the effects of product-harm crisis on brand performence

8/2/2019 The Effects of Product-harm Crisis on Brand Performence

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International Journal of Market Research Vol. 52 Issue 4

The effects of product-harm crisis on

brand performance

Baolong MaBeijing Institute of Technology

Lin ZhangTruman State University

Fei LiTsinghua University

Gao Wang

China Europe International Business School

The. purpose. of. this. paper. is. to. offer. a. better. understanding. of. the. effects. of.

product-harm.crisis.on.a.brands.performance.and.market.structure.This.research.

is. based. on. panel. data. on.milk. powder. sales. during. the.Nestl.product-harm.

crisis.in.China.The.NBD-Dirichlet.model. is.used. to.evaluate.the.performance.

of. Nestl. and. other. leading.milk. powder. brands. before,. during.and. after. the.

crisis.Our.data.show.that.product-harm.crises.disturb.the.market.structure.and.

change.customer.behaviour.While.a.product-harm.crisis.had.a.negative.effect.on.

Nestls.brand.performance,.it.created.opportunities.for.other.brands.Overall,.

our.analysis.shows.that.the.NBD-Dirichlet.model.is.a.valid.tool.for.monitoring.

the.performance.changes.of.both.crisis.brand.and.other.non-crisis.brands.during.

a.product-harm.crisis.The.managerial.implications.are.also.discussed

Introduction

The. term. product-harm. crisis. refers. to. well-known. events. related.to. product. defects. or. harm. associated. with. some. brands. (Siomkos. &.Kurzbard.1994).For.example,.in.2000,.when.news.spread.that.more.than.100.people.had.died.in.accidents.involving.defective.Firestone.tyres,.the.company.had.to.recall.millions.of.its.products.(Advertising Age.2000).In.September.2008,.6244.babies.in.China.were.diagnosed.as.suffering.from.numerous. ailments. after. ingesting. the. poisonous. Sanlu. formula. (People

Daily.2008).Having.used.all.of.its.cash.reserves.for.product.recall.and.

Received.(in.revised.form):.26.February.2010


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The effects of product-harm crisis on brand performance

medical. payments,. Sanlu. Company. was. declared. bankrupt. in. 2009. In.2005,.Nestl.Company.mistakenly.sold.milk.powder.that.contained.more.

iodine.than.Chinese.national.standards.permit.in.the.market.When.the.news.broke,.Nestl.had.to.make.a.public.apology.and.remove.the.defective.product.from.shelves.(ABC.News.2005).After. this.crisis,. in.an.effort. to.restore. reduced. sales,.Nestl. gave.out. samples. and. stationed. doctors. in.Beijing.supermarkets.to.deal.with.customers.concernsThese.examples.clearly.suggest.that.a.product-harm.crisis.can.seriously.

imperil. a. brands. performance. . and. even. totally. destroy. a. company,.as. in. the. case. of. Sanlu. Therefore,. understanding. how. a. product-harm.crisis.influences.brands.and.the.market.structure.is.of.great.practical.and.

theoretical.interestThe. NBD-Dirichlet. model. (Ehrenberg. 1988). is. a. well-established.

statistical.model.and.has.been.extensively.used.to.audit.and.predict.brand.performance. measures. (BPMs). under. stationary. and. dynamic. market.structures.(Ehrenberg.et al..2004).However,.this.model.has.not.been.used.to. analyse. the. influence. of. product-harm. crises. Since. a. product-harm.crisis. can. greatly. affect. brand. performance,. it. is. reasonable. to. assume.that,. by.monitoring. the. BPMs. through. the. product-harm. crisis,.we.can.indirectly. observe. how. a. product-harm. crisis. influences. brands. and. the.

market.structure.of.this.product.category.This.approach.should.provide.some.practical.benefits.from.a.new.perspectiveOur.main.objective.in.this.paper.is.to.use.the.NBD-Dirichlet.model.to.

