Lindt of Switzerland - Assignment Example

TABLE OF CONTENTS 1.0 Introduction 2.0 Micro-level analysis 3.0 Macro-level analysis 4.0 Lindt as a market-orientated firm 5.0 Conclusion References 1.0 Introduction Lindt and Sprungli AG, branded as Lindt, is a Switzerland-based confectionery and chocolate business producing gourmet and premium chocolate products distributed throughout the world. The company’s product line consists of its most famous Lindor chocolates, a product consisting of a hard chocolate shell covering a smooth, liquid-like chocolate interior that comes in many different flavours. Lindt also produces seasonal products, such as the chocolate bunny for Easter, chocolates manufactured in block form, speciality petit fours, ice cream products, and chocolate drops filled with various liqueurs. In 2013, Lindt boasted significant corporate revenues of 2.88 billion CHF (Lindt 2014), or the equivalent of 1.8 billion Pounds Sterling. Between 2012 and 2013, revenue growth represented a 10.3 percent operating profit increase (Nieburg 2013). This is a significant accomplishment in a market with stagnant growth (Nieburg), a growth rate of only 0.9 percent estimated through 2015 (IBIS World 2014). In the UK, the company distributes its products in a very saturated environment, competing against major brands with domestic brand recognition, including Mars Incorporated, Cadbury, Nestle, Hershey’s, Dove, Ferrero Rocher and Thornton’s on High Street. This report aims to understand what contributes to such significant growth for Lindt in a market environment that is sustaining limited growth. The research consists of a micro-level and macro-level analysis of the UK market, explores aspects of consumer behaviour in the chocolates industry, and other relevant factors that impact the apparent market success of the organisation. How Lindt has managed to achieve significant growth when many other competitors are struggling to achieve substantial increases in revenues requires an in-depth investigation of the brand, its competitive strategies and integrated marketing communications utilised in the UK market. 2. Micro-level analysis To fully explore Lindt’s apparent market success, Porter’s Five Forces Model is a viable method by which to examine in the micro-level factors impacting the business. This model includes five dimensions that pose risks or opportunities for the firm, including competitive rivalry, threat of substitutes, buyer and supplier power in the market, as well as threat of new entrants (Gamble, et al. 2010; Porter 1987). Competitive rivalry advantages for Lindt could explain the firm’s superior revenue growth achievements. Lindt maintains an advantage of having a very highly recognised brand name, having been a chocolate producer since 1845. The company positions itself in terms of quality, drawing on a promotional strategy which emphasises product superiority over that of competition. Figure 1 illustrates the promotional strategy of Lindt which consistently emphasises its products as being gourmet, high-quality and premiumisation. Figure 1: Integrated Marketing Promotions Emphasising Quality Source: Mortimer, N. (2014). Lindt buys US chocolate rival Russell Stover in expansion push. [online] Available at: http://www.thedrum.com/news/2014/07/14/lindt-buys-us-chocolate-rival-russell-stover-expansion-push (accessed 18 December 2014). Source: Advantageous Advertising. (2013). 4 memorable Food Network Magazine Advertisements. [online] Available at: https://advantageousadvertising.wordpress.com/2013/03/04/4-memorable-food-network-magazine-advertisements/ (accessed 17 December 2014). The brand is consistent in its integrated promotions, ensuring that consumers do not lose the perception that the products are of superior taste, richness and relevant for the chocolate connoisseur. Consistency in IMC is absolutely vital for supporting a brand’s market reputation and the establishment of an effective methodology to differentiate from competition (Kitchen, et al. 2004; Duncan and Moriarty 1997). However, what justifies the apparent effectiveness of quality positioning? Figure 2 illustrates a positioning map of competition in the UK to explain Lindt’s quality focus success in promotion. Figure 2: Positioning Map of Major Competitors in the UK Main competition in the UK is positioned in the lower quality range, justified by a lower price. Lindt, which sustains a higher price point, must justify a premium pricing structure with tangible quality and perceived quality in order to capture market attention and loyalty toward the brand. Cadbury, as one example, positioned moderately in terms of quality and price, utilises promotional materials with less emphasis on the product, but more focus on the end users’ lifestyles and emotional characteristics. Figure 3 illustrates Cadbury’s approach to promotion. Figure 3: Cadbury’s Market-Centric Lifestyle Promotional Approach Moeen, H. (2011). Cadbury Billboard Advertising. [online] Available at: http://pakmediablog.net/3474/cadburys-fascinating-outdoor-campaign/ (accessed 18 December 2014). Why, though, is this not providing Cadbury