A comparative research for Friesland Foods

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The Changing Role of Marketing in the FMCG Market

A comparative research for Friesland Foods

Tessa A. van Gennip Groningen, May 2007

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A comparative research for Friesland Foods

Author: Tessa A. van Gennip Student number: 1271563 State University of Groningen

Faculty of Management and Organization

Company supervisor: Mr. J.H.M. Vervoort Faculty supervisor: Mr. H.C. Stek Co-assessor: Mr. H.A. Ritsema

Date: 2^ndof May 2007

The author is responsible for the content of the thesis. The copyright of the thesis rests with the author.

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Executive summary

A report of the Marketing Leadership Council named Redefining Marketing Productivity; Focusing Marketing on the Drivers of Firm Value , argues that the role of marketing in companies is changing. Marketers see the net productivity of their organisations under significant pressure. This productivity challenge is placing Marketing in a difficult position.

The role of marketing is defined as the contribution the marketing function has to the added value of the company. This contribution concerns the degree to which it matters financially how much time and money is invested in marketing.

Friesland Foods has detected a change in the role of marketing as well. Marketing does not contribute to the added value of the company as much as it used to and the company wants to know if this contribution can be restored. The focus in this research is on marketing strategy, organisation and activities.

The objective of this research is: to investigate if and how Friesland Foods should adapt its European marketing strategy, organisation and activities to the changing role of marketing in order to increase the contribution to added value.

The central research question is: How do FMCG companies deal with the changing role of marketing and what can Friesland Foods learn from this?

The set up is to look at literature and other FMCG companies to find out which developments in the environment influence marketing strategy, organisation and activities and how the selected companies react to these developments. By researching which of these suggested reactions are positively applicable to Friesland Foods, recommendations can be made for changes to the marketing strategy, organisation and activities at Friesland Foods and so the company can learn from the selected companies.

In order to answer the central research question, three sub questions are formulated:

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Sub question 1: Which causes for the changing role of marketing in the FMCG market can be found in literature and how do these influence marketing strategy, organisation and activities? (Literature review)

Sub question 2: Which causes for the changing role of marketing do marketing managers in FMCG companies experience and how do they react to it? (Case studies)

Sub question 3: Which solutions from other companies (and the literature) are positively applicable to Friesland Foods?

The developments in the environment that influence marketing strategy, organisation and activities are uncovered through a literature review. The following (interdependent) developments are most frequently mentioned in relation to an influence on marketing strategy, organisation and activities and are therefore the answer to the first sub question.

Growing power of retail and distributors Rise of Private Labels

Lack of distinctiveness Harder to reach consumer

Fragmentation of media: increased costs More informed consumer

Increased importance of accountability Increased supply-chain thinking

The developments from the literature review are tested by asking selected FMCG companies how much the developments influence their marketing strategy, organisation and activities. This is done through a survey in which the respondents are asked to value the influence each of the developments has on marketing. Also, they were asked to rank the developments on their influence on marketing. The respondents had the possibility to add new developments that influence the marketing in their company. The results of the

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survey served as input for interviews with the respondents. In the interviews the respondents were asked how their company reacts to the developments.

The following nine FMCG companies were selected for the research: Aviko, Dr. Oetker, Farm Frites, Grolsch, HAK, Heineken, Johma, PepsiCo (Lay s chips) and Wessanen (Zonnatura).

The survey indicates that all developments from the literature have some influence on marketing strategy, organisation and activities in the selected companies. Two companies added three developments:

Health trend

Problem of making unique products with large production volumes Vision of a new mother company on the marketing function

These three developments combined with the eight from the literature review form the answer to the first part of sub question two: Which causes for the changing role of marketing do marketing managers in FMCG companies experience?

The ranking of the developments in the survey shows that respectively a lack of distinctiveness, the rise of private labels, the increased power of retail and distributors and the harder to reach consumer are experienced as the developments with the largest influence on marketing strategy, organisation and activities.

In the interviews, the following reactions to the developments were mentioned (between brackets, the number of companies that mentioned this reaction):

Strategy: Do not make price deals with retail (2), do not produce private label (4), choose and keep strategy: be consistent (2), build and guard brand (6).

Organisation: Create trade marketing department (4), increase consumer marketing (3) hire new product development manager (1), hire digital media manager (1), place innovation/R&D under marketing (3).

Activities: Innovate (9), choose different marketing communication channels (9), measure effectiveness channels (2), increase advertising and promotions (2), involve

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consumer in marketing (add value/emotion/brand experience, speak language consumer, good contact consumer and customer) (4).

These reactions are the answer to the second part of sub question two: .how do FMCG companies react to the changes?

