioned if this popularity would 00 sustained or if the ew Beetl would become another retro fad with sales quickly tapering off after the initial fanfare.

The Launch

. /

Reaching across her desk, Vanzura picked up the three documents that would be reviewed at her team' trategy meet:ing. Th first, a review of 1997 results, was encouraging and suggested that the Volkswagen brand was w 11 poised [or its n "product initiatives in 1998 and beyond-the w Beetl ,New Jetta, New Golf, and th w Cabrio. From a sales perspective, while a supply issue had

nee again hamp ed the company's ability to reach its sal targ t, fforts to build th brand had paid off gen rously. In fact, most quantitative measures had reached their highest levels in 1997. Total advertising recall crossed the 50% mark to 53,0, image attributes [or th brand had made

positi e gains, and the Passer's awaren had r ached an all-time high in the fourth quarter o[ 1997 .

A report on the recent public relations effort the second document in the pack, highlight sam

f the critical events that had contributed to the motor press's euphoric recepti n to th f!W Beell .

This reception had been carefully orchestrated to create an arly and overwh l.tnillgiy positive consensus among orth Am rica's most in1Iu tiaI automotive journalists about th "magic" of the

w Beetle. In December of 1997, a select group of j urnalists were invited to Woltsburg, GCUIlany to m t with management and previ w th New Beetl Similar to the visit by deal 15, the visit by the press provid d the gr up with uniqu insights into th ew Ii '5 design and development process and offered them bert r understanding of Volkswagen's new product line-up. In January 1~8, th dramatic unveiling of th ew Beetle had stolen th show at the car industry's m t important event. A]ld then most recently, j umalists had been given an opportunity to drive th

ew Beetle for at least one day and one night through different communities in th ountry in order to rienee firsthand the outpouring f public exeitem nt about the car. Reading the article that was to appeaL in the April issu of Automobile Mllgazille, Vanzura r ali.zed that the PR efforts had been successful in a . ving their ob' lives. (See Exhibit 13 for excerpts from Jean Jenning article in Automobile Magazim that chronicled consumers' reacti ns to the New Beetl as th car drove from San Francisco to New York City.)

But Vanzura kn w that positive press coverage alone would not be enough to sclJ th N w Beetle.

The marketing team would have to decide whom to target and how to communicate th car's benefits. Targeting the baby boomers with a value proposition f "indulging in n talgia" appeared to be the most appropriate strategy for the New Beetle. In additi n to their personal history and emotional ties to the Beet! brand, these buyers could also afford the plus $15,000 price tag for the car. But the decision was not that easy. Consumer trend among th Baby Boomers r vealed

lorenzo, p. 68.

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t:.I Exhibit 7 B tl, "Lemon" Print Advertising

This Volkswagen missed th boat. The chrome strip on th love compartment i blemished and must be replaced. Ch rices are that you wouldn't have n riced It: lnspector Kurt Kroner did.

Th re ar 3,389 m 11 at our Volkswag n factory with only one JOb: to inspect Volkswagens at each

tage oj production. (3,000 Volkswagens re produced daily: th e arc more ins 0 than cars.)

Ev ry hock absorber is tested (spot checking won't dol, ev ry v indshield is scanned. Vw have been r j ed f r 'uriace cratches barely visible to the eye,

Final inspection is really omething! W insp cror run each car the line onto the

Fun ... tion pnHstand (car test rand], tote up 1 check ornts, gun . head to he aut marie brake

stand. and Uno" 10 one VV>l out of fiitv.

This preoccupation with detail means the VW a ts longer requires less maintenance, by and

large, than other cars. lit also means a used VS d predates less than any oth r r.)

We pluck the lemons; you get the plums.

Source: Arnold Communicati

21

..

. .

Harvard Business School

9-586-035 Rev. 9/87

H. J. HE 'Z CO.: PLASTIC BOTTLE KETCHUP (A)

n March 1983, Barbara Johnson, product manager on Heinz ketchup was debatL~g whether or not to launch ketchup in a new plastic bottle ana, if so, what 1 vel of support to place behind the mav. Th new product had been in development for three y ars . Johnson comm need: "I have to determine if the plastic bottle is truly a 'big idea' or just anocher line extension."

