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THE BRANDED INGREDIENT STRATEGY
Product branding is recognized as being a major factor in the success of many products and services. This fact is evidenced by the billions of dollars spent annually on advertising and packaging in both consumer and industrial markets. The value of branding has also been recognized by suppliers who produce ingredients or components that are incorporated into final products. An input supplier may now choose to invest in a branded ingredient strategy, that is, the promotion of the ingredient to the final user. DuPont, a veteran of ingredient branding, has successfully encouraged consumer demand for numerous brands. A recent example is Lycra, its brand of a spandex fiber which is woven into a variety of garments. Despite the expiration of its patent on spandex several years ago, DuPont retains roughly two-thirds of worldwide demand and expects Lycra's annual profits to exceed $200 million.(8)
When promotion of the brand is initiated by the input producer, the goal is to build awareness and preference among consumers for that supplier's brand of ingredient or component. If successful, the branded ingredient strategy causes the consumer to pull the input product through the manufacturer of the end product. One visible example is G.D. Searle's consumer promotion of NutraSweet. This strategy targeted consumers, but really sought to convince food and beverage manufacturers to use the artificial sweetener in their products.(4) There are many advantages for the supplier who opts to brand an ingredient, including the opportunity to establish long-term contracts, to share development and promotion costs, and to earn higher profit margins.
Conversely, it may be the manufacturer who seeks to benefit from the recognized brand. A variation of ingredient branding occurs when a manufacturer seeks out a recognized brand to use as a key ingredient in the final product. For example, Beech-Nut baby food promotes its use of Chiquita bananas in its products. In this case the ingredient producer licensed the use of its brand name to the manufacturer who seeks to benefit from the quality image of Chiquita. Similar agreements permit Kellogg's to promote its use of Smuckers preserves in its Pop-Tarts and permit Betty Crocker to highlight in its packaging that Hershey Syrup is used in its brownie mix. In the high-tech field Intel...