Thanks for the Love

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Kingsford is Barbecue: A Response to Harvard Business School Case Study 9-506-020 by Narayandas and Wagonfeld

I was at the store today, looking at the seasonal section that is slipping away from summer to the fall. The firewood is being replaced with Oktoberfest beers; Halloween candy is rearing its ugly head. The barbecue briquettes are still on the shelf though. There are different sizes and flavors, and various accessories hand around them. There is one thing all those bag have in common – red, white, and blue. Most of those bags show the Kingsford logo. There is one group of bags on the lower left who just carry the colors without the logo. It is a store brand. It is priced 30% less than the comparable sized bag of Kingsford briquettes. I see that display, and it tells me one thing: Kingsford is barbecue.

            In 2001, though, the present situation may not have been so assured. Barbecuing had been growing at an awesome rate: the number of times Americans barbecued had more than doubled in between 1987 and 2000, growing from 1.4 Billion to over 3 billion times (2). Over that time, Kingsford had enjoyed positive growth between one and three percent. Within the grilling category, Kingsford’s biggest competition was the growing use of propane grills, where by 2000 over 54% of US households owned a grill powered by propane where 49% owned a charcoal grill (5). In terms of charcoal, though, Kingsford was king. Since at least 1997, they had enjoyed a majority of the charcoal category. Their biggest competition being private labels such as I saw in the supermarket today, and a competing brand, Royal Oak.

Though Kingsford enjoyed category domination, the activity it supported was maturing, and the category’s growth was “softening” (1). It had spiked as the economy was growing, hitting four percent growth in fiscal 1998 and growth had slowed to two percent to an anticipated loss in 2000 (5). This noted softening is a hit on the share price for Clorox, the parent company. Especially important to note is that charcoal represented a higher profit margin than most of the company’s other brands, since it was nine percent of the revenues, but more than that for net profits (3). The problem was not within the category. In fact, Kingsford had become more dominate in the charcoal category over that time. Part of the reason was that the competing brand, Royal Oak, and the private labels had increased their prices. This increase made the once 30% discount into a 10% discount, and made Kingsford an attainable luxury with their higher-quality product (5). The real competition is the gas grilling. Between 1996 and 2000, gas grills shipped had increased from 6.5 million to 9.3 million. At the same time, charcoal grills shipped had stayed relatively flat, going from 5.1 to 5.9 million units shipped (5). This created an imbalance: where once there was parity between gas and charcoal grills, five percent more households in the US had gas grills as opposed to charcoal grills in 2000 (15). The brand managers Marcilie Smith Boyle and Allison Warren had a dilemma on their hands. How do you get back to that four percent growth and pad Clorox’s bottom line?

            What Boyle and Warren need to do is simple to say – they need to revive the growth that has halved to a more traditional path of around 4% annual growth without hurting profitability. There is also not much time to accomplish this achievement, as 11,000 employees of Clorox are depending on their success (3). I will look at various solutions to bring Kingsford to this path and then identify what is best based on the evidence presented in the case study.

            The brand managers have identified four separate areas where they could possibly apply resources to maintain continued growth in the Kingsford brand. The first area they are looking at is pricing. Both Royal Oak and the private label brands have increased their pricing in the last year. The traditional gap between the less premium brands and Kingsford has shrunk. One option then is to increase pricing to maintain the gap between the lower and the upper levels (7). There are multiple issues with that approach though. First off, there has not been an appreciable rise in company costs, making it so that as noted by Marketing Director Derek Gordon: “We don’t have a clear justification for a higher price point” (7). The second issue is that this approach might raise profitability on each bag sold; it has a chance of decreasing sales and slowing growth. The brand managers countered that charcoal has a higher elasticity of pricing because it is seen as a “happy product” (7) which is often an impulse purchase. This allows pricing to increase since the customers are not as affected by the possibility of a price rise. My opinion on increasing the pricing is that it is a suboptimal because it means that it will give back some of the advantage Kingsford has gained over the competing brands. Its share of charcoal category has grown as pricing has come closer to parity. If the price is increased, that gain will be lost and overall profitability will not grow.