monitor.the.leading.brands.BPMs.during.the.2005.Nestl.product-harm.crisis. that. occurred. in. China. By. comparing. the. observed. BPMs. of. the.pre-,. during. and. post-crisis. periods. to. those. expected,. and. looking. at.the.differences.between.these.three.periods,.we.may.come.to.understand.how.a.product-harm.crisis.influences.brands.(including.both.crisis.brand.and.non-crisis.brands).and.market.structure.Limitations.and.managerial.

implications.are.discussed

The product-harm crisis and its influence on the brand

After.a. series.of.product-harm.crises.over. the.years,.related.studies.have.been.developed.in.a.number.of.research.fields.It.has.been.widely.accepted.that.product-harm.crises.have.a.negative.influence.on.crisis-brand.equity.(Heerde. et al.. 2007). For. example,. a. brand. under. crisis. may. lose. its.baseline.sales.and.become.more.sensitive.to.a.competitors.market.activities.(Heerde. et al. 2007). The. crisis.may. also. affect. the. crisis. brands. stock.price. (Salin.&.Hooker. 2001). Compared. to. limited. systematic. research.


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into.crises.market.sequences,.past.research.has.focused.on.consumers.and.firms.reaction.towards.such.crises.(Dawar.&.Pilluta.2000)

Depending.on.how. it. is.conducted,.most. research.in.connection.with.product-harm. crises. can. be. classified. into. three. categories. The. first.consists.of.descriptive.checklists. suggesting.which.strategies.work.or.do.not.work.in.terms.of.business.practices.(Mitroff.2004).Because.this.kind.of.research.cannot.quantify.the.damage.incurred,.it.can.only.provide.limited.guidance.for.understanding.the.underlying.mechanisms.of.product-harm.crises.Another.stream.of.such.research.focuses.on.laboratory.experiments.Equipped.with.psychological.theories.and.different.control.variables,.this.kind.of.research.can.help.us.understand.the.moderators.that.play.a.part.

in.influencing.a.product-harm.crisiss.effects,.and.perhaps.provides.some.valuable. insights. (Dawar. &. Pilluta. 2000;.Vassilikopoulou. et al. 2009).However,.external.validity.is.one.limitation.of.such.researchAnother. research. stream. has. recently. grown. in. popularity,. where.panel.data.gathered.during.real.product-harm.crises.have.been.collected.and.analysed.using. advanced.mathematical.models. (Heerde.et al.2007;.Cleeren.et al..2008).How.the.crisis.influences.the.performance.of.the.crisis.brand.or.the.affected.product.category.can.be.tracked.by.monitoring.the.brands.stock.price.(Salin.&.Hooker.2001).or.sales.(Heerde.et al.2007).

By. all. accounts,. this. research. stream. provides. more. practical. insights.about.the.influence.of.the.product-harm.crisisThis.study.contributes.to.the.third.research.stream.in.that.we.used.the.

NBD-Dirichlet.model.to.quantify.the.product-harm.crisiss.effect.on.BPMs.(including. penetration,. market. share,. purchase. frequency. and. share. of.category.requirement).and.market.structure.during.the.2005.Nestl.milk.powder.crisis

The NBD-Dirichlet model

The.NBD-Dirichlet. model. was. developed. by. Chatfield. and.Goodhardt.(1975),. and. improved. by. Ehrenberg. (1988). This. model. is. a. statistical.model.based.on.two.well-established.assumptions:.customers.are.thought.of.having.steady.habitual.personal.purchase.propensities,.and.brands.are.characterised.with.their.purchase.probabilities.and.their.market.shares.In.a.word,.it.is.based.on.a.stationary.market.structure.This.model.has.been.widely.used.to.describe.observed.brand.performance.patterns,.and.helps.to.explain.and.predict.them.(Kahn.et al..1988;.Ehrenberg.et al.2004;.Rungie.&.Goodhardt. 2004).With. limited.numerical. inputs,. the.NBD-Dirichlet.model.can.be.used.to.predict.BPMs.for.particular.brands.if.they.are.under.