Assessing the advantages and disadvantages of the suggested reactions and testing them for applicability to Friesland Foods resulted in the following recommendations:

Build and guard brand => The strong brands of Friesland Foods should be supported by consistent strategies and brand equity should be guarded, measured and constantly improved.

Place R&D under marketing => Development should be done by each operating company for their products, brands and markets. Innovation teams consisting of employees from several functional areas can be founded and lead by Marketing.

Innovate => For distinctive products/brands, keep innovating to add value to the products so that consumers are prepared to pay a premium price. For products with low distinctiveness, innovate by looking for possibilities to reduce costs.

Use different channels => Experiment with new communication channels besides mass media and store-displays. Possibly consumers can be involved in marketing; research is necessary. Using new channels can require training or hiring new employees. Measure the results per channel so that informed decisions can be made on the allocation of budgets.

Also=> The company should keep producing private label products and maintain a good relationship with retailer through trade marketing. Brand value should be leading in price negotiations and further research is required to decide on if A&P budgets should be increased.

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These recommendations are the answer to sub question three: Which solutions from other companies (and the literature) are positively applicable to Friesland Foods?

The central research question in this research is: How do FMCG companies deal with the changing role of marketing and what can Friesland Foods learn from this? This question is answered by the answers to sub questions two and three.

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Preface

In the past few months, I performed a challenging research project for Friesland Foods in Meppel. The report for this research now lies before you and is the final product of my study Business Science, Marketing at the State University of Groningen.

As a marketing student, who is almost ready to enter the labour market, it was very interesting to research the changing role of marketing. I experienced this graduation project as a great learning experience and an excellent preparation to my professional life.

I would like to thank the people who contributed to that.

First of all, I would like to thank the Corporate Marketing department at Friesland Foods for the opportunity to perform this research. Especially, my great appreciation goes to my company supervisor Mr. Jos Vervoort for his time, support, feed back and practical advice.

In an empirical research like this, it is essential to have participants who are willing to cooperate. Therefore, I want to thank the participants in the research for their invested time and effort. Without them this research could not have been completed.

At the university, my graduation process was supervised by Mr. Stek. At this point I would like to thank him for his constructive feedback, which was sometimes overwhelming, but really improved the final result. Also, I would like to thank Mr.

Ritsema for assessing this thesis.

Last, by certainly not least, I would like to thank my family and friends for their interest, encouragements and patience.

Tessa A. van Gennip Groningen, May 2007

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Table of Content

Executive summary...3

Chapter 1: Starting point ...12

Chapter 2: Introduction to Friesland Foods...21

§2.1 Royal Friesland Foods... 21

§2.2 Friesland Foods ... 22

§2.2.1 Organisational structure ... 22

§2.2.2 Mission, objective and strategy of the company ... 24

§2.2.3 Distribution channels ... 26

§2.2.4 Consumer markets... 27

§2.3 Current marketing situation... 28

§2.3.1 Marketing strategy... 28

§2.3.2 Marketing organisation ... 28

§2.3.3 Corporate Marketing ... 29

§2.3.4 Branding ... 32

§2.4 Summary ... 33

Chapter 3: Research design and methodology ...34

§3.1 Context of the research... 34

§3.2 Problem analysis ... 36

§3.2.1 Problem statement ... 36

§3.2.2 Problem owner ... 39

§ 3.2.3 Fencing off ... 39

§3.3 Research design... 41

§3.3.1 Research objective... 41

§3.3.2 Research question... 42

§3.3.3 Sub questions and methodology... 42

§3.3.4 Conceptual model, research framework and research model... 45

§3.4 Selection criteria for companies to be included ... 48

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Chapter 4: Changes in FMCG marketing ...50

§4.1 Introduction ... 50

§4.2 Growing power of the retailer and distributor... 51

§4.2.1 Development identification and explanation... 51

§4.2.2 Relation to marketing strategy, organisation and activities ... 54

§4.3 The rise of private labels ... 54

§4.4 Lack of distinctiveness ... 57

§4.5 Harder to reach consumer ... 59

§4.6 Fragmentation of media: increased costs of reaching the consumer... 63

§4.7 More informed consumer ... 66

§4.8 Increased importance of accountability... 67

§4.9 Increase of the supply chain-thinking ... 69

§4.10 Interdependence of developments... 71

Chapter 5: Case study methodology and results ...73

§5.1 Selection of companies... 73

§5.1.1 Selection process ... 73

§5.1.2 Description selected companies ... 76

§5.2 Methodology ... 78

§5.2.1 Purpose of the surveys... 78

§5.2.2 Making the survey... 79

§5.2.3 Survey distribution plan ... 79

§5.2.4 Purpose of the interviews ... 80

§5.2.5 Designing and preparing the interviews... 80

§5.2.6 Taking the interviews ... 81

§5.3 Field work results ... 82

§5.3.1 Survey results and analysis ... 82

§5.3.2 Interview results and analysis ... 87

§5.4 Conclusions on case study ... 100

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Chapter 6: Applicability to Friesland Foods ...105