with the type of growth that Lindt has achieved? A study conducted by Mintel (2013) found that only 22 percent of British consumers surveyed would eat more chocolate if available at a lower price structure. Lindt, itself, stated that consumers of its product will not abstain from seeking high quality chocolates and a legitimate quality taste experience, even in an uncertain economy (Nieburg 2013). Mars utilises this same lifestyle-based promotional strategy, under its “you’re not you when you’re hungry campaign”, featuring Mr. Bean as a means of attracting market attention. Figure 4 illustrates this IMC user-focused approach. Figure 4: Mr. Bean and “You’re not you when you’re hungry” for Mars Inc. Source: Mars. (2014). Welcome to Mars UK. [online] Available at: http://www.mars.com/uk/en/ (accessed 18 December 2014). The UK market is characterised by market needs which demand top quality products that underpin their consumption decision-making. This illustrates that Lindt is market-orientated, understanding what drives chocolate consumption in the UK and creating promotional strategy that is relevant for the legitimate expectations of consumers. Concurrently, the premium ingredients utilised in Lindt’s manufactured products illustrate market orientation where the firm focuses more strongly on product in the marketing mix which dictates the majority of consumer consumption decision-making; in greater proportion than concern over how a brand connects at the socio-psychological level. Lindt is relatively isolated from threat of substitutes, as premium or gourmet chocolates have few substitutes in the market. Buyers can, in some degree, defect to lower-priced brands, which has been a recurring trend in the UK market in the post-recession economy (Nieburg 2014). However, this has impacted Mars, Nestle and other moderate-quality, lower-priced products whilst Lindt achieved 10 percent growth between 2012 and 2013. This would seem to support that buyer power is only a minor risk in an environment where premium taste experiences underpin a willingness to pay a higher price. Furthermore, in this market, suppliers have considerable market power as a result of limited cocoa and other confection raw materials products in the global supply chain. The switching costs for these vendors are low in a market where many competing chocolate companies have lucrative contract negotiations. However, this impacts all competition throughout the entire chocolates industry in the UK whereby all competitors must consider rising supply chain costs, not just Lindt. To enter this market and compete against major brands with significant capital and manufacturing capacity is substantially-difficult, thus new market entrants represent limited threat to Lindt; especially with a brand reputation spanning over 150 years. 3.0 Macro-level analysis The PESTLE Analysis framework is the most relevant to assess the macro-level environment impacting Lindt’s successes. Political – The UK is a stable, capitalistic and democratic free market whereby businesses have significant autonomy in decision-making, dictating supply and demand, and setting market prices with limited regulatory forces. However, the government is creating new policies which are informing UK citizens about obesity concerns. The UK Prime Minister, David Cameron, even publicly suggested that he would cease consumption of all sugary foods for a day to back public health campaigns to combat obesity (Daily Mail 2014). Only three Lindor truffle balls maintain 60 percent of the recommended daily saturated fat for a UK consumer in a day (Global Chocolates 2014). With growing special interest groups, the National Health Service and government advocating caloric and fat content reduction in the UK consumer diet, this could pose significant threats in chocolate consumption volumes in the country. Economic – The UK economy is emerging from a difficult recession, however consumer disposable incomes have fallen by 3.8 percent at the end of 2013 (Arnett 2013). This maintains a moderate risk for Lindt in terms of consumers having a propensity to tighten their belts for certain consumption decisions related to pricing. Concurrently, significant rises in cocoa prices in the UK supply chain impact operational costs for Lindt. Many competitors are attempting to alter ingredients, such as using more artificial flavourings and vegetable oils to offset these substantial rises (Bruce 2014). Lindt, however, with such a high reliance on product emphasis in the marketing mix cannot seek lower-quality ingredients in order to satisfy consumer expectations for premium chocolate consumption if they are going to pay a higher price for chocolate products. Social – In the UK, consumers that purchase premium products as a form of conspicuous consumption have declined. This is consuming higher-priced, top quality premium or luxury products as a means of expressing to social reference groups that they have achieved wealth or superior social status (O’Cass and McEwen 2004). In fact, the post-recession consumer is finding more comfort in frugality and thrift is becoming a chic