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a.stationary.market.(see.Table.1.for.detailed.information).The.model.and.the.empirical.generalisations.associated.with.them.have.been.widely.tested.

and.supported.in.marketing.for.over.30.years.across.European,.US,.Asian.and.Australasian.markets.(Uncles,.Ehrenberg.&.Hammond.1995)Although. the. NBD-Dirichlet. model. is. based. on. a. stationary. market.

assumption,. this. does. not. limit. its. application. only. to. steady. markets.(Ehrenberg et al.2004).For.example,.the.model.has.been.used.to.audit.the.performance.of.established.brands.(Ehrenberget al.2004),.as.well.as.niche.and.change-of-pace.brands.(Kahn et al.1988).It.has.been.used.to.predict.and. evaluate. the. performance. of. new. brands. (Schmittlein. et al.. 1987;.Ehrenberg.&.Goodhardt. 2001),. as. well. as. access. brands. performance.

under.price.promotion.(Ehrenberg.et al..1994).and.loyalty.programmes.(Sharp.&.Sharp.1997;.Meyer-Waarden.&.Benavent.2006).However,.this.model.has.not.been.applied.to.product-harm.crisis.analysis,.although.past.research. has. shown. that. it. would. be. a. valid. tool. under. such. dynamic.circumstancesIn.our. research,.we.used. the.NBD-Dirichlet.methodology. to.estimate.

theoretical. BPMs,. and. compared. them. with. those. observed. measures.Because.of.the.product-harm.crisis,.we.would.expect.that.the.market.would.no. longer. be. stationary.As. a. result,. there.would.be. some.discrepancies.

between. the. theoretical,. or. predicted,. BPMs. and. the. observed. values.(Meyer-Waarden. &. Benavent. 2006). These. discrepancies. may. indicate.how. the. crisis. disturbed.the. stationary.market. (Ehrenberg et al. 2004).and.affected.these.brands

Table 1 Brand performance measures

Indicators Explanation

Market share The percentage of the total sales of a given type ofproduct that is attributable to a given company

Penetration The proportion of the product category customers who

buy a special brand at least once in a given period

Purchase frequency The average purchase rate for those consumers who buy

this brand over a special period; this can indicate the

customers loyalty

Share of category requirements (SCR) The brands share among the group of consumers who

bought the brand at least once during a special period


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Data and methodology

The.Retailing.Research.Center.of.Tsinghua.University.provided.the.panel.

data.used. in. this. analysis,.which. includes. purchase. data. on. 53. product.categories. from.336. families. in.the. Beijing.area.during. the. period. from.January. 2004. to. December. 2005. These. data. recorded. the. detailed.purchase.information.of.each.product.category.(for.example,.brand.name,.purchase.volume,.purchase.price,.purchase.time.and.purchase.locations).Our.analysis.shows.that.there.were.more.than.70.milk.powder.brands.in.the.market. during. this.period.However,. for. the. purposes. of.this. study,.we. focused. only. on. four. leading. brands:. Yili,. Nestl,. Wondersun. and.Mengniu

The.Nestl.milk.powder.incident.began.on.25.May.2005.(ABC.News.2005),.and.we.can.assume.that.the.market.before.May.2005.was.stationary.We.first.used.the.12.months.data.before.the.crisis.(ie.April.2004April.2005). to. fit. the. NBD-Dirichlet. model,. and. predict. the. normal. brand.performance.and.market. structure.We.then.focused.on.data. from.three.distinct. three-month.periods. (pre-crisis.. 25.February. 2004. to.24.May.2005;.during-crisis..25.May.2005.to.24.August.2005;.and.post-crisis..1.October.2005.to.31.December.2005).Theoretical.BPMs.(penetration,.purchase. frequency,. share. of. category. requirements. (SCR),. etc). from.