§6.1 Developments at Friesland Foods ... 105

§6.2 Build and guard brand ... 107

§6.3 (Do not) produce private label products... 108

§6.4 Do not make price deals with retail... 109

§6.5 Hire more/different employees... 110

§6.6 Place R&D under marketing ... 111

§6.7 Innovate... 112

§6.8 Change marketing communication channels... 113

§6.9 Increase Advertising & Promotion... 114

§6.10 Involve consumer in marketing... 114

§6.11 Recommendations and conclusion ... 115

Chapter 7: Research evaluation ...118

§7.1 Central research question ... 118

§7.2 Reflection ... 120

§7.2.1 Research limitations ... 120

§7.2.2 Recommendation for further research... 121

References ...123

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Chapter 1: Starting point

The starting point for this research is a report by the prestigious research institute the Marketing Leadership Council: Redefining Marketing Productivity; Focusing Marketing on the Drivers of Firm Value (2005). The study, that was performed with the help of over 70 companies and institutes like Sony Electronics, Procter & Gamble and the Kellogg School of Management, documents the advances made by progressive marketing organisations to free resources, enhance capabilities, and integrate marketing effectively with the rest of the enterprise in an effort to sustainably boost marketing productivity.

The report states that marketers at many companies see the net productivity of their organisations under significant pressure, requiring ever more investment to maintain the returns historically generated by their efforts. This productivity challenge is placing Marketing in a difficult position. If the function continues to increase its marketing spend in order to maintain the same output, it will erode corporate margins, but if it tries to increase productivity by cutting spend significantly, it places brand strength at serious peril¹.

The report advocates a more integrated role for marketing within the organisation.

Marketers should identify key points of integration across the firm in accordance with the particular strategy the company is pursuing. Marketing should be the logical, best- prepared function to fill market- or customer-oriented needs in the company².

According to the study, companies come across the following problems when trying to make marketing a more integrated function in the company (see figure 1.1):

1. Poorly defined marketing scope

Marketers need to critically reassess the scope of their roles and responsibilities, mapping out new competencies for the function to add but also shedding activities that don t clearly contribute to the realisation of company goals.

1 MLC, Redefining Marketing Productivity: Focusing Marketing on the Drivers of Firm Value, 2005

2 ibid

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2. Overburdened with low-value activities

In order to create the space required for more strategic focus, marketers must reduce the time intensity of low-value activities, specifically by streamlining internal processes and the management of vendor relationships.

Figure 1.1: Obstacles on the path to focused marketing integration

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3. Underdeveloped strategic skills

Marketers need to look far beyond traditional approaches to training, developing next-generation marketing leaders instead by creating experiential learning opportunities and providing tailored, just-in-time training that focuses on business drivers.

4. Operational pressures overwhelm strategic processes

To avoid perpetually compromising attention to long-term growth drivers, marketers may need to redesign current organisational structures and incentives that irresistibly skew focus toward realising short-term revenues.

5. Marketing contribution to peer function performance not valued

Marketing must identify the most leveraged points of integration across company processes, creating targeted partnerships with other functions based on Marketing s ability to add value to its peers and the firm.

Historic perspective

Kotler states that in the beginning there was Sales. Marketing appeared later to help sales people by:

using marketing research to size and segment the market

using communications to build the brand and develop collateral materials finding leads through direct marketing and trade shows.

Marketing was originally located in the sales department. Then marketing grew as a separate department responsible for the marketing plan (4P s) and brand-building³.

For decades marketing was the ultimate function in the organisation. Marketing, being the only function focused on the consumer, could really make a difference if a company knew how to drive it. The CEO s in many companies were people with a marketing background and marketing s opinion was highly valued in the companies. Today, the entire company is market oriented. Even the invoices are consumer oriented. Where the

3 Kotler, Philip Kotler on Strategic Marketing, 2006

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top marketers used to take the courses of the leading marketing institutes, the assistants now do. The differences between companies in their ability to drive marketing have mostly disappeared. Everybody knows marketing and according to critics, the function has therefore lost its unique position in the company and has a hard time proving its value.

Moorman and Rust (1999) note that there has been a movement toward thinking of marketing less as a function and more as a set of values and processes that all functions participate in implementing. In this view, marketing becomes everybody s job, which potentially diffuses the marketing function s role but increases marketing s influence⁴.

