Diversification of Quaker Oats and Whitbread plc
Diversification is one of the most important and sought-after concepts in investing (Ed, 2017). Diversification is branching out into a new business segment in new markets and taking new risks (Ashe-Edmunds, 2017). A might firm might own a restaurant in one town and open another one in another town, that is expansion and not diversification. However if the firm decided to open a pet care business that would be considered as diversification. Diversification can be divided into two main strategies: related and unrelated (Ashe-Edmunds, 2017). Related strategies are staying within your market but different sector, for example, a restaurant offering a cooking class. Unrelated strategies are strategies that focus on a completely different market, for example, an architecture company opens a beverage company. There are more risks in diversifying into an unrelated market but it gives the company more sustainability because if a specific industry fails, you will always have a backup industry. One other type of diversification is brand diversification which is when a business sells the same or similar product but under a different name. (Ashe-Edmunds, 2017) Brand diversification are good for expanding your range of consumer by targeting the consumer from low class to high class. A firm might be selling a high-end product focusing on the high-income customer to buy your product and suddenly you might want to also focus on the low/normal income people to buy your product too, so if you were to sell the product under the same brand it might affect the company image.
In a stable business firm diversification is one of the most common marketing strategies (Craig 2015); take Apple Inc. for example it had started off with digital camera and portable CD players but they were struggling to find a profitable source, things changed quicking when in 1997 Steve Jobs decided to change their vision and enter a new market (Chargify, 2016). This is known as diversification and has helped Apple. Inc to become successful until now. Firms are always looking for opportunities to expand their market and gain more revenues. However, providing services and products in new unexperienced market could be very demanding and will require a lot of precautions (Craig, 2015). A fail diversification could cause a company to lose a large amount of capital and in some cases – bankruptcy. In this essay, we will be exploring two companies diversification strategies and find out why has one yield a better result than the other. It is important to investigate about diversification because many established companies will look for ways to diversify their products or/and services (Vallauri, 2017), hence it’s crucial to know the pros and cons of diversification and what are the factors involved in a triumphant outcome. My research question is: Why has the diversification corporate strategy of “Whitbread plc” yield a better result than the diversification of “Quaker Oats”? To further analyze the variables that played a role in the success of Whitbread plc. and the downfall of Quaker Oats, I will be using the SWOT analysis to assist my investigation.
In order for us to be able to explore in more depth of the causes of Quaker Oats failure and Whitbread plc. upshot, we first have to understand why diversification is necessary, the advantage and drawback of diversification. This cooperation strategy is risky, however, it is also a standout amongst other approaches to keep up a measure of solidness in your business (BrandonGaille 2017). It’s relatively similar to a reinforcement plan to float your portfolio when one of your speculations doesn’t work out. In a business, everything is capricious, by broadening your company’s viewpoints and seeking new openings it gives your company more stability (Craig, 2015). A business that is struggling might use diversification, not as a mean of treatment, but instead to remain competitive in the business world. It might not be necessary but it may also save your business. (Craig, 2015)
When a business gets older, it’s more difficult to start seeing exponential growth in the business (Ashe-Edmunds, 2017). There will be a lower increase in market share and profits. The diversification strategies will not only protect you when one of your business fail but will also give you an opportunity to increase your income and continue to receive exponential growth (Ashe-Edmunds, 2017). The best time to use this corporate strategy is during your business saturation phase, where you are getting a steady income neither increasing or decreasing drastically, however it should not diversify into the same sector because the inflection point might means the market for the product/service is starting to decline. (Business, 2017)
Pros and Cons for diversification
It is important for us to know the merits and risks of diversification. Before making a decision to diversify, a firm must take into account of all the possible risks involves. The risks and merits of diversification are listed down below:
Reduces the long-term risks: a successful diversification will lead to leveling out market volatility and reduce risks. When a firm have investment across multiple asset classes it have more stability, hence given that a stock market fail, it would not affect the other business that the firm have obtained and while still generate profits. Diversifying one’s portfolio and holding on to it for the long-term will reduce overall risk significantly, but will not eradicate it completely. (Teo, 2017)
Higher profit: More profits can be earns from several different asset classes, even if one asset class is not doing so well. Furthermore higher profile will means that more revenues are being produced. Different market have different profit limitation, if a firm had reached the epitome of its profit that can be produced in that market, expanding into a new market will provide other alternatives to increase the firm’s profit growth.
Decrease the effect of unpleasant surprises: With more and more businesses appearing and unpredictable clients patterns, there is a higher chance of unexpected events happening that could cost the business to go in debt. However if the firms have another industry to help support the crisis, this means that the business will be able to plough through this phrase with the other businesses keeping this one buoying.
Fight against change in economy: Economy can grow and it can slow down too. People buying habits will change because of the economy. So diversifying a business enable to weather the recession.
Diversification helps to maximize the use of potentially underutilized resources: underuse resources might become useful in other asset classes. When a firm broaden its portfolio, leftover or unused resources from other industry of its own can be used in another industry, hence saving on the expense of buying the raw materials. (Brandongaille, 2016).
Force a business to depend on the expert: Expanding into a new market means that the firms does not expertises in the field, therefore a firm will often find itselfs relying on other expertises to run the business, hence the firm will be generating passive income.
Marginal Profit Returns: There’s an optimal numbers of holdings a company can have to maximize their profit. Over-diversifying can lead to a marginal or average profit return. In some cases it might even reduce the profit, due to the higher brokerage fees, transaction costs or bank charges that comes along with it. (Teo, 2017)
Ruin brand image: If the diversification were to be brand under the same brand, failure in diversification will ruin one’s image and reputation.