each. period. were. estimated. using. the. fitted. NBD-Dirichlet. model,. and.these.estimated.values.were.then.compared.to.those.observed.values.This.enabled.us.to.detect.whether. there.were.deviations.due. to.the.product-harm.crisis.When.determining.whether.the.deviations.were.significant.or.not,.we.used.the. standards. from.Fader.and.Schmittlein.(1993):+/.3%.for.market.share,.+/.3%.for.penetration,.+/.03.for.purchase.frequency,.and.+/.3%.for.SCR.For.example,.if.the.theoretical.SCR.is.different.from.the.observed.SCR.by.more.than.3%,.we.determined.that.the.discrepancy.is.significant

The.three-month.period.was.chosen.based.on.the.following.factors.First,.we.wanted.to.set.the.period.as.short.as.possible,.so.that.the.companies.could.quickly.track.the.transitions.of.BPMs.Besides,.it.is.impractical.for.companies.to.wait.for.a.long.time.before.they.can.make.any.estimation.of.the.crisiss.influence.Second,.according.to.Ehrenberg et al.(2004),.the.base.analysis.period.for.BPMs.should.be.greater.than.the.average.inter-purchase.interval. Since. our. data. show. that. the. average. inter-purchase. interval.of.milk.powder. is.around. 13.months,. a. three-month.period. should. be.appropriate.Third,. the. extensive. media. coverage.on. this. product-harm.crisis.extended.from.25.May.to.the.end.of.August.2005.Therefore,.we.think. the.period. from. 25.May.2005. to. 24.August. 2005. should. be. one.


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when.the.market.was.greatly.disturbed.by.the.crisis.Fourth,.the.BPMs.are.dependent.on.the.period.For.example,.a.brands.penetration.will.be.much.

higher.in.a.year.than.in.a.week.In.contrast,.SCR.will.be.lower.in.a.longer.period.(Ehrenberg et al.2004).To.minimise.the.error.when.comparing.the.BPMs.across.different.periods,.we.chose.the.same.duration.for.each.period

Results

Model fitness and brand performance measures before the crisis

Table.2.presents.four.key.brand.performance.measures.based.on.12.months.

data. before. the. crisis. (ie. April. 2004April. 2005). These. theoretical.BPMs.match.very.well.with.the.observed.values.(the.correlations.between.observed. and. theoretical. values. are. 099. for.market. share,. penetration.and.SCR,.092.for.purchase.frequency).This.result.shows.that.this.was.a.stationary.marketThe. observed. purchase. frequencies. and. penetrations. of. four. leading.

brands.are.represented.in.Figure.1,.where.the.x-axis.marks.the.penetration.while. the. y-axis. indicates. the. purchase. frequency. The. estimated. values.from.the.NBD-Dirichlet.model.are.also.marked.in.Figure.1.The.straight.

line.in.the.figure.connecting.the.observed.values.represents.a.least.squares.regression. line. using. the. observed. penetration. and. purchase. frequency.The. other. line. connects. the. theoretical. values. The. points. in. Figure. 1.clearly.mark.the.marketing.positions.of.each.brand.It.is.obvious.that.a.small.brand.has.fewer.buyers.(lower.penetration).than.larger.brands,.and.its.customers.tend.to.buy.it.less.frequently.(less.purchase.frequency);.this.is. the. so-called. double. jeopardy. phenomenon. (Ehrenberg.et al.. 1990).It.is.also.clear.that.the.variation.on.the.observed.penetration.and.market.

Table 2 Part BPMs from the 12-month period before the crisis

Brand

Nestl Yili Wondersun Mengniu

CorrelationT O T O T O T O

Market share (%) 13.45 12.00 13.30 11.83 7.23 7.69 5.41 6.59 0.99

Penetration (%) 23.90 24.86 23.67 24.29 13.70 14.00 10.44 10.29 0.99

Purchase frequency 1.9 1.61 1.9 1.67 1.78 1.59 1.75 1.48 0.92

SCR (%) 38.13 40.61 38.05 35.89 34.99 32.58 34.10 37.04 0.99

Notes: T = theoretical value; O = observed value; the correlation is based on all brands in this productcategory (more than 70 brands).