Figure 1.2: Porter s value chain model

Porter s value chain shows that all functional areas contribute to the firm s margin (figure 1.2). He distinguishes between primary and support activities. The firm s margin or profit then depends on its effectiveness in performing these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It is in these activities that the firm has the opportunity to generate superior value. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation⁵.

4 Moorman and Rust, The Role of Marketing, 1999

5 Porter, Competitive Advantage: Creating and Sustaining Superior Performance, 1985

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Some people feel that marketing has a smaller part in the business process and also in creating value for the company then it used to have. As displayed in figure 1.3, the contributions of the functions supply, production, logistics, marketing and sales in the business process were about the same. This also holds for the portions of added value to the final products. Nowadays marketing has a smaller role in the business process and is unable to contribute the same amount of added value that the other functions do⁶.

Supply Production Logistics Marketing Sales

~ 1990

Supply Production Logistics Marketing Sales

~ 2006

Figure 1.3: Indicative image of relative importance of functional areas in business process and added value before (around 1990) and nowadays (around 2006).

A recent study, however, indicates that 75% of companies believe that marketing s role in the organisation has become more important than in years past, citing growing industry competition as the primary driver of this trend⁷. Figure 1.4 shows the evolution of FMCG marketing over the past decades according to Denison and McDonald (1995)⁸ where marketing effectiveness keeps increasing after the 1990 s. This shows that there are very different opinions about the role of marketing.

6 Interview with Corporate Marketing manager

7 Marketing Leadership Council, Retailer Organization of the Marketing Function, 2006

8 Denison and McDonald, The Role of Marketing Past, Present and Future, 1995

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Figure 1.4: The evolution of marketing in Fast Moving Consumer Goods companies

Definitions

The title of this thesis is The changing role of marketing in the FMCG market . In this research, when spoken of the changing role of marketing the following is meant: the contribution that the marketing function has, among other functional areas, in creating value for the company and the consumer. The value for the company will in turn lead to value for the shareholders. Share price and dividends are critically related to the profits earned by the company. And profits come from selling the product at a price greater than the cost of production and distribution; higher profits results from the customer paying a little more for the same product than that offered by a competitor. According to James, this comes from marketing understanding the needs and wants of the customer, providing benefits, building brands and creating loyalty⁹. The contribution of the marketing function to added value concerns the degree to which it matters financially how much time and money is invested in marketing.

Marketing is defined by Hoffman et al. as the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create

9 James, The Important Role of Marketing

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exchanges that satisfy individual and organisational goals¹⁰. The American Marketing Association (AMA) formulates the following definition: Marketing is an organisational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organisation and its stakeholders¹¹. Marketing in this research has the definition of marketing as a function: the functional entity of an organisation¹²amongst other functional entities like operations, procurement and finance. As shown in figure 1.2, marketing strategy, organisation and activities are important factors for the role of marketing and therefore we focus on those parameters in this research.

The Chartered Institute of Marketing s official definition of Marketing Strategy is 'the set of objectives which an organisation allocates to its marketing function in order to support the overall corporate strategy, together with the broad methods chosen to achieve these objectives¹³. The AMA says the following about marketing strategy: a statement (implicit or explicit) of how a brand or product line will achieve its objectives. The strategy provides decisions and direction regarding variables such as the segmentation of the market, identification of the target market, positioning, marketing mix elements, and expenditures. A marketing strategy is usually an integral part of a business strategy that provides broad direction to all functions¹⁴.

Marketing organisation can be defined as a firm s design for the allocation of marketing task responsibilities and decision-making authority, and the delineation of marketing procedures¹⁵. Thus, marketing organisation in the sense of structure and tasks.

The marketing strategy and organisation result in marketing activities, which include marketing research, campaign and brand building, effect research etceteras.

Fast Moving Consumer Goods (FMCG) are consumption goods (as apposed to usage goods) that have a high frequency of acquisition¹⁶.

10 Hoffman et al., Marketing principles and Best Practices, 2005

11 www.marketingpower.com

12 Leeflang and Van Rooy, Leerboek Marketing, 2002

13 www.he.courses-careers.com

14 www.marketingpower.com

15 www.emeraldinsight.com

16 Friesland Foods definition

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Friesland Foods

At Friesland Foods the contributions of the marketing function to the added value of the products has decreased as its effectiveness has decreased. Also, the Corporate Marketing department has noticed a reduced attention for marketing from the Board of Management.

At the request of the Board of Management, the Corporate Marketing department does not analyse the results of the operating companies (OpCo s) for underlying trends anymore. The Board of Management only wants to see the hard figures and the few comments the operating companies add to it. More and more attention is given to financial performance and supply chain management and marketing is considered less important. This points towards a focus on short term results that, combined with the decreased effectiveness, could result in reduced budgets for brand building and brand equity. At the moment budgets have not been reduced yet, but it is necessary to find out what is causing the changing role of marketing, where the developments will lead and how one can react to it.

