NEW YORK (AdAge.com) -- For decades, the focus of many companies has been taking cost out of their products, often to invest in marketing and always to increase profit. But a series of high-profile quality failures and accidents this year at titans like BP, Toyota and Johnson & Johnson, along with a growing number of lower-profile recalls, shows crises can destroy brand equity in days that takes years to build. It all raises the question of whether efforts to cut production costs have gone too far and whether marketers would be better off putting more money back into quality control -- even if it means spending less on marketing.
"For years the focus of R&D spending has been mainly on taking cost out of the products," said Bernstein analyst Ali Dibadj, who has seen an unmistakable focus in squeezing cost out of products among food and personal-care players alike in the past decade, both in his work as an analyst and previously as a McKinsey & Co. consultant. Much of the impetus for that effort has been freeing funds for marketing, he said.
But all that investment in marketing to build brands is for naught if it leads to recalls that sap share and destroy brand equity. "Cost cutting probably has gone too far in many cases," he said.
If a political operative like Karl Rove were devising a plan to undermine brands by attacking their strengths or selling points, he could hardly have done a better job on BP, Toyota and J&J.
BP, whose five-year "Beyond Petroleum" campaign sought to position the brand as the greener alternative among oil companies, finds itself tarred for years as the firm behind the biggest oil spill ever. Toyota, a brand built on quality and reliability, has recalled 9 million vehicles since October, along with luxury sibling Lexus, prompting investigations and lawsuits charging it tried to cover up rather than fix problems.
And J&J, a company that built a sterling reputation for itself largely through its response to cyanide poisonings of Tylenol capsules in 1982, now faces growing criticism and a federal grand jury investigation over its handling of far lesser problems with Tylenol and other drugs. Among the allegations is that J&J waited as long as two years to admit or address some quality problems and sent consultants in the guise of shoppers to buy all packets of Motrin suspected of releasing too little active ingredient rather than issue a recall.
Toyota and BP both lost ground in their industries in Brand Keys' Customer Loyalty Engagement Index rankings following their crises -- Toyota slipping one place to second, BP slipping from first to seventh.
The deeper problem for J&J, however, is inability to keep shelves stocked with product -- something that will continue well into 2011 as it works to get its Fort Washington, Pa., plant running again and FDA approval for a yet-undisclosed remedial plan. One executive familiar with the industry termed J&J's problem as "forced trial of competitors' products, which you never want to do." It's unclear how many consumers or retailers will come back once the company has the products to fill the pipeline again.
Familiar with recalls himself on two package-goods brands in recent years, the executive said they were likely the result of two factors -- manufacturing executives pressured to cut corners to control costs and the somewhat related trend of outsourcing production to China, which makes quality control harder.
The J&J recalls have played a major role in rekindling growth of private label for household, personal care and OTC drugs that had flattened last year. Since March, private-label shares in those categories have surged a half percentage point to 14.4%. Private label in OTC drugs have led that resurgence, up 3.6 points from a year ago to 27.1% for the four weeks ended July 10, according to Nielsen data from Sanford C. Bernstein.
Toyota and BP had each stood out as leaders in profitability or cost control in their businesses prior to their well-publicized problems. But they and other companies involved in recent recalls or safety breakdowns all deny -- both publicly and for this story -- that cost cutting led to their recalls or accidents.
"Our commitment to safety and reliability is higher than ever," Toyota said in a statement. "Improved quality and reduced cost go hand in hand. The best way to reduce costs is to improve quality. In other words, as you improve quality it means less downtime on the line, less rework, etc. Reducing costs, which is a focus for all automakers, does not automatically reduce quality."
And in an interview with CNBC last month, incoming BP CEO Bob Dudley said operating margin, not gross margin that would reflect spending on oil platforms and drilling, were where the company had really gotten its profits up.
In congressional testimony in May, Colleen Goggins, J&J's worldwide chairman for consumer products, said "I believe at the Fort Washington plant [currently shut down and the focus of most of the company's quality issues] our head count is basically flat. I do know that between 2006 and 2009 we increased our spending 17% and we increased it again this year."
What she didn't mention was that J&J purchased Pfizer's $4 billion consumer-health-care business in 2006 and consolidated or added production for Benadryl and Zyrtec products from that deal into the Fort Washington plant starting in 2007. J&J set a target upon announcing the deal to generate $600 million in annual cost savings by this year -- when, ironically, serial recalls have led to a loss in annual sales of the same amount.
Donald Kay Riker, a consultant with On Point Advisors and publisher of the OTCProductNews.com blog, believes cost cutting and integration of the Pfizer brands may have helped lead to problems for J&J. He also believes the low status of quality-control executives may be playing a role in rising drug recalls generally.
"The emphasis on marketing and [ad] spending and the attention that marketing gets from senior management at any company is far and away more important than not just R&D, but also the quality function," Mr. Riker said. "[Quality] is the orphan function. It's rarely represented in any boardroom setting unless there's some emergency."
A recall review
On the recall front, Toyota has dominated news this year with 9 million cars recalled to date, including its namesake brand and Lexus. J&J has been runner-up with serial recalls from its McNeil unit for Tylenol, Motrin, Benadryl and Zyrtec products that will cost the company at least $600 million in sales before a problem plant in Pennsylvania gets fixed next year.
But there have been others getting less attention. Kellogg Co. in June recalled 28 million boxes of cereal for a waxy smell and flavor linked to a packaging material. Like J&J, the recall knocked about a percentage point off corporate sales last quarter and has prompted calls for congressional hearings, something BP, Toyota and J&J have already been subjected to.
P&G has had eight recalls since November, including three for Vicks, three in the past two months for Iams and one each for Pringles and Scope, the majority having to do with bacterial contamination. Unilever has had three recalls since October for Breyers, Country Crock and Slim-Fast, which was the biggest with 10 million cans recalled in December for potential bacterial contamination.
'Recall' and the media
News stories containing the word "recall" are at by far their highest level this year since the six years Google Trends has been tracking news stories.
The Google Insights index for searches on the word "recall" so far in 2010 is at its highest level in the U.S. since 2007, when a massive pet-food recall linked to a tainted ingredient that killed at least dozens of pets drove the biggest spike ever in the index, which goes back to 2004. The search index for recall is running 66% ahead this year of its level for 2009 and 137% ahead of 2008, though still about 14% below the record year of 2007, when search was driven by widespread recalls of pet food and toys from China found to contain lead.
Data from Infegy's Social Radar show social-media mentions of recalls have roughly doubled from their levels two years ago to around 200,000 monthly by July. "Safety or recall issues carry unique currency in terms of word-of-mouth pass-along," said Nielsen Co. exec VP Pete Blackshaw. "People feel they're helping one another by spreading the news."
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