Over-diversification will increase risk: Some companies diversify their portfolio for the sake of diversification. Investing blindly a market without considering the nature of the stock which could lead to unintentional correlation between asset classes.
Complexity in investment process: If you were to invest in branching out to different asset class, costs of setting one, the management and the administrative costs would would be more than had you just put that money into the business you already have.
Unexpected cash complication: Tax vary from business to business, this is causes confusions and complicate the finance calculation.
Market research and product identity: Researching about the market can be daunting, moving into a new market means you have no prior knowledge to the detail of the market hence it will be a challenging task. Not to mention, with so many asset classes to care about, a company might not have a strong product identity specifically for each one.
We have looked at the different kind of diversification, pros and cons and the necessity of it: increase market power, responding to recessions, spreading risks… Even though diversifying your business stunt the growth rate of your core assets, but it also means that shall one sector fail, you won’t be losing everything. For a business to become successful, a change in the business strategies is needed. Making changes requires both the foresight to know existing strategies suitable for future opportunities and the discipline to change the fundamental shift in the corporation focus. By changing the direction and the strategies that the company takes the business are able to gain more revenue and profitability, at heights that would not be reached if that had stayed on their original path (Chargify, 2016).
The diversification of the two companies:
Quaker Oats Company
Quaker Oats Company was founded in 1891. Being one of the oldest companies in North America it initially started with the cereal market but later diversify into a range of products: animal feeds, pet food and toy industries (Britannica, 2017), and later had also diversified into optical wear and clothing. In 1983 Quaker Oats Company purchased the Gatorade brand, making Quaker Oats, the market leader of sport drink industry, in 2000 holding 80% of that market share according to the BBC, 2000. In 1994, Quaker Oats Company bought Snapple, soft-drink brand, for $1.7 billion (Feder, 1997). They felt confident the brand was worth the value, with the previous success the company had with Gatorade. (Dumont, 2018)
Nevertheless, the two brands: Gatorade and Snapple had two different identities. Gatorade was meant for sports with a high energy, athletic image. Snapple, however, was more focused on the fashionable side, more for the youth. In just 27 months, Quaker sold the company for $300 million, an equivalent of losing $2 million each day Quaker owns snapple (Feder, 1997). Quaker Oats simply didn’t understand what Snapple identity was; There were two main reasons that led to Quaker Oats diminishment of the brand’s value.
Even though Quaker Oats had successfully diversified into many different sectors, Snapple was a case of over-diversifying and not understand the market. The first reasons has to do with the distribution channel. Quaker Oat thought that they could bring more value by having connection with large retailers such as supermarkets, yet before 1994, about half of Snapple’s sales came from the cold channels: convenience store, shops or petrol stations, where it directly targets their audience and future enhance the brand image. Due to the lack of understanding of a brand identity, Quaker Oats used it’s usual mass marketing techniques and sold Snapple in supermarkets and other not suitable location. Hence leading to inventory problems that forces Snapple to dispose a large number of outdated Snapple cans and ingredients, as well as discontinued flavours. (marketinglens.co)
Not understanding its market, Quaker Oats had tried to use the same approach as it did with Gatorade which was to introduced Snapple in larger sized bottles (32 and 64 ounces) however the consumer didn’t want it (Deighton, 2014). Snapple was a drink that teenagers buy to drink during lunchtime and can finish it in one sitting, however Gatorade was more for sport events and extensive exercises.
The other issue was the manner in which Quaker chose to advance the item, surrendering erratic promoting efforts for a more preservationist approach.
Quaker Oats failed to launch a new marketing campaign until nearly 18 months after purchasing Snapple (Deighton, 2014). By then intensified competition made it impossible to regain the market share that was lost. In 1995, Snapple posted a 5% decline in sales. (marketinglens.co) Snapple started to slide, Quaker had came up with a solution which was to send sale representative out onto the street and asked residence to sample the product for free. Then the company back-tracked to its original identity, however it was too late – it didn’t work.
It was sold to Michael Weinstein in 1997 for $300 million, keep in mind Quaker Oats had bought the company for $1.7 billion. (Gilpin, 1997)
According to an interview at Fast Company in 2001, Michael Weinstein said that his managed to turn around the advertising failure under the ownership of Quaker Oats and created a fun atmosphere in the advertisement and even brought back Wendy the receptionist that made Snapple popular.
Gradually, Snapple had it original customers and the brand again increased value. In 2000 it was sold to Cadbury Schweppes for $1 billion USD.
Lessons from Quaker Oats:
Different brands need different types of distribution.
Understand the brand, Quaker failed to hold Snapple’s brand value because it erased the Snapple original value which in a sense could be seen as creating a new brand.
When contemplating a deal, managers from both companies should list all the barriers to help realize the synergies thus increasing shareholder value after the transaction is completed.
A company should have a detailed market research and product research before branching out into new asset classes. Company should avoid paying too much for the target company.
Whitbread was founded in 1742 as a single brewery in London, United Kingdom. In 1750, another branch was established in Chiswell street. According to Referenceforbusiness, during the time there were over 50 pubs across London, despite the outrageous competition, the company became one of the most reputable of London’s older breweries which carries on from 1742 to 1992. Whitbread began to change course in the early 1960s and have diversify to the restaurant sector, with a milestone of the launching of Beefeat a casual dining chain in 1974. In 1995 it runs two U.S.-based chains: Pizza Hut and T.G.I. Friday’s–in the United Kingdom and Costa Coffee chain. It was this time that Whitbread had forked into hotel industry. In that same year, Whitbread also entered the health and fitness sector in 1995 under the brand David Lloyd Leisure. In 2000 it sold their first start off company, the brewery business, and in 2001 sold their pubs and now their business have nothing to do with beer. (Refernceforbusiness)