The managers at Friesland Foods Corporate Marketing concur with the Board of Management that it could be reasonable that marketing budgets are changed or re- allocated, since its added value is reduced. One of the measures to be considered is transforming towards a cost leadership strategy. This would mean that large cost savings have to be made and little room will be left for marketing. Consumer marketing will disappear for the most part and the emphasis will be on trade marketing. This does not necessarily change the contribution of marketing, but it does change the strategy, organisation and activities. Within Friesland Foods, trade marketing is defined as all activities to make the brands and product-offerings effectively available and in line with the brand vision and brand positioning visible for the consumers/shoppers, in the chosen point-of-purchase environment, thereby recognizing specific trade customer groups, needs and opportunities against optimal costs to serve¹⁷.

A change in strategy will lead to a different marketing organisation and different marketing activities. It is thus important to research the best reaction to the changes for Friesland Foods, since adjustments require time.

17 Friesland Foods Business Intelligence Network

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Research setup

In this research the causes of the changing role of marketing in the FMCG market will be investigated through a literature review. The literature review will uncover developments in the role of marketing that influence marketing strategy, organisation and activities.

These developments will be tested through case studies with selected FMCG (food) companies. The case studies include a survey and an interview in which the reactions to the developments will be uncovered. Finally, the reactions of the companies will be assessed for applicability to Friesland Foods. Figure 1.5 shows the structure and setup of this research. The several steps and methodology will be discussed in more detail in the research design in chapter three.

Figure 1.5: Setup of the research

In the next chapter the company Friesland Foods and its marketing organisation will be introduced as a basis for the research design in chapter three.

Observation: Decreased contribution of

marketing to added value.

Causes of observation:

Developments that influence marketing strategy, organisation, activities (Literature review).

Test developments in selected FMCG companies (Survey).

Uncover reactions of selected companies to developments (Interviews).

Learn: Best solutions for Friesland Foods Marketing.

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Chapter 2: Introduction to Friesland Foods

In this chapter the company Friesland Foods will be introduced. The company is the point of reference for the research. The findings of the research have to be useful for the company, so the setting of the company is leading for the way the research is performed.

Attention will be given to the structure of the holding company, Friesland Foods B.V.

(structure, mission, objectives and strategy, the distribution channels and consumer markets) and the marketing organisation.

Analysing these factors is an important step in understanding the problem situation as explained in chapter three.

§2.1 Royal Friesland Foods

Royal Friesland Foods is a young company with a long history. Its roots go back to 1879.

A large number of mergers and takeovers have brought about the current modern structure and size. The most important merger occurred in late 1997, when four Dutch dairy cooperatives -Coberco, Friesland Frico Domo (Friesland Dairy Foods), Twee Provinciën and De Zuid-Oost-Hoek- joined forces¹⁸. In 2004 the company received the title Royal. This title is only used for the holding company and in official documents.

Royal Friesland Foods N.V. shares are held by Zuivelcoöperatie Friesland Foods U.A.

Royal Friesland Foods N.V. is the sole shareholder of Friesland Foods B.V. and Friesland International B.V. The company is owned by its member milk farmers and it has the obligation to accept all milk supplied by them (5.3 billion kilograms in 2006). The ownership of the farmers is in the form of shares in the company and not directly anymore as is still the case with Campina.

18 www.frieslandfoods.com

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The Dutch activities are concentrated in Friesland Foods B.V. and the foreign activities in Friesland International B.V. (figure 2.1) ¹⁹. For the remainder of this thesis the name Friesland Foods is used for both the Dutch and international activities.

Figure 2.1: Structure of Royal Friesland Foods N.V.

§2.2 Friesland Foods

§2.2.1 Organisational structure

The activities of Friesland Foods are divided over four product groups: fresh and long- life consumer goods, cheese, ingredients and foodservice products (figure 2.2). The product groups are responsible for their own products and/or geographical area. In Western Europe, the operating companies are organised according to product group.

Outside Western Europe, activities directed towards consumers are carried out regionally, with each operating company responsible for its own development, production and sales operations²⁰.

19 Royal Friesland Foods Annual Report 2005

20 www.drinks-business-review.com

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Figure 2.2: Organisational structure of Friesland Foods B.V.

The corporate staff consists of 16 departments that support the operating companies and the Board of Management.

The role of corporate staff is to:

support the Board of Management with planning & control and in managing the required coordination and professionalisation;

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support the operating companies, upon request, with the implementation of these coordination and professionalisation initiatives.