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share.among.different.brands.were.greater.(for.example,.the.penetration.from.maximum.2486.of.Nestl.to.minimum.1029.of.Mengniu,.a.ratio.of.24.to.1),.while.the.purchase.frequency.and.SCR.variation.were.relatively.smaller.(for.example,.the.observed.purchase.frequencies.are.all.within.the.157.+/.01.range).This.is.consistent.with.previous.findings.(Ehrenberget al.2004)We.also.used.the.NBD-Dirichlet.model.to.analyse.the.three-month.pre-

crisis. data.Both. the.predicted.BPMs. and. the.observed. BPMs. from. this.

period.are.listed.in.Table.3.Clearly,.there.were.no.significant.deviations.between.theoretical.measures.and.the.observed.measures,.and.this.shows.that.the.market.was.stationary.This.also.indicates.that.choosing.a.three-month.period.as.the.basic.period. is.appropriate.Similar.to.the.one-year.period.data,.the.market.share.and.penetration.differed.greatly.among.four.brands,.while.the.purchase.frequencies.and.SCRs.had.tighter.distributionFrom.observed.values. during. this. period,. Yili. and.Nestl. had. greater.

market.share.than.the.other.two.brands.Yili.also.had.the.highest.purchase.frequency.and.SCR,.although.some.of.the.margin.was.not.significantComparing. the. BPMs. from. the. one-year. period. and. those. from. the.

three-month.period,.we.found.that.the.penetrations.of.four.leading.brands.

Figure 1 Double jeopardy in the pre-crisis market

Penetration (%)

Wondersun

Wondersun

Mengniu

Mengniu

YiliNestl

NestlYili

Purchasef

requency

7 9 11 13 15 17 19 21 23 25 270

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

Observed valuesTheoretical values

Linear regression values

y= 0.009x+ 1.419

R2

= 0.717


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from.the.one-year.period.were.greater.than.those.from.the.three-month.period. On. the. other. hand,. the. SCRs. from. the. one-year. period. were.smaller. than. those. from.the. three-month.period.This. is.consistent.with.previous.findings.(Ehrenberg et al.2004)

Brand performance measures during the crisis

To.check.how.much.the.brands.were.affected.by.the.product-harm.crisis,.we.also.used.the.model.to.analyse.the.during-crisis.period.data.Both.the.predicted.BPMs.and.the.observed.BPMs.are.listed.in.Table.3Obviously,. there. were. significant. deviations. between. the. predicted.

measures. and. the. observed. measures. (see. Table. 3). For. example,. the.observed.SCR.of.Nestl.was.984%.less.than.the.theoretical.value,.while.the. observed. SCR. of. Yili. showed. a. positive. deviation. of. 1702%. In.addition,.the.observed.purchase.frequencies.of.Mengniu.and.Wondersun.were. significantly. lower. than. those. predicted. values. (by. 04. and. 042.respectively).It.is.clear.that.the.Nestl.product-harm.crisis.disturbed.the.market.and.the.market.was.not.stationary.during.this.period

Table 3 Part BPMs from the pre-, during and post-crisis periods (each period lasts threemonths)

Brand

Nestl Yili Wondersun Mengniu

T O T O T O T O

Market share (%)

Before 9.36 9.19 8.13 10.29 8.85 7.35 5.48 5.25

During 4.34 3.86 10.93 12.63 9.28 7.37 8.12 6.32

After 5.74 5.17 8.60 9.59 8.27 6.64 7.68 5.90

Penetration (%)

Before 11.83 12.57 10.33 10.86 11.21 12.00 7.06 7.43

During 7.39 7.62 17.73 18.10 15.23 16.19 13.45 14.29

After 9.27 9.57 13.62 13.91 13.12 13.91 12.24 13.04

Purchase

frequency

Before 1.72 1.59 1.71 1.96 1.72 1.43 1.69 1.54During 1.58 1.38 1.66 1.89 1.64 1.24* 1.62 1.20*

After 1.46 1.27 1.49 1.63 1.48 1.13* 1.48 1.17*

SCR (%)

Before 55.80 53.03 55.34 57.33 55.61 55.90 54.38 56.67

During 42.20 32.36* 45.05 62.07* 44.32 45.65 43.81 41.00

After 45.84 41.85* 47.00 59.09* 46.87 49.25 46.63 45.56

Notes: T = theoretical value; O = observed value; * indicates that there is significant difference between

the observed and the theoretical indicators.