consumption trend (McDougall 2011). Hence, social trends that are supporting a more prudent spending pattern could impact how consumers view the consumption of gourmet and premium chocolates in a changing UK social environment where social factors influence buying decisions. Technological – There are no identified technological factors providing Lindt with advantages or threats. The UK supply chain affords procurement of innovative production and development technologies and major competitors have adequate warehousing technologies to keep its chocolate products fresh. Legal – Lindt must be ever-diligent of UK requirements for accurate labelling of its products that do not mislead consumers. In the U.S., Lindt was forced to settle a lawsuit for $5.25 million in which plaintiffs alleged that Lindt’s Ghirardelli unit had labelled its products as containing premium baking chips when, in fact, the ingredients did not maintain regulatory standards for what constituted an appropriate cocoa solids level (Askew 2014). Legal scenarios such as the aforementioned can provide Lindt with negative publicity about its ethical practices that can impact consumption behaviour. A recent study by Oh and Yoon (2014) found that consumers maintain a more favourable impression of companies with strong ethical stance and would seek these brands over less-ethical competition, a new trend in ethical consumption. However, Lindt seems to offset these risks by having a strong ethical stance with well-publicised efforts in corporate social responsibility. Environmental – Research could not uncover any substantial threats in this category that did not also impact competition. Issues such as biodegradable packaging research, water consumption minimisation, and optimisation of transport routes impact all competition. However, Lindt addresses these issues in its corporate social responsibility statements. 4.0 Lindt as a market-orientated firm Thus far, this report has identified that market demand in the chocolates industry are inclusive of high quality and premium ingredients that exemplify their sophisticated tastes underpinning consumption. Additionally, frugality is becoming chic from a social perspective with less emphasis on conspicuous consumption characteristics. Outside of these factors, research indicates that three in ten consumers (28 percent) is willing to pay higher prices for products that source raw materials ethically (Mintel 2013). Furthermore, consumers in the UK are maintaining much more concern about health and obesity (Research and Markets 2013). Hence, in order to be considered a market-orientated company, Lindt should consider the following consumer characteristics and cater to these expectations: Providing legitimately superior products with top quality ingredients. Maintaining an ethical stance and policies. Showing concern for frugal and thrifty consumption evolutions. Addressing obesity and health concerns Lindt accomplishes market orientation in terms of product emphasis in the marketing mix. The firm’s value proposition, indulge yourself with Swiss quality, underpins the firm’s guarantees that consumers will have a quality consumption experience when selecting Lindt over that of competition. This is further accomplished in an environment where rising supply chain prices have not changed the firm’s direction to scale back ingredients (such as using vegetable oils or artificial flavourings) which is a common competitive activity to offset supply chain costs related to cocoa inflation. By not sacrificing product quality, the firm is market-orientated and continues to illustrate value to consumers related to product guarantees. In terms of ethics, Lindt devotes considerable resources to corporate social responsibility to meet market needs. The firm selects only the finest cocoa beans in the supply chain (Lindt 2014) and has established stringent inspection policies to ensure that these raw materials meet strict expectations for quality prior to procurement. Lindt also devotes resources to enhancing the lifestyles of its cocoa farmers along its global supply chain (Lindt 2014). The business pays a premium for its cocoa products which provide funds for improved water well construction for farming communities, mosquito net distributions, and Internet access at regional schools (Lindt). These investments satisfy the ethically-minded consumer that is more willing to buy products from companies with strong corporate social responsibility. In relation to frugality and thrift as an evolving consumer trend, the business has responded effectively. Lindt has sought to optimise its entire raw materials procurement model as a means of offsetting substantial rising prices for cocoa and other ingredients (Lindt 2014). The team-focused environment works towards more productive cost management strategies which have ensured that price increases are not passed onto consumers for its products (Lindt 2014). The business takes dramatic steps along its operational model and other aspects of the value chain to ensure that pricing does not become unfavourable for the discriminating consumer target