As figure 2.2 shows, the structure of Friesland Foods looks like a divisional organisation with corporate staff departments²¹. At Friesland Foods, the operating companies all have their own business units for marketing, operations, finance, development etceteras. The corporate staff departments support the managers in the operating companies, but they have separate activities and the business units in the operating companies do not report to their corporate staff department. A closer view at the division of tasks and responsibilities between the marketing business units of the operating companies and the Corporate Marketing department is given in paragraph 2.3.

Besides the operating companies and the corporate staff departments there are category teams, consisting of specialists from several different operating companies and/or corporate staff departments. The teams take up special projects and dissolve when the project is completed. The objective is to maximise the benefit of corporate knowledge and expertise and create synergy between the operating companies.

§2.2.2 Mission, objective and strategy of the company

A mission statement is the company s reason for being²². Objectives are qualitative goals and strategy determines how one plans to achieve the objectives.

Mission

The company s mission is twofold:

- To create both long-term and short-term value for its owners, the member dairy farmers, by undertaking profitable international dairy and dairy-related operations.

- Development, production and sale of a wide range of reliable, natural and nutritious dairy products that contribute to well-being and vitality for life²³.

21 Daft, Organization theory and design, 2004

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Objective

The objective of Friesland Foods is to manufacture and market the company's dairy- and fruit-based products in such a way that it creates value that can be sustained over the long term for consumers, customers, shareholders, employees, business partners and the communities in which Friesland Foods operates. In order to create this value the company s first priority is to be a profitable business and to improve the quality of sales and profitability by increasing the proportion of total sales attributable to differentiated branded products. The company wants to develop number one or two positions in selected markets and product categories, aiming at market dominance, where possible.

The company s medium-term objectives (2008) are twofold: on the one hand, Friesland Foods aims to improve the profitability of the activities based on milk supplied by members of the cooperative (Western Europe) by a further shift away from the range of standard dairy products to more value-added products and further efficiency improvements; on the other hand, Friesland Foods seeks to bring about revenue and profit increases for its companies operating in the strategic markets of Central Europe, the Middle East, Southeast Asia and West Africa, which purchase milk upon demand.

The activities are aimed at the existing strategic product groups (cheese, fresh and long- life products, industrial ingredients and foodservice products) and strategic regions (Western Europe, Central and Southern Europe, the Middle East, West Africa, and Southeast Asia). In addition, Friesland Foods is looking to further increase revenue of the key drive brands. The company aims to achieve this ambition by achieving expansion in strategic markets where strong positions are held and further building on enhanced nutrition concepts²⁴.

Strategy

The strategy of Friesland Foods is:

To further develop strong branded positions in high added value segments

To provide quality branded products and services preferred by its customers and consumers

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To strengthen through innovations

Above average investing in Friesland Foods' key drive brands in consumer markets (90% of total Advertising & Promotion)

To optimise on long term basis the allocation of Friesland Foods farmers milk and the allocation of investments in people and resources

To actively pursue acquisitions that contribute to Friesland Foods achieving its objectives

In Porter s competitive strategies Friesland Foods has a differentiation strategy for most of the operating companies, which means that the organisation attempts to distinguish its products or services from others in the industry²⁵. This is done by focussing on true branded business . The key characteristic of the true branded business is that it is based on strong consumer loyalty to brands that create both functional and emotional benefits generating a substantial premium price. For the true branded business to be successful, a strong focus on carefully selected consumer needs, concept innovation, communication, and strong distribution selected channels is essential²⁶.

In Miles and Snow s strategy typology, Friesland Foods would be characterised as an Analyzer. The Analyzer tries to maintain a stable business while innovating on the periphery. It tries to balance efficient production for current product lines with the creative development of new product lines²⁷.

§2.2.3 Distribution channels

Friesland Foods is a multinational company that profitably develops, produces and sells a wide range of branded dairy products and fruit-based drinks for consumers, professional users and food producers. The consumer products are distributed through retail channels, like supermarkets, gas stations, train station shops, catering industry etceteras.

In Europe the company uses the distribution strategy of intensive distribution: stocking the product in as many outlets as possible²⁸. Because most of Friesland Foods products

25 Daft, Organization Theory and Design, 2004

26 Friesland Foods Internal document (Budget 2005)

27 Daft, Organization Theory and Design, 2004

28 Voerman and Hoppen, International Marketing for IE&B:1&2, 2005

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can be substituted by another product or a similar product from a competitor, it is important to make the products widely available. Also, because of the concentration of retailers, not delivering to one of the retailers means a significant loss in market share.