Company Background

H.J. Heinz Co~any was founded in 1869 on a packaging innovation:

Henry Heinz packaged horseradish in clear glass jars. n fiscal year CFY) 1983 (ending April 30), the food manufacturer recorded sales of $3.7 billion and net incom of $2 4.3 million. During the previous 10 years, sales bad grown at an BV rage annual rate of 12.7:, and earnings per share at 14.6%. In tho Un ted States, K.J. Heinz Co. consisted of five subsidiaries: Heinz SA, Star Kist ~oods, Ore Ida Foods, Hubinger Co., ~d Weight Watcbers Internationa. Star lUst (Darketed tuna and pet foods (9-Lives), Ore-Ida frozen potato produces, and Hubinger industrial corn sweeteners. "'eigh"t stchers International promoted we11- n weigbccon"trol programs. Heinz USA, the oldest subsidiary, mployed 6,000 peopl and marketed such diverse preduccs as ketchup, pickles, vinega-c, baby foods, soups ALBA dry beverage mixes, and foodservice products.

Heinz USA employed a 200-person sales force tbat covered the nor hesstern and north central regions. Sslespeopl were CO(Dp~sated on S8 ary p us 4 bonus linked to two volum goals: a ketchup goal nd a second goal covering all other products. Heinz used brokers in the South and West.

H inz had been se ling ketchup for over a c ntury. By FY 1983, it held a 45.61; sbare of r tAil ketchup volume and a 45.01. shar e of foodservice volume, making it the dOminant competitor in th ketchup (Darket. Heinz r tail ketcbup sales were $215 mil ion and accounted for 30~ of Heinz USA sales and 35% of profits; Heinz foodservice ketchup sales ~ere S175 million.

This case was written by Research Assistant John L. T opaco , under tbe direccion of Associace Prof ssor John A. Qu lcb, as a basis for e Iass d.i s cus s Ioa rath r than to illustrate either effective or ineffectiv handling of·an administrative situacion.

985

Copyrigh~ by the Preside1\t and ~ows oi Huva..-d Co~e

AI ngllt! ~.·ed. No pan <Ii t!>ls?UbiJ<; non ~y be "p1OdU(fd. $tO<t<I in a ~ ".,.~ or InMmitte<! in 'r!)' Ionn Of by ~ny m~.1U ""'''out .he permission <Ii HMVW 8_, 5<:hool. Dismbuttd l>y tht ~hll16 DiVIS""," ~ lIU$ltICSS School,

BostOn. MA 02l63. (617) ~9S-6117. ~ in the U.S.A. .

.' .

- 3 -

586-035

trends favoring q~ick, convenient meals, such as hamburgers. n addition, ketchup consumption was thought to be correlated negatively with the price of beef which had fallen during aC3 of the previous three years.

Hajor Competitors. Heinz, Hunt's, and Del Monte were the three major ketchup brands. Hunt's was owned by Esmark, Inc., and Del Honte by R. J, .. Reynolds, Inc. Hunt's ketchup sa es accounted for 3: of ESlII4rk' 5 U.S. Foods Division sales while Del Monte ketchUp sales made up 5: of R. J. Reynolds' Dry Grocery and Beverages Division sales. Hunt's and De' Honte erop oyed their o.~ sales forces to S 11 their products nationwide.

Heinz's 45.6X retail share of ketchup volume in 1983 compared to Hunt's 14.1: and Del Monte's 11.8:. Private-label, generic, and lDinor brends made up the remaining 28.SX. Heinz vo ume was up 23~ over the 1979 level; it was the only major brand that had grown over the past four years. Exhibit 2 shows·market shares by region for FY 1979-FY 1983. Heinz had increased its share during the previous five Y Bes, but, in FY 1983, Heinz had lost half a share point to Hunt's and private-label brands. Market shares varied by region; Heinz was strong st in the Northeast with a 60.9% market share and weakest in the W st and South.

Package Sizes. In 1983, th major =anufactur rs sold four sizes of ketchup: 14 oz., 24 oz., 32 oz., and 44 oz. Lxhibit 3 shows industry volume mix by siz over the previous 20 years. In 1964, only two Sizes had been availabl , and the 14 oz. size accounted for two-thirds of the volum . By 1983, over 801 of ketchup sales were in sizes that had not existed 20 years earlier.