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During. the. crisis,. Yili. had. the. highest.market. share,. penetration. and.SCR,.while.Nestl.was.the.lowest.among.these.four.brands.Yili.also.led.in.

terms.of.purchase.frequency,.while.the.other.three.brands.had.very.close.purchase.frequencies

Brand performance measures after the crisis

During. a. product-harm. crisis,. extensive. media. coverage. draws. public.attention. and. therefore. the. crisis. has. maximum. effect. on. the. market.structure. However,. after. a. period. of. time,. the. media. will. reduce. its.coverage. of. the. crisis,. the. crisiss. influence. on. the.market. will. decline.

and.the.market.will.probably.shift.to.another.stable.condition.How.the.brands.perform.under.this.new.market.structure.is.of.great.interest.As.one.of.our.efforts.to.shed.light.on.this.question,.we.used.the.NBD-Dirichlet.model.to.analyse. the. three-month.post-crisis.data.The. results.are. listed.in. Table. 3,. which. shows. that. the. observed. BPMs. had. some. deviations.from.the.expected.measures.These.deviations.are.similar.to.those.in.the.during-crisis. period. For. example,. the. observed.SCR. of.Nestl. and. Yili.showed.399%.and.1209%.deviation.respectively.On.the.other.hand,.the.observed.purchase.frequencies.of.Mengniu.and.Wondersun.were.031.

and.035.less.than.the.prediction,.respectively.Clearly,.four.months.after.the.outbreak.of.Nestls.product.crisis,.the.market.was.still.not.steadyDuring.this.period,.Yili.maintained.the.highest.market.share,.while.Nestl.

had.the.lowest.market.share.However,.the.difference.between.Nestl.and.Wondersun.or.Mengniu.was.insignificant.In.terms.of.penetration,.Nestl.was.still.the.lowest,.but.the.other.three.brands.were.all.very.close.to.one.another.Yili.maintained.the.highest.purchase.frequency.and.SCR,.while.Nestl.had.the.lowest.SCR

Compare brand performance measures across three different periods

To. understand. how. the. product. affects. the. brand. performance. of. the.leading.brands,.we.put.the.BPMs.of.these.brands.from.the.three.periods.(pre-,.during.and.post-crisis).together.in.Table.3.Because.the.market.was.not. steady. in.the.during.and.post-crisis.periods,.we.focused.only.on. the.observed.BPMs.when.comparing.these.brandsIn.terms.of.market.share,.Nestl.experienced.significant.changes.across.

these.three.periods:.it.had.919%.market.share.in.the.pre-crisis.market,.it.dropped.to.386%.during.the.crisis.and.recovered.to.517%.in.the.post-crisis. period.This. indicates. that. the. product. crisis. resulted. in. a.market.


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share.shrink. for. the.crisis.brand,.and. the.market. share.recovered.slowly.after.the.product.crisis.but.was.still.less.than.the.pre-crisis.level.At.the.

same. time,. the. other. three. brands. all. experienced. insignificant. changes..that.is,.they.increased.from.pre-crisis.levels.to.during-crisis.levels,.and.eventually.dropped.back.in.the.post-crisis.periodExamining.the.penetration.of.the.four.brands.during.these.three.periods,.

we. found. that. they. all. experienced. significant. changes. For. example,.following.the.trend.of.its.market.share,.Nestls.penetration.was.1257%.in.the.pre-crisis.period;.it.dropped.to.762%.during.the.crisis.and.recovered.to.957%.in.the.post-crisis.period.On.the.other.hand,.the.penetration.of.the. other. three. brands. experienced. similar. transitions,. increasing. from.

