Why niche brands win

Once upon a time, big companies bought smaller companies and integrated their offerings into the larger product line. It made sense to sprinkle the better-known brand on the lesser-known products and leverage all that brand power. Hence DEC Compaq HP.

But now big is bad. Consumers are fleeing the mainstream for the authenticity and quality of niche products. Today, when a big company buys a little one, it hopes that nobody notices. The aim is to keep the indie feel of the niche brand, while applying the distribution and marketing advantages of the big acquiring firm.

I spent the morning in Hershey, PA ("The Sweetest Place on Earth"), speaking to Hershey about just this. A few years ago the candy giant bought Scharffen Berger, a high-end chocolatier based in Berkeley. (As it happens, my kids' school is right next to the Scharffen Berger factory, so I start each day with the lovely smell of chocolate-making; indeed, some of the book's chapters were sketched out in meetings at the factory's chocolate-themed restaurant, Cafe Cacao). The question is how Hershey can benefit from Scharffen Berger's indie/artisinal cred without screwing it up. I won't tell you more than that about the conversation, but I will give you an example that I brought up as an analogy.

If you go shoe-shopping on Zappos, you's see that there's a category for "Vegetarian" shoes, which is to say shoes without leather or other animal products. The bestselling brand in this category is Converse sneakers, which as you probably know is the cool shoe of the moment (and not just among vegans). In an era where consumers are socially conscious and green issues drive taste, being both cool and kind to animals is a good thing.

What you probably don't know--and not by accident--is that Converse is a wholly owned subsidiary of Nike. Yes, the Nike of sweatshop infamy (unfairly, since Nike now has some of the best business practices in the industry, but lasting perceptions have power). For consumers who care about such things, it looks like this:

No wonder that the Nike Store doesn't mention Converse and Converse marketing doesn't mention Nike. If people knew that Converse was a division of Nike it wouldn't be as cool. Call it brand dis-synergy.

Back to candy. Hershey has just launched AllChocolate.com, which is built around the high-end boutique brands of its Artisan Confections subsidiary, such as  Dagoba Organic Chocolate, Joseph Schmidt, Cacao Reserve and Scharffen Berger. Hershey is mentioned as a "sponsor" of the site, but the connection isn't drawn much more explicitly than that.

It is a testament to the inversion of power in the marketplace that for the influentials Hershey is trying to reach, an artisinal Berkeley chocolatier such as John Scharffenberger apparently has more brand power than America's largest candy company. But that's exactly the conclusion Anheurser Busch came to when it created Long Tail Libations. Niche brands rule!

[UPDATE: Greta Lorge from the Wired Science blog reports on one way not to promote a chocolate brand: sponsor giddy research on how the sweet stuff might make you smarter.]

Comments

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[BWJones]

Well, as I sit here sipping my Blue Moon Belgian White Ale (subsidiary of Coors), you could color me surprised as I had no idea that both Scharffen Berger and Converse, both brands I purchase, were owned by Hershey and Nike respectively. Reminds me of a conversation I had back in 1986 with some fellow punk rockers when I said "with all of these big corporate mergers, it's getting harder to be cool...."

[Timothy]

In some ways this relates to the thesis of Heath and Potter's 2004 "Nation of Rebels," namely, that positional goods (the opposite of network effect goods, their value increases as fewer people use them) cannot be made widely available in an "age of abundance.” In their eyes, this drives all kinds of counterculture behavior - competitive consumption by another name. But it would also drive the brand fragmentation that Chris describes.

Here's the Amazon link.

[Aayush Iyer]

Funny though that now people will know their Converse\Nike connection a lot better :)

What I'd like to know is if the niche brand works in developing markets. In places like India, the Nike and Adidas still do a LOT better than Niche brands. Does it take time for perceptions and taste to come from individual qualities instead of the giant brand image?

[worth]

Aayush, what people look for first is a product or service that they don't believe will betray them. That's why brands arose in the first place - names you could trust. In the U.S., that is now taken for granted and people feel safe branching out from the well-known names. In India, that may not be the case yet, so people are going with the brands they can trust. I would bet that an artisan in India could sell more shoes for more money online to American customers than they could in their own backyard, since we take the quality for granted and would be taken by the novelty of wearing shoes that no one else has.

[Jed Christiansen]

Another Nike subsidiary that is not incredibly obvious is Cole Haan.

This concept has been in practice for a while. Black & Decker bought a small company back in 1960. In 1992, they wanted to start a line of professional tools, but with Black & Decker's poor reputation in the marketplace, they had to keep the new line very separate and distinct. Suddenly, the company bought in 1960 had it's name resurrected, and the legend of DeWalt tools begun.

DeWalt immediately garnered a great reputation, and the fact it was owned/operated by Black & Decker simply wasn't advertised. It worked for them!

[Ehren Cheung]

Excellent post. I think the niche brand idea can also be applied to Flickr and Yahoo. It is also one of the reasons why when Yahoo acquired Flickr, there was no rush to fully integrate and embed the Flickr users into the Yahoo portal of applications. I know of a number of people, myself included that were initially fans of Flickr only to be severely disappointed when Yahoo acquired the Canadian startup. Even to this day, Yahoo continues to struggle with the idea of getting rid of the Flickr name to push forward its own name, but in my opinion that'd be silly considering Flickr is renowned in the realm of photography whereas Yahoo Photos lacks that reputation.