segments. Obesity and health concerns, however, are not being addressed at Lindt. Many competitors have filed patents for new lower-calorie or lower-fat products. For instance, Hershey’s was issued a patent in 1995 on development of a dietetic product and Cadbury granted a patent in 1999 for manufacture of reduced fat and lower calorie products (Google 2012). This illustrates a focus on improving research and development to meet the needs of health-conscious chocolate consumer segments. Cadbury has made public statements and commitments in this area, promising to phase out its giant-sized chocolate bars and even Mondelez is committing to assist in aiding consumers to snack healthier (Tran 2014). In 2012, Mars made a public commitment to reduce calories on its products to be more aligned with a government program to limit chocolate products to only 250 calories (Tran). Research uncovered no evidence of Lindt currently distributing or developing lower-fat or lower-calorie products and has made no public responses or commitment in this growing campaign to reduce obesity levels and promote healthier consumption in the UK. The company, therefore, does utilise product in the marketing mix to effectively position the business and provide guarantees that consumers buying Lindt products will receive a quality taste experience. Pricing in the marketing mix is also a concern for this generally market-orientated business by changing operational strategies to reduce costs and streamline procurement to ensure that price-sensitive consumers are not negatively affected by future price increases. Promotional strategy which emphasises superior quality as a consistent method underpinning a quality-focused value proposition also illustrates a market-orientated business that understands lifestyle connections are an inferior method of gaining consumer interest in the Lindt brand as compared to competition that have witnessed revenue declines by using lifestyle-related promotions for their chocolate products. The business has determined that product quality and consistent communications toward this promise is more effective for satisfying consumers and illustrating the firm’s commitment to superior quality products. The firm is able to keep costs stabilised on its products whilst still procuring top quality ingredients through effective management and cost management systems; designed to satisfy the consumer target segments as a market-orientated company. Lindt’s lack of recognition and effort toward addressing obesity and health concerns with consumers may very well be a product of having to change product ingredients to reduce fat and lower sugar content. It has taken decades for Lindt to build a procurement and quality control model to ensure it is using top quality ingredients and R&D toward healthier options may very well sacrifice the quality that consumers have grown accustomed to through the years of Lindt’s operations. This lack of focus on healthy consumption and obesity reduction does not indicate a lack of market-orientation, rather the opposite. Foregoing this one singular, evolving market demand ensures superior quality of all of its products which underpins the firm’s entire positioning strategy, its value proposition, and competitive strategy against lower-quality competition such as Mars and Cadbury. If the firm changes its ingredients to healthier options, the company may very well undermine decades of quality guarantees that has built a loyal consumer base in the UK. In fact, the company utilises a higher sugar content in its products in the United Kingdom than in broader European markets (Lindt 2005) and has for many years. Hence, to reduce this sugar volume to satisfy changing political efforts toward healthy foods consumption could significantly erode the firm’s long-standing brand reputation founded substantially on superior quality and taste. 5.0 Conclusion As illustrated, Lindt is a market-orientated company that has managed to outperform its main competition in terms of revenue growth in a market stagnant in relation to growth and where many chocolate producers have witnessed revenue declines. The firm’s products, price and promotions are superior to competition and are directly aligned with established knowledge of consumer segments, their demands and expectations, as well as consumption characteristics. The firm aligns its people, processes and operations to fulfil these needs, giving the firm competitive advantage as a quality-focused organisation that satisfies the quality-minded consumer target segments. Unlike competition that raises prices to offset rising costs along the supply chain, Lindt recognises that this could be detrimental to its revenue growth and reputation. Though Lindt’s products have a premium pricing structure in comparison to most competition, consumers in the UK have been willing to pay this price. However, in a market where frugality and thrift are growing trends, Lindt recognises market needs and, as a market-orientated company, seeks internal changes to ensure consumers remain satisfied. 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