the. pre-crisis. period. to. the. during-crisis. period,. then. dropping. to. an.intermediate.level.(between.the.pre-crisis.and.during-crisis.periods).in.the.post-crisis.periodOne. interesting. finding. is. that. the. purchase. frequencies. of. the. four.

brands. dropped. from. the. pre-crisis. period. to. the. during-crisis. period,.and. kept. dropping. into. the. post-crisis. period. Although. each. step. of.the. changes.was. insignificant,. if.we.compare. the. post-crisis. level. to. the.pre-crisis. level,. we. find. that. all. four. brands. displayed. a. significant. or.marginally. significant.drop.Overall,.Nestl. did. not. seem.different. from.

the.other.three.brandsThe.SCRs.of.these.four.brands.experienced.a.totally.different.transition.than.the.other.three.BPMs.For.example,.Nestl,.Mengniu.and.Wondersun.all. experienced.SCR.drop.from.the.pre-crisis.period. to.the.during-crisis.period;. and. all. recovered. somehow. in. the. post-crisis. period. The. only.exception.is.Yili:.its.SCR.increased.from.5733%.in.the.pre-crisis.period.to. 6207%. in. the. during-crisis. period. and. eventually. dropped. back. to.5909%.in.the.post-crisis.periodTo.better.display.the.performance.transition.from.the.pre-crisis.period.

to. the. post-crisis. period,. the. penetrations. and. purchase. frequencies. of.these.four.brands.during.these.three.periods.are.all.plotted.in.Figure.2.Two. things. are. obvious:. first,. this. crisis. harmed. Nestls. penetration.greatly,.while.the.other.three.brands.benefited. to.some.extent. from.this.crisis;.second,.the.purchase.frequencies.of.each.brand.and.even.the.entire.product.category.fell.after.this.crisis.However,.Yili.always.had.the.leading.purchase. frequency. while. the. other. three. brands. purchase. frequencies.were.close.to.one.another


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Discussion

This.study.focused.on.the.Nestl.milk.powder.crisis.that.occurred.in.China.in.2005.Based.on.panel.data.from.336.families.in.the.Beijing.area,.we.studied.the.effects.of.a.product-harm.crisis.on.brands.and.market.structure.

using.the.NBD-Dirichlet.model.We.found,.first,.that.the.market.structure.in.the.pre-crisis.period.was.stationary.The.product-harm.crisis.disturbed.the.balance,.and.the.market.during. the.crisis.was.no.longer. steady.As.a.consequence,.the.predictions.of.purchase.frequencies.and.SCRs.were.not.consistent.with. the. observed.measures. Four.months. after. the. outbreak.of. the. crisis,. the. overall. market. was. still. not. back. to. stationary. status.and. there.were.some.deviations.of.SCRs.and.purchase. frequencies.This.indicates.that.the.crisiss.influence.on.the.market.still.existed,.and.it.might.last.for.some.time.However,.it.is.interesting.to.point.out.that.the.observed.

market. share. and. penetration. seemed. to.match. the. predicted. measures.in.all.three.periods.When.the.market.was.not.steady.in.the.during-crisis.and. the. post-crisis. periods,. detailed. data. show. that. in. most. situations.the. observed. purchase. frequencies. (Mengniu. and. Wondersun). or. SCRs.(Nestl).were. significantly. lower.than. the. estimated.measures.This.may.indicate.that.Mengniu.and.Wondersun.acquired.some.new.customers.from.Nestl,.and.these.new.customers.did.not.commit.heavy.purchases.to.these.brands.(This.is.explained.in.more.detail.in.the.following.paragraph).Our.data.also.show.that,.among.those.non-crisis.brands,.Yili.was.an.exception,.with.higher.than.expected.SCR.in.both.the.during.and.post-crisis.periods.In.addition,.the.observed.purchase.frequencies.of.Yili.in.the.during.and.

