Welcome to the latest installment of Understanding the Consumer Products Industry, where I'm attempting to level the informational playing field between consumers and the companies that sell us stuff.
A thorough conversation about consumer brands could theoretically go on for several weeks over several posts... until I singlehandedly kill my readers with boredom. So in today's post, I'm just going to talk about one well-known food company that embraced an unusual business decision--a decision that should make consumers forever reconsider the real value of branding.
Exhibit A: Sara Lee
Have you ever bought a Sara Lee pastry or dessert? Back in the late 1990s, the Sara Lee company did something seemingly irrational: it sold off all of its factories and bakeries. That's right: Sara Lee doesn't actually make its own pies, cakes and desserts any more. Instead, it contracts the work out to other companies.
Believe it or not, there are legitimate reasons why Sara Lee might do something like this. For one thing, it saves money, because Sara Lee can hire the lowest bidder to make its products--while still maintaining reasonable quality standards, obviously. It also spares the company from many of the problems common to asset-heavy manufacturers, like the impossibility of matching a relatively fixed factory capacity to the constantly fluctuating demands of customers.
All of this explains why Sara Lee's stock price went up materially the day this new strategy was announced. But what does a decision like this mean for consumers, especially consumers loyal to Sara Lee products?
Unfortunately, the implications are deeply disturbing. Because in a way, this particular business decision, which has been copied and imitated to varying degrees across many segments of the consumer products industry, changes everything about how we perceive brands.
So, with that as a backdrop, let's ask a simple question. What value do you receive when you pay a price premium for Sara Lee brand desserts?
The cynic's answer: you get a sticker.
That's right. A sticker. Somebody else made that crumb cake you just bought. They then slapped Sara Lee's label on the box. Sure, it might be Sara Lee's recipe, but it is quite obviously not their product.
Sara Lee assumes you trust their brand. They believe you'll overlook (or remain blissfully ignorant of) the somewhat inconvenient truth that Sara Lee doesn't actually make its own stuff. Ask around: you'll find that most consumers have no idea that Sara Lee sells products under these conditions.
The thing is, this happens more often than you'd think with the products we buy. Dell Computer, for example, contracts out its customer service functions, as well as the manufacture of most of its PCs. For many years, General Electric contracted out the manufacture of GE-branded TV sets to Asian assemblers. Technology companies like Cisco and Juniper make almost none of their own products, preferring to use contract manufacturers exclusively. And yet we still "trust" these brands.
Now, let's take things one step further. Let's think about the third-party contractors who win the business to manufacture products on behalf of Sara Lee or other companies. What of them?
Typically, they'll manufacture products for more than one company. Take pasta, or jarred pasta sauce, both of which are commonly outsourced food products. A regional food producer might have a contract to make linguine for Ronzoni and then another contract to make store-brand pasta for two or three different grocery chains (you'll often hear the term "private label" used in these instances). Another food contractor might manufacture jarred pasta sauce for Ragu as well as for Shop-Rite's in-house brand.
This happens with a surprising number of food products, including pasta, pasta sauces, frozen juices, canned or frozen fruits and vegetables, and many other prepared foods. Even consumer products such as sunblock, facial tissues, band-aids and shampoo come to mind as obvious and likely products to be contracted out to third party manufacturers.
The exact same factory
Sure, there might be differences in the recipes or formulations used, but not always. In any event, the key fundamental concept is this: the generic product and the branded product sitting side by side on the store shelf are often made at the very same factory by the very same manufacturer. And the more expensive branded product quite often isn't even made by the company that owns the brand.
Roll that over in your mind for a few minutes. If you are at all pro-consumer, I hope by now you are beginning to question whether branded products are always worth a premium price.
However, if you've read this far and truly grasp the concepts of this post, and yet you still mindlessly prefer branded products and consider it beneath you or "cheap" to think otherwise, please listen carefully to that buzzing noise in the back of your brain. That is the sound of rationalization.
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