            A second option looked at is promotion. This is working with the retail partners so that Kingsford Charcoal is in stock, customers know it is in stock and is visible within the store. This is a key part of maintaining Kingsford at the level of sales it is currently at. In the words of the sales team, “With Kingsford, the key is display – you need to pile it high and watch it fly” (4). Kingsford works hand in hand with the retailers for this display, because having Kingsford on hand increases the sales of the other merchandise by 30% (9). Brand managers on the Kingsford team want to take advantage of this by extending the traditional grilling season, and keep growing the number of “grilling occasions” that people take advantage of outside the summer holidays (9). Looking at trends and food consumption habits, Kingsford may have a tough row to hoe if this is the platform for growth. Exhibit 2 on page 13 shows the spikes where consumption peaks in the summer and goes down in the winter. A full 64% of all US charcoal sales are from May to September. Wanting to expand beyond these months could be futile since it goes against habit and against the weather. One noted factor in the softening of the business in 2000 was the fact that the weather was wetter and colder than normal towards the last part of the year (6). If you want to expand outside the normal grilling window in much of the country, you will face the same sort of weather conditions that hold people back from going outside to grill and are aiming at growing the number of grilling occasions within a small niche of users.

            A final consideration is in looking at capacity. Though the company runs five plants (3), continued growth is possible. The plants only run at about 80% capacity, so there is room. The brand managers do have to know that expansion of the plants or outsourcing of the manufacturing is possible, but doing so entails additional costs that challenge the ultimate profitability of the brand even in the face of rising sales. In the short term, as long as growth does not exceed “5 percent for several years in a row” (10), then those costs are not a problem. Ultimately, growth will necessitate expansion, so the two to five years lead time necessary to build out that expansion should be a factor in the years ahead as the current plants utilize more of the capacity.

            If we, as we have covered, raising prices could hurt the bottom line and in-store promotion only holds the current levels, how are we meet the goal of returning the brand to the previous growth? For me the ultimate answer is to advertise the brand again. Kingsford had not advertised since 1998 (1), nor has Royal Oak or any of the private labels had any advertising on the air (6). This lead to a vacuum where there was no message of charcoal in the air (6). Instead, the main hope was to lead the sales from the retail store, the so-called “Pile it high and watch it fly” approach (4). The problem with this approach is that it was not working, and the sales growth had turned negative. The problem with this need is that the brand managers came to the brand first off with a warning: “There is no additional money to spend” (5). A warning like that only reinforces the status quo. Luckily, we learn that there is a reserve of between five and seven million dollars available in the Clorox “kitty” the brand managers can apply for to spread their message (8).

            To get that money, though, the Boyle and Warren need a strong message, one that does not muddle the brand as senior sales executive Grant LaMontagne notes where marketers change the brand image as they seek greater sales (4). What is that message? For me, it is simple: Kingsford is Barbecue.  No other charcoal or no other method of grilling surpasses Kingsford. What the message does is not try to gain market share over other charcoal companies nor wholly increase the grilling instances, but instead show the superiority of grilling with briquettes over using gas. Looking at the stats and history show this superiority to be true. The company invented the briquettes segment almost 100 years ago (3). Additionally, If you look at the list of reasons that people give for enjoying grilling which include “great flavor, desire to be outdoors, hanging out with family and friends, change of pace, easy clean-up, and informality” (2), the only thing on that list that propane grills have an advantage with is ease of clean up (2). Grilling is a primal and social activity where we eat some of our favorite meats – and according to blind taste tests, those meats taste better with a two to one preference over gas (8). Therefore, what I see is the problem being is that Clorox and the previous brand managers were being complacent in the sustained growth. Investing in the brand with this message, knowing that Kingsford enjoys sector dominance in the charcoal category is a smart allocation of the available resources. The studies done by the third party Marketing Management Analytics show that by taking advantage of this opportunity, Kingsford can grow their brand’s growth by between three and seven percent (8). Kingsford can no longer ignore the gas grills and enjoy the dominance over the category rivals. They have to take to the airwaves and remind the consuming public of one thing: Kingsford is Barbecue.

            The biggest worry, of course, is of outside forces limiting potential growth. Our forecasts have assumed that the economy of 1995-2000 will remain on the same growth path into the near future. An additional headwind was looked at earlier. Though the goal is to reignite growth to the previous path of roughly 4% annualized, our projections have an upper limit of 7% growth. At that rate, Kingsford would face some costly decisions about expansion of factory capacity, though for the short term anything under 5% should be within Clorox’s limits to handle without costly expansion, which would hit profitability negatively.  