Exhibit 4 shows tbe volume mix by size and by region for ach ~8jor ketchup brand in 1983. For the three m8'or brands, the bulk of their business was accounted for by the 32 oz. size. This size was even more important for Hunt's and De 1 onte than for Heinz.

Pricing. Heinz was the highest priced ketchup brand on all SiJ6S in 811 regions (except for the 24 oz. size in the West, where Del Monte was priced higher by 1. 7~). Exhibit 5 shows the major m8.nufacturers' base selling prices and actual retail selling prices by regiqn. Except on the 14 oz. size, Heinz's retail prices wer between l~ and 91 higher than Hunt's and Del Honte's. Hunt's and Del Honte's average national retail prices differed by 3: to 6: across the different sizes. As Exhibit 5 shows, the trade was taking the low Sl: margin on the 32 oz. size, which account d for 551 of industry volume. It was believed that the trade treated the dOminant 32 oz. size as a "loss lel!der."

Heinz had tak n its last price increas in early 1982, a uniform 5: raise across the entire product line. Hunt's and Del onte had followed with the sam dollar per case incr ase . IHth a 40: lDanufacturer's gross margin, Heinz xecutives were concerned chat Heinz might be priced too high. Fearing that competition could cut prices and gain !Dark t share from Heinz, Heinz mana,gement had r so Iv d to try not to take any IIIOre price increases in the near future.

- 5 -

586-035

research showed that both incidence and amount of ketchup use increased in 1983: 67:; of households (115. 651 in 1981) purchased ketchup in the previous four wee~s, and they used an averag of 32.3 ounces per month (vs. 30.8 ounces in 981). Other key findings from Heinz market research showed that:

o 971 of U.S. households used ketchup and 89% of all househo ds used it at least once every week. However, leve of use varied widely:

: of Us rs

.. of Consullltlt,i.on

Heavy users (33 oz./mo. or ore)a Mediu~ us rs (17-32 oz./mo.) Light users ( 6 oz./QO. or less)

282'. 3'J 33

54:; 34 12

~eavy ketchup users consumed, on average, 67 ounces per month.

o Consumers used ketchup a I year round. The volume consum d in the higbest period, Jun -July, was only 142'. higher than that consue d during the lowest period, October-January.

o Children, who made up 201. of the population, accounted for 301. of ketchup "eating occ8sions." Tb ir vo ume per use was arso greater partly due to waste in usage.

Exhibit 9 pres nts key tables fro~ a 1983 national market survey cond~cted fot: Heinz by t1aIket Facts. Brand oyalty for Heinz i.ncr ased significantly bet:w en 1975 and 1983. Heinz was not as successful as Hunt's, however, in attracting h avy use~s. Host major brand purchasers selected th brand first then the bottle size.

Exhibit 9 also reports ketchup us r attitudes. family acceptance and the "best flavor" were the most important product attributes. Heavy users were more likely to believe tbat ketchup brands were different, and they also paid closer attention to price.

New Product Introductions

During ~ost of the 1970s, the k tchup industry focused on cost control rather than new product development. The 32 oz. size was the only new product, first introduced by Heinz in 1974. To streamline opera~'ons, H inZ c Ios ed four of . ts seven ketchup p Lant s . H i.nz enjoyed cost advantages over its competition due to quantity purchasing discounts on raw materials and lower transportation costs. After the 32 oz. introduction in 1974, Heinz new product develop~ent during the r st of the decad was focused on gravy and Weight Watchers products.

- 7 -

586-035

allowance and a cents-off coupon promotion for ach of the two new sizes in Sunday free-standing inser s (FSIs). There was no incremental advertising spending, and the adver~ising did not focus on the new packag s. They were nee considered newsworthy enough.