[Jason Falls]

Another good example of a niche brand's purchase being handled correctly (disclosure-I work for the ad agency for said brand) is Maker's Mark. Beam Brands owns it, but allows it to continue it's folksy, among friends marketing strategies much to the corporation's delight. Few folks outside the spirits industry even realize it's a Beam product.

[BillyG]

Converse is a division of Nike? Damn...

[Vincent LaConte]

Seems to me the medium-term trend is definitely towards consolidated ownership, but conversely (no pun) disaggregated brands.

Marty Neumeier has the definitive word on this strategy in "The Brand Gap" and "ZAG" -- building a "house of brands" (rather than a "branded house"), one must be careful to avoid/minimize cross-brand contamination.

Yet another example of the many tiny forces working in concert against big companies getting "too" big.

[David]

And Starbucks owns Seattle's Best Coffee. I guess the best strategy is to own all the major brands and all the niche brands, so no matter who consumers buy from you win.

[crypt0]

I don't think this is a niche brand vs a major brand type of thing. It's about what the brand represents and stands for. Hershey's doesn't stand for high end chocolate, so it would be suicidal for them to try to make it so. It's not that niche brands are winning, it's just they stand for something DIFFERENT than major brands.

[Mary Warner]

For a good discussion about the psychology of how people relate to brands, especially niche brands, check out Alex Wipperfurth's book "Brand Hijack."

Did you know that Unilever owns both Dove and Axe? I have to credit an unknown blogger for this piece of news. Dove has the Campaign for Real Beauty, while Axe promotes sex-crazed women. How's that for keeping brands distinct?

[Dick Rowan]

I see all brands as pre-packaged decisions. Big brands are big packages that help us make broad decisions about a product category or manufacturer. For example, “You can’t go wrong buying a Toyota.” The assortment and variety possible only in niche brands provides us with more personal decision packages (but not really personalized).

I think the larger point is that most of us can't keep up with the changing business structures or corporate shenanigans behind our brand choices. Expectations for corporations are low. Products rule.

[Elvis]

Maker's Mark is owned by Jim Beam? Damn, another one bites the dust.

As an example of how NOT to do it, GM buys Saab and promptly replaces their quirky, distinctive cars with rebadged Chevys.

[Joel]

Very good point. Also consider Chipotle's (the burrito restaurant based on the Subway-made to order concept. McDonald's purchased it a few years back and has not at all tried to co-brand the companies. As a matter of fact, they have not marketed the purchase at all. Doing so would harm both the Chipotle's brand and perhaps even McDonald's brand. No one wants their healthy burrito to be owned by a fatty multinational corporation.

[David]

It's like there's a whole new positioning strategy. Stealth branding.

[jonney]

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[Shahar Even-Dar Mandel]

Earlier today I tried sending a trackback to this post, but somehow failed, so here is a link instead

[doug]

One of my favorite quotes in this vein is from the memoir of the owner of Sterling winery after they sold out to Heublein brands. Heublein wanted them to buy much larger volume tanks to achieve economies of scale. Sterling responding by saying "we like to keep our reds separate from our whites."

[coloncleanseMike]

I agree in regards to the vegetarian shoes comments... Increasing awareness through popular brands "is" a good thing indeed.

[rob]

I agree with the sentiment that it is not an "either-or". Niche brands and mass brands will always co-exist. What is exciting is that niche branding is ever more possible as branders can cost effectively communicate with "networks of interest." No doubt, the big brands are working this angle (e.g.P&G is a data-mining and social networking leader)but the playing field is somewhat more level....us wee folks can get consumer awareness, interest, trial and purchase through target means....that still costs serious dollars, just not has much as before and not simply through guerilla tactics. The landscape has changed. We can use and afford many of the same tactics as the big guys.

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Heublein wanted them to buy much larger volume tanks to achieve economies of scale. Sterling responding by saying "we like to keep our reds separate from our whites."Dove has the Campaign for Real Beauty, while Axe promotes sex-crazed women. How's that for keeping brands distinct?
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[baby]

Ah, man, did you have to go and ruin my love for Converse like that? I have never bought a Nike shoe in my life. I probably never will. Although, I have bought adidas once... and probably will again. The truth is, I just don't like Nike. I never even knew about the sweatshop issues back in the day. I just don't like 'em. But I love my Converses, and now you say I can't like them anymore? Suddenly the brand HAS lost coolness. Shucks!
I think niche brands work well in bigger markets – very well. HP tried to keep the Compaq name brand, but it didn't work. Personally, I love indie, and so am very happy when brands stay as they are even when bought out by big companies. What often used to happen in the past was that the 'big' company would try and 'improve' on the product. It never worked! Besides, one of the other reasons why I think big companies keep the 'niche' brand, is because the company is so big they have to differentiate between products in some way. If changed the converse name into Nike, it would get a little confusing when you are looking for a specific style or shoe. The chocolate company is a good example of this.

[Account Deleted]

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Yes! For example I'd love to have WDFA work on something more adult or just different, even if (semi-)low-budget, that would be released as a Touchstone or Miramax picture instead of as the latest "Disney Classic".