            Overall, I think the Kingsford brand has a good opportunity to return to growth and help support the parent company’s bottom line. By investing in the advertising they are repositioning them somewhat. Previous advertising focused on competition in the segment and they were losing out to gas grilling. The gas grill companies had used advertisng of their own, growing from four to ten million a year in dollars spent (6). The problem for the gas grillers is that of the points of difference that they can point to, all they can show a clear advantage is ease of cleaning. In terms of the social aspect and the change of pace, they are comparable to Kingsford. So that means Kingsford can use the point of difference of taste to position the brand as superior to gas. Of the stakeholders, from the brand managers to the director of marketing, the only person who might be worried about the new direction is the sales manager who was worried about muddling the message. The problem is that the previous messages Kingsford had been using were to show points of difference against their competitors, i.e. Lights faster, burns longer (8). The new positioning takes for granted Kingsford’s advantage against those competitors and focuses on the clear and present threat of the gas grill and sells both the experience and the taste of the meat. Gas is clean and hygienic but it belongs in the kitchen where you can use it year-round. If you want a special experience, you use Kingsford, the originator of Barbecue. The final obstacle I can see here is if the managers of the advertising “kitty” withhold the funds to invest in the advertising. Without those resources, the advertising push would be fruitless. However, I feel with the new angle and the studies from the third-party marketing experts would be enough to convince the Clorox Company that this is the right investment, especially when so much is riding on the company returning to profitability. With nine percent of the company’s sales on a high margin item, Clorox cannot afford not to invest.

The House of Debt: A Book That Deserves to be Talked About

There were three major books in economic this summer. First came the Flash Boys, then hot on its heels was the doorstop of Piketty’s Capitol.  Then there was House of Debt. 

Each book had its readers and it policy prescription, but House of Debt was overshadowed by everyone who had read Piketty having to write a think-piece on it. Everyone else, as the kindle stats seemed to show, stopped around page 30. (I for one made it all the way to page 100 or so before I realized that the idle readings that I had during work pretty much summed up Piketty’s argument). 

But I digress. In house of debt the authors pretty convincingly show  that a special feature of the debt build-up in the middle of the aughts was responsible for the long bust and recovery. (I am inclined to be convinced for two reasons. First, I have long been of the mind that the bad guys of the crash who were let off too easily were the ratings agencies. The face of my crisis is Moody’s, S&P, and Fitch. Secondly, I am easily convinced by the things I read. I was not fun to be around after I finished “My Struggle” and not the Norwegian novel, you dig?) So here’s the thing. The borrowing was the problem to the authors because the junior claims on the mortgages – the home occupiers – were the party with the biggest stake in the house in terms of a wealth effect. The homeowners lost their equity and stopped their spending. 

The bailouts thus went to the wrong people.  The banks lost some of the value of their investments when they went underwater, but the people who put in the down payment to move in. It was funny how we went from a party pushing an ownership society in homes (and the social security) to demonizing those people who bought into the rhetoric and tried to join that ownership society. You a cable-television blow-hard on a trading floor being cheered for mocking the idea of trying to get in on the rising home price escalator. It is nice to know that Cuccenelli et al were not complicit in the boom or the bust. 

So we come around and ask, “How do we not let this happen again?”. As much as I hate putting out the old fires instead of building so the fires don’t happen, the authors have a very good actionable idea that will never be considered – share both the risk and reward of mortgages. Instead of having the borrower take all the risk, they would instead have a percentage of the value of the house equal to the original investment. You have a house worth 100K and you put 20% down, and it loses 20% if its value, you are not wiped out, but you still own 20% of 80K. The loan is then figured on the current value of the home. To compensate lenders, you give them some of the upside if houses appreciate. 

What this allows is for people to stay in their home and incentives for them to keep paying on the homes and keep maintaining the homes and to arrest the downward spiral that happens when houses start being foreclosed and emptying out by people who lost all stake in the neighborhood.  (Alternately, domino effect. Whatever you call it, it is a spooky cycle). Will this be enacted? Most likely not, especially with how Piketty took all the air out of the room on any other proposals this summer. However, it has more chance of happening than a globally adjudicated wealth tax, pace Piketty. House of Debt deserves to be talked about.

Schwed's "Where Are The Customers Yachts": Still True After All These Years

This is an awesome book.
It is funny and it feel contemporary.
Schwed has an amazing way with words and a deep insight on the market.
The only thing that feels off is that there are some references that were contemporary with the writing of the book that feel a little off. FOr example, there is a reference to Hitler that makes it seem that the crimes of Nazism had not been fully brought to life.
Other than that it is funny and easy to read.
THe customers still don't have any yachts, but we can't blame Schwed  -- he admits that knowing the problem is not the same as knowing the answers.