The 1980s: A Period of Aggressive Marketing

The ar y 1980s was a period of.aggressive marketing by the major brands. Dudng this time, Heinz concent r at ed its efforts in the South. Exhibit !2 shows Heinz k tchup marketing spending per case foe tn total United States and the South for: FY 1979-Fi' 1983. Heinz increased total nat ional spi!nding per case durillg this period by 92~, and spending in the South by 147~. Aside from increasing advertising sp nding, H inz used ~or competitive, comparison copy. The ads featured side-by-side d monstrations of Heinz and oth r national brands, pointing out Heinz's thicker consistency. Exhibit 13 pr es ent s a Heinz TV commercial us d in this campaign.

In 1982, Hunt's challenged the validity of this commercia in a complaint filed with the ational Advertising Division (NAn) of the Council of Better Business Bureaus. Hunt's complained that the demonstrations were not related to nor~al use, and that the differences did not r fleet true thickness. Heinz countered by arguing that resistance to separation was r:elevant to evaluating thickness, and they also provided bind, paired comparison test results that showed preference for Heinz over Hunt's and Del Monte. The. NAD conc Iuded that the Heinz claims were substantiated.

In 1983, Hunt's and Del Monte reformulated their ketchup to imp:ov8 taste and consistency. Spices were added to improve the taste, and each company invested about Sl.5 million in b~genization, a p~oeess that produced a product almost as thick as Heinz's. As a result, Heinz could no longer run its comparison advertising cillllpaign. In addition, homogenization improved Hunt's and Del Monte's variable cost par bottle.

)

As a result, Heinz lost half a point in national ~arket shere, and 1.4 points in the South betwun Fi' 1982 and FY 1983. R inz counterattacked with a new television adVertising caopaign that stressed Heinz's taste superiority and greater popularity, claiming that it was the

consumer's 3 to choice over any other brand. Exhibit It. shows a

commercial from this campaign. Heinz also add d extra trade deals and coupon drops in the South. Overall, however, the counterattack prov d to be ineffective in fighting off Hunt's offensive. In addition, Del Monte and private label brands benefit d as the two major brands comp ted head-to-head.

3

Homogenization processed tomatoes into very s1ll811 pieces that did not

coagulat , thereby producing a higher solid yield. Heinz already used this process.

- 9 -

586-035

and portion cont ro , and had a conv nient, nonremovable flip-top cap.4 Un ike glass bs>tt es , h04.lever, th plastic bottle had to b refrig rated after opening. Th plastic flip-top cap allowed gr at r air inflow than the Iug+s t y l e III ta closure used on the glass bottle which provided a tighter seal. Refrigeraeion was necessary to retard the ketchup's oxidation, the chemical reaction of the ketchup with oxygen which resulted in th; dark residue that formed around the seal. Although shatterproof, the plastic bott l e was breakable- -another potential drawback since consum rs might mistak n y assume that 81 plastic contain IS were unbreakable. Refrigeration added to the %robl III since the plastic (polypropylene) became brittl with coo ing.

Heinz managers were confident that the plastic bottl de ivered s'gnificant consumer benefits, but they were not sure which size(s) was right. Should they start with an existing size or create a new size for plastic? The ketchup brand group planned a cons um r testing program of various package sizes, primarily 6~ oz. and 28 oz. Johnson and her group started witb tb 64 oz. size (5 3/6" wid x 4" d P x 10 3/4" tall) because plastic's shatterproof and light~eight attributes would be ClOst b neficial in a large size. The plastic 64 oz. container offer d 20 ounces !DOre

k tchup than the 44 oz. glass bottle but, when full, both packages weighed the same. In addition, the category trend was towards larger sizes, as evidenced by the success of Heinz 44 oz. ketchup.

I

As an alternative, the brand group originally consider d 6 32 oz. plastic bottle. But in ord r to attain a lower. pric point. a 28 oz. size (4 1/8" loIid x 2 1/8" de p x 0 3/8" a 1) was pursued instead. The plastic bottle cost sign' Eicantly more than a glass container of equival nt siz. Exhibit 5 shows a cost comparison of the 28 oz. plastiC, 32 oz. glas~. and 6~ oz. plastic bottles.