To make its products both available and visible, Friesland Foods uses mainly a push- strategy: the company pushes its products through the supply chain by making sure that, with the help of discounts to distributors and the effort of salesmen, the product eventually gets a good place in the shelves of the retailer²⁹.

§2.2.4 Consumer markets

The branded products of Friesland Foods have a strong presence on international dairy markets, especially in Western Europe, Central Europe, the Middle East, West Africa and Southeast Asia. Consumers do not only buy Friesland Foods products in supermarkets to consume them at home. Products can also be bought in restaurants, station, theme parks etceteras.

Food producers that use Friesland Foods products as an ingredient for their products are also customers, but this business-to-business market is excluded from this research, as is the professional market.

Friesland Foods as a whole does not aim its sales on a special target group. The company has products for multiple consumer groups, such as baby and infant food, juices for children in the growth stage and dairy based drinks with pro-biotic for better digestion.

Apart from these specific products, the products are suitable for every age group/consumer.

For the Classic Dairy business, the key challenges defined are to establish long-term, leading positions in dairy product categories through delivery of complete product offering under private label and brand, and sustainable home market size covering a large number of customers, hindering competitive entry and providing economies of scale and cost leadership throughout the value chain³⁰.

30 Friesland Foods internal document (Budget 2005)

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§2.3 Current marketing situation

As described in the first chapter the role of marketing in companies is changing. This change is also evident in Friesland Foods marketing organisation. The effect that this has on day-to-day activities differs between operating companies. At the Cheese operating company, budgets and the number of marketing employees are decreasing, while trade marketing becomes more important. In West- and Central Europe more and more attention is given to brands and Asia still shows high growth because of the absence of private labels. These changes have an influence on the marketing strategy, organisation and activities. Therefore, in this paragraph attention will be given to these factors. The information is based on interviews with Friesland Foods marketing managers and research in the Friesland Foods business intelligence intranet and internal documents.

§2.3.1 Marketing strategy

Strategies describe the anticipated allocation of resources (deployment of capabilities) to achieve the objectives³¹.

The objective of Friesland Foods is to achieve a number one or two position in the market for its branded products. Friesland Foods pays the member dairy farmers of the cooperative a competitive price for the milk they supply. In addition, the company intends to achieve, in due course, a structural net profit margin in excess of 3 percent.

The strategy of Friesland Foods is aimed at mitigating the risk of dropping selling prices by offering more unique branded products and ingredients, focusing on innovation and implementing cost efficiencies³².

§2.3.2 Marketing organisation

Friesland Foods has organised its business into several operating companies that have their own marketing business units and are responsible for their own product group and/or geographical area. In addition, there is a department Corporate Marketing that supports the operating companies and the Board of Management. The Corporate Marketing department is concerned with the marketing policies and the operating

31 Capon and Hulbert, Marketing Management in the 21^st Century, 2001

32 Friesland Foods Annual Report 2005

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companies do the actual marketing. The operating companies practise their operational and strategic marketing activities fairly independent from the corporate department because they have the expert knowledge over their products and geographical areas.

Therefore, they have the best information and assessment on what is going on in their area and which developments are important for them. So, in the area of marketing the operating companies are dominant and the corporate staff department has an advisory and supporting role.

Also, the operating companies have their own business units for New Product Development for their products and brands. Most research is done by the Corporate Research department.

The marketing business units of the operating companies develop, plan and execute their own strategic and operational marketing activities. Every year they formulate their own annual plan, called budget . This plan contains both commercial and financial objectives for the business unit and an overview of the costs that have to be made in order to achieve those objectives. The operating companies report directly to the Board of Management, but the Corporate Marketing department checks the plans and asks critical questions about the plan. The second phase in the budget process is for the operating companies to answer the questions asked about the plan by the corporate department. The plan, the questions and the answers to the questions are sent to the Board of Management to make the final decision on the budget allocation. So, Corporate Marketing does not allocate the marketing budget over the several operating companies and the operating companies are responsible for their own profit and loss.

§2.3.3 Corporate Marketing

The Corporate Marketing department supports the operating companies and the Board of Management in consumer marketing, trade marketing and sales.

Consumer marketing is divided in two streams: concept development and brand activation. Concept development entails innovation and development of brand positioning in the several operating companies and countries. Brand activation is about

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making the connection between the brand and the customers and consumers at a national level.

Trade marketing concerns all activities to make the brands and product-offerings effectively available and in line with the brand vision and brand positioning visible for the consumers/shoppers, in the chosen point-of-purchase environment, thereby recognising specific trade customer groups, needs and opportunities against optimal costs to serve³³.

