In an article on Ted Forstmann in The New Yorker last month, the investment banker talked about why he pursues companies that are dominant in the marketplace. As writer Marie Brenner explained, Forstmann looks for targets that have barriers of entry.
"Recently, I bought a company from Kodak called Thompson-Minwax," he told Ms. Brenner. "The company has 70% of the market, because of the good advertising it did."
Forstmann, Little has just paid $1.4 billion for the computer magazines of Ziff-Davis, and a major reason he paid top dollar is the publisher had a formidable barrier of entry.
"PC Magazine and the other Ziff-Davis magazines pose a serious barrier to entry. Theoretically, Ziff-Davis will have a better chance of making interactive magazines work than the next guy," Mr. Forstmann told The New Yorker. Ziff-Davis protects its turf by promoting itself and explaining what each of its magazines stands for.
Ted Forstmann's observations seem like pretty basic stuff: Advertising can form a protective shield around products and services, helping to repel competitors.
But that elementary lesson does not have universal acceptance within the marketing community. Let me cite H.J. Heinz as a perfect example of a company that doesn't get it.
Over the years Heinz developed some of the strongest brand names in their categories, such as Star-Kist tuna and 9-Lives cat food. But the company's recent strategy is to pull back from franchise-building advertising and dump its marketing dollars in trade and price promotion tactics.
Down the drain went all the great work of Leo Burnett Co. and the wonderful characters it created, Charlie the Tuna for Star-Kist and Morris the Cat for 9-Lives. The products were treated as commodities, driven by price. Finally, after 26 years on the Heinz account, Burnett resigned in disgust.
Now Heinz has bought the pet food business of Quaker Oats Co., including market leader Kibbles 'n Bits. Quaker has done cute and memorable advertising for the brand to drive it to the top, but Heinz most likely will abandon that hard-earned equity by turning it into just another price brand. What a waste.
The irony is that Heinz is said to be trying to fatten up the bottom line in anticipation of selling the company. But if Ted Forstmann is right about advertising being a barrier to entry, Heinz might be inviting competitors by scaling back on ad support and thus lowering entry barriers.
If Heinz really wants to get a fat price for its collection of brand names- especially from a guy like Ted Forstmann-it would build mighty barriers around its still formidable assets. Instead, the company seems determined to invite competitors to have their way.