Unbranded Home-Use T sts

September 1981: 6~ Oz. P astic and 64 Oz. Glass. The fi~st in a series of product tests of the plastic bottle used a 64 oz. size. Sixty-four ounce plastic and glass prototypes, with no brand names, were consue r tested in two monadic (sepa.rate, single product exposure as opposed to paired coepaxLson ) hOal -use tests. The s8lllples consisted of regular users of 44 oz. ketchup. Both products scored cOGlparably on ketchup ratings, including overall favor, spiciness, sweetness,

4The squeezable and flip-top cap features could be applied to l!Claller bottles, but not to keg-design bottles.

5

Over 80t of ketchup using households kept glass bottles in the

refrigerator after opening. The plastic bott e, if introduced, would have to carry 8 label instruction to refrigerate upon opening.

':

60ne of 10 bottles, if full and dropped !-rom counter h ight after r frigeration, would break.

- 11 -

586-035

were questioned on how this feature would affect their purchase behavior. Sixty-three percent said i~ made no difference, while 20: said thst they ~ould be less likely to purchase; 251 said that they tried to r move the cap.

Three purchase intent scenarios were test d with th foilowing

results:

Purchase Intent: 28. Oz. Plastic (N=200)

OnQriced Priced §! u, 59 f Fi~1ed w[Heinz
Definitely buy 31% 201 37:
Probably buy 52 51 43
Probably not buy. 13 18 14
Definitely not buy 3 8 7 When asked to choose between a $1.59 28 oz. Heinz plest c bottle and a $1.32 Heinz 32 oz. glass bottle, SSl chose the latter, 40: the former.

Among the 831 of r spondents who would definitely or probably buy the 28 oz. plastic bottle (unpriced), 13% said that tbey would buy the plastic bottle in addition to an exist:ing ketchup size that they cur r ent.Iy used, while 83% said that th plastic container would b used as a replacement, primarily for taP. 32 07.. bottle:

Si%. Would Replace (Base-Positlv Purchase Interest, N=164)

Otber/Don't know

11%

37%

10%

7%

Wben ask d what they 11k d about the 28 oz. plastic bottle, respondents most frequently m ntioned "unbreakable," "squeezable," "e.uy to handle," and the "flip-top cap." One-third of respondents voiced dislikes about the p astic bottle although ther was no one pred~iDant complaint. SOllie of the IIIOr frequently cnentioned concerns were "too large to store" and "OOttOIll was too large." At least 85% of respondents stored the plastic bottl in the refrigerator after op ning. Nineteen percent agreed strongly I.'ith the sta ement, "plastic squeeze containers are som~hat more expensive, but they're worth it."

"Hore E.xQ nsive, but Worth It" {Base-Total R s~ndents, Nl="200 2 •
Strong SOCIIel.'bat Somewhat Strongly
Agree Agree Disagree Disagree
19% 431 20t 13% 5% ""'
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Exhibit 9 (continued)

5. Promotiona Activity on Last Purchase

Heinz

Regular price

"On sp cia ," no coupon "On special," vi.th ret.ailer

coupon

Ne~spaper manufacturer coupon Magazine/Mail/On-pack coupon On sp cial display

44% 23

1 22 9 18

6. Importance of Ketchup Attributes

Total

Whole family likes it 64%

Best flavor 62

Good value for tbe money 56

Good to use on food at the table 54

Brand name 1 trust 50

Thick consistency 40

7. Attitudes T~ard Ketchup

Srand Differentiation

seee brands are web t.hicker than others There's a lot of difference be~ en

ketchup brands

Most brands of ketchup t.aste the same

Brand Loyalty

I like to stick to one brand of ketchup

Price/Value

Some brands of ketchup cost more and are worth it

When buy~ng ketchup, t pay close attention to the price

1 usually buy whatever ketchup brand is on sa e

Packaging

Would pay up to 20 cents more for ketchup in a plastic bottle than I would for a

glass bottle I

I like the idea of 'packing it in squeeze

bottles

The convenience of squeezable packaging for ketchup makes it worth an extra 20 cents per bottle

586-035

Hunt's D 1 Monte Private Labe

46% 30

62% 28

42% 31

1 17 5 19

2 B 6

2

5 4 17

% of

Users Stating Attribute Is
"Vet)' Important"
Heavy Medium Light
Users Users Users
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63 65 58
59 58 53
60 56 48
50 53 47
42 40 37
% Stating That They
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Heavy Medium Light
Users Users Users
74% 66% 59%
59 57 Sl
15 15 11
59 62 58
47 46 46
57 49 45
22 22 19 10