The objective of the Corporate Marketing department is to maximise the contribution of marketing and sales to the overall company objectives, through:

Capability development of Marketing and Sales through development and roll-out of Friesland Foods Ways of Working and through trainings (Friesland Foods Training Platform)

Management of Marketing-/Sales related operating companies-overriding projects and actions

Support of Board of Management and operating companies in consumer- and trade Marketing: strategic planning, marketing planning and execution

Stimulation of exchange of best practices

Friesland Foods policies development (e.g. on branding, obesity, trademarks) Market research

The following priorities are being pursued by Corporate Marketing across Friesland Foods:

General: development of Friesland Foods visions and methodologies such as growth platforms.

Brands: stimulate completion of brand strategies.

Brand activation consumer: identify best practices, improve procurement of media management, advertising, brand development; pursue application of product performance testing, consumer preference testing.

33 Friesland Foods Business Intelligence Network

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Brand activation trade: further implement trade marketing model, toolkit, self- assessment tool throughout Friesland Foods (primarily B2C); key projects include channel development incl. outlet censuses, shopper research studies, sales development with focus on customer management skills.

Friesland Foods Training platform: curriculum teams for consumer and development curricula for trade marketing.

Enhance fact-based decision making: enhance market research professionalism throughout Friesland Foods; continuously update and improve KPI set as support for performance management.

OpCo/region/unit support: expert advice where and when asked for³⁴. Structure of Corporate Marketing

The Corporate Marketing department consists of five managers and three management assistants. The structure of the department is displayed in figure 2.3. The mutual division of tasks is stated in internal documents. The trade marketing manager is responsible for trade marketing and sales issues on a general level, such as the development of the trade marketing model and toolbox and the development of the self-assessment program for operating companies. The consumer-trade marketing managers support the operating companies in day-to-day consumer trade marketing and sales issues. The marketing services manager is responsible for market research, brand strategies, media management and training for these areas.

The managers report to the Corporate Marketing director, who in turn reports to the Board of Management.

34 Friesland Foods internal document (Budget 2005)

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Figure 2.3: Structure of Friesland Foods Corporate Marketing department

§2.3.4 Branding

Friesland Foods uses its brands on the products mostly as family brands. A family brand is defined as a brand that is used in more than one product category but is not necessarily the name of the company or the corporation itself³⁵. Friesland Foods is reorganising its brands. In 2004 many Dutch fruit-based drinks were brought under the name Appelsientje , using modifiers to identify the exact products. Also, all Dutch dairy products apart from cheese (Frico) are combined under the family name Friesche Vlag In Hungary, most dairy products have been brought under the brand Milli . This is done to create unity and economies of scale, opportunities for assortment expansion and to free marketing capacity. Still there are many brands. Cheese is sold under the name Frico and there are products like Chocomel and Fristi that still have the name the original producer, Nutricia, gave them. Besides the fruit-based products from Appelsientje, the brands Coolbest and Dubbel Friss are used for fruit-based drinks that serve a different segment.

In most other countries where Friesland Foods products are sold, the brand names are different.

Friesland Foods makes a distinction between true branded and classic dairy products.

True branded products are famous A-brand with high brand equity and large A&P budgets with substantial premium prices. The classic dairy division holds products with lower brand value and margins and subsequent lower investments.

35 Keller, Strategic Brand Management: Building, Measuring, and Managing Brand Equity, 2003 Corporate Marketing director

Mgt. Assistents

Trade Marketing Manager Marketing Services Manager

Developing countries Developed countries

Marketing Manager Marketing Manager

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The brand Friesland Foods is not used as a corporate brand on the products. For legal reasons the corporate brand is almost always present somewhere on the product or package³⁶. This is also the case in this company. On the back of the product label there is a text [product name] is a product of [Friesland Foods Logo] . The main reason for this is to make the connection between the brands/products and the mother organisation Friesland Foods. This way, consumers may be more inclined to try other products of the company. Still, the policy of Friesland Foods regarding the use of the corporate brand is as follows: Brand design is leading in all communication; Friesland Foods should not compete with brand in any means.

§2.4 Summary

Friesland Foods is a multinational company that develops, produces and sells natural, nutritional and high-quality dairy products, fruit-based drinks and ingredients. The company has a cooperative background. Friesland Foods is organised in several operating companies, each responsible for their own product and/or geographical market, and 16 corporate staff departments. Each operating company has its own marketing business unit for the marketing activities. Corporate Marketing supports the operating companies (market research, training, coordination) and the Board of Management.

The company sells in many consumer markets through retail and out-of-home markets (Business-to-Consumer indirect sales). The objective is to be profitable by selling more unique branded products, focusing on innovation and implementing cost efficiencies.

36 Keller, Strategic Brand Management: Building, Measuring, and Managing Brand Equity, 2003