8

10

37

33

33

12

10

11

- 21 - 586-035
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?LAS:IC 30T!"_::: K:.-:CKUP (A)

586-035

• LEO BUR 'ETT COMP.\NY. I C. IU. HEINZ

~ -A~$~f-'-l-M-E~O~A--H-O--.~!~C~O~.~O~E~O~(~~-$2~)---------~--c_--~----ne-'-n--~-.-t-e-T-¢-:U~~---~---·-~------------~H=ZH~~'~330~~

I. FUI.LUP CAMet VO): " I take """'. H .~ K etcno..p "t the oean: of y<J<Jr me~_

... """etN"SI ama:i"Sl ""POe"" b<!fore Y""'re half throug>.

1. Now .. "id\ ~ would you rathe, _ 0" you< -"bU<9"'?

1982 H.einz ~e:chu:l :'1 Co=erc ial

2. _ put It right hetL-

8. He'lTL

:l. ."., out U,I~ H.-.t's Ketct>up ,;gIIt her _

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- 25 - 586-035
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'helpful in sample-size problems. To illustrate, suppose you are conducting a national poll to determine the percent of voters who will vote for the Republican candidate in the next presidential election. Suppose that you want to state with 95% confidence that your results are within an interval of L = 5 percentage points. We can be quite sure tbat/will be between 0.2 and 0.8, and hence tbats will be between 0.4 and 0.5. Let's assume the "worst case"-tbat s == 0.5. Then our sample size n. should be such that

n '" 16s'-/L 1 = 16~{).S2JO.Os2 '" 1.600 .

In fact, many national polls involve around 1,600 respondents, and are commonly reported as having a 'margin of error" of 2Y:% (half the length of tbe confidence interval); the confidence level of 95% is implicit

Sampling in the Real World

Apart from random sampling error, there are tWO other sources of error in making mferences about a population from a sample. The first involves response bias and the second concerns the representativeness of the sample.

ReepoMe Bla.

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AJmO<St all questions about people's opinions, attitudes. expectations, or preferences involve response biases of various Iriods. When 44% of the voters sampled in a pUQlic-opinion poll in June say tney will vote for the Republican presidential candidate, and wben the actual vote in ovember turns out to be 53% for the Republican, the polls are often said to have been "wrong." However, the discrepancy between 44% and 53% can seldom be accounted for by sampling error. Instead. it is mostly due to the fact that respondents did not do in November wbat they said they would do in June.

Sucb response bias stems from a Dumber of factors.. FU"St, opinions change over time.

Second, people do cor always say what they will do or have dooe. Third, peopl.e cannot answer certain questions realistically; for example, they seldom know how much they will spend on a oew product in the coming year. Fourth, the way in which a question is asked sometimes influences the response. For example, of 764 people who .... ere ;uked whether tbey greed or disagreed with the statement, "Advertising often persuades people to buy things they sbculdn't buy,· 76% agreed. 20% disagreed, and 4% had no opinion. while of m people who were asked a similar question about the statement "Advertising seldom persuades people to buy things they shouldn't buy: 40% agreed, 56% disagreed, and 4% had no opinion. I I

Altbougb the-way a question is asked may influence the answer, the same question asked repeatedly accurately reveals changes in respondents' anirudes over time. The President'S "report card" is generated by aslcing respondents periodically to assess the President's performance. As long as the question remains the same, a sharp drop in performance rating that cannot be explained as mere sampling error is a good indication tbat the population at large bas become

tl. R.aymood A. Bauer and Stepbeo A. Gccyser. Advmirittg in A"""'*'a: T1u CQIISWrW V_. OMsion of R~ HIlMII'd BU$11le$S SdlOOI. 1968.

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191.Qi:Z

The implications of a nonrandom sample depend on the reason for tbe lack of randomness and the nature of the tudy. [f you are asking about evening television viewing habits, people who are not at home in the evenings are likely to be very different from people found at borne at that time. But if you are interested ill which of twO spaghetti sauces they prefer, it may be more reasonable to believe tbat at-homes can be treated as nearly, if not exactly, representative of not-at-homes. It is sometimes possible to lest such a proposition by making special efforts to track down a sample of not-at-homes but one is always left with the lingering doubt that the trackable cor-ae-bomes arc different from those wbo could no! be tracked. And it is even b rder to test whether respondents who WIllingly aoswer an interviewer's questions are representative of those who slam their doors in the interviewer's face. or hang up the telephone.

One corrective ction commonly taken by sampling organizations is to replace randomly selected oonrespondents with respondents that have ideo tical, or nearly identical. demographic profiles, such as age. gender, eth.oicity, education, and income. To the extent that these demographic characteristics help to distinguish the responses of different segments of tbe population, this replacement technique makes sense: for example, if the young and the old have markedly different attitudes towards rock music, then replacing a young noarespondent with an old substitute would distort your sample esrimates about the population'S musical tastes, while replacing the young nonrespondeat with a young substitute would void tbat particular kind of distortion. evertheless, the replacement necessarily differs from the noarespondem with respect to willingness to respond, and to the extent that one can hypothesize a link between willingness to respond and musical taste, a problem remains, IT 00 such link seems plausible, then this correc ive action is probably sufficient to render inferences about the population re_liable.

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13 Degrees of Ffeedom

You may have noticed that the sample standard deviation uses a divisor of n-I before you take the square root, while the stand rd deviation defined in Data Analyris and Statistical Description (DASO) uses a divisor of fl. Or, the Excel function for the standard deviation in OASO was :STDEVP, wbile here we are using =STDEV. Wby the difference?

In DASO we were computing the mean and standard deviation of a popalatioa. Here, we are computin tbe corresponding Statistics for a sample. The same computations are wed for the populatioo and the sam~le mean, but there is a slight difference (divisor of n-I vs. n) for the sample standard deviation. I

JUSt as tbe ample mean ~ an estimate of the population mean, the sample standard deviation is an estimate of the population standard deviation. We would like the sample mean and the sample standard deviation to be "unbiased" estimators. By this we mean that, if you took repeated random samples of fixed size (say fI-IO) with replacement (i.e., witb the possibility of drawing the same element more than once in a given ample), the sample estimate would sometimes be too high and sometimes be too low, but in the long run would "average out" to the corresponding population value. The sample mean is an unbiased estimate of the population mean, but the sample standard deviation using a divisor of fI, is Dot an unbiased estimate of the population standard deviation. It will "average out" too IOW,16 because in order to compute the sample standard deviation, you first must compute the sample mean from the same set of data.

In statistical terminology, e:very one of the n sample values provides a degree of frudbm for estimating sample statistics, One of these is "used up' in estimating the sample mean, leaving just 11·1 for estimating the sample standard deviation. 1.0 order for the average value of the sample standard deviation to be approximately equal to the value of tbe population standard deviation, you should, instead of dividing the sum of squared deviatioo.s by It (the sample size), divide by n-I (tbe degrees of freedom), and then rake the square root. (In Excel, the =STDEV function does this for you automatically.)

E-a:ept when the sample size is very small (10 or less), this refinement is of DO practical consequence, and this discussion is included to introduce the concept, not to plague you with additional computational burdens, When we come to regression, however, more degrees of freedom are used up in estimating additional statistics, and the degrees-of-freedom issue will become consequential

IS. Because Ibc ~Dd;I:d error (mc St3cdatd <leviation 0( the cooficklxe distribution) also iIMlMs l division by vh • It is easy to b«:ome coofwed. Hen: we are t3llcing about h.ow 10 compute s, the $3IIlplc St3lldard c1cviarioo, wblell Is an csdm4tc of the population StlUldard deo<iatioo.. "The sQlladard emit', as pr-cviousty statc4. b sjvfi

16. In tbe at~, if you U$Cd 3 mptc 0{ 1 b~igbl to c:stimalc tbc: SW1dard dcY!atioo of tbe hciYlIS of tll'$t-y.:ar MBA . SUKkDlS at HBS. your sample standard c1cviation, ~g a dMsot o( It. o.'OU.1d be O. wbiell Clearty undere:stimata Ute !.rue value.

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