Figure 2 The performance transitions from the pre-crisis period to the post-crisis period

Nestl (N)

Wondersun (W)

Yili (Y)

Mengniu (M)

Mduring

Wduring

Nduring

Yduring

Ybefore

Nbefore

Mbefore W

before

Yafter

Nafter

Mafter

Wafter

7 9 11 13 15 17 191.0

1.2

1.4

1.6

1.8

2.0

2.2

Penetration (%)

Purchasef

requency


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post-crisis.periods.were.always.greater.than.the.predicted.measures,.even.though. the. difference. was. less. than. 03. This. may. relate. to. its.market.

position:.in.both.periods,.Yili.had.the.highest.market.share,.with.more.than.3%.margin,.while.its.penetration.was.similar.to.that.of.its.competitorsSecond,. a.product-harm. crisis. hurts.the. crisis. brand.greatly.Our. data.

clearly.showed.that.the.market.share.and.penetration.of.Nestl.dropped.significantly. during. the. product. crisis. Even. though. these. measures.recovered.during.the.post-crisis.period,.they.were.still.significantly.lower.than. their. pre-crisis. levels. On. the. other. hand,. those. non-crisis. brands.benefited. from. this.crisis.with.significantly.higher. penetration,. although.our. data. also. show. a. trend. of. returning. to. their. pre-crisis. levels. The.

decreased.market.share.of.Nestl.redistributed.to.all.other.brands.(more.than.70.brands),.and.each.of.them.took.only.a.part.of.it.Therefore,.no.significant.change.of.market.share.was.seen.in.the.non-crisis.brandsThird,.the.crisiss.influence.on.purchase.frequency.and.SCR.of.the.crisis.

brand.was.not.significantly.different.from.those.of.the.non-crisis.brands.In. terms.of.purchase.frequency,. this. similarity. lies. in.two. aspects:.in.all.three.periods,.Nestls. relative.purchase.frequency.was. always. the. same.(significantly. lower. than. Yili. but. marginally. higher. than. the. other. two.brands);.and.during.the.transition.from.the.pre-crisis.period.to.the.post-

crisis. period,. all. four. leading. brands. dropped. by. around. 03. Similarly,.the. observed.SCRs. of.Nestl,.Mengniu. and.Wondersun.all. experienced.a.similar.drop.from.the.pre-crisis.period.to.the.during-crisis.period,.and.recovered.to.some.extent.in.the.post-crisis.period.Previous.research.shows.that. new. brands. garnered.customer. loyalty. immediately.after. they.were.introduced.(Ehrenberg.&.Goodhardt.2001).Our.data.further.show.that.even.a.product-harm.crisis.will.not.hurt.the.crisis.brands.customer.loyaltyOverall,.Nestls.penetration.and.market.share.decreased.dramatically,.

while.other.brands.experienced.an.increase.in.penetration.at.the.same.time.

Associated.with.this.transition,.the.purchase.frequencies.and.SCRs.of.most.leading.brands.dropped.significantly.Combining.these.observations,.one.reasonable.explanation.can.be.given.The.product-harm.crisis.drove.some.of.Nestls.customers.away.to.other.brands.These.switched.customers.did.not.form.stable.purchase.behaviour..in.other.words,.they.did.not.limit.their.purchases.to.any.one.special.brand.These.switched.customers.were.somehow.like.change-of-pace.customers.(Kahn et al.1988).Even.though.the. non-crisis. brands. attracted. some.new. customers. and. increased. their.market. share.or.penetration,. the. average. loyalty. of. their.new. customer.group.was. low.As.a. result,. their.purchase. frequencies. or.SCRs.became.even.lower.This.combination.of.higher.penetration.and.lower.loyalty.is.


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similar.to.what.happens.to.change-of-pace.brands.(Kahn et al.1988).or.to.normal.brands.under.deep.price.cuts.(Bhattacharya.et al.1996)

Finally,.we.may.need.to.pay.particular.attention.to.Yili.Yili.was.special.in.many.aspects.First,.it.always.had.the.highest.market.share.in.all.three.periods.Second,. in.both. the.during. and.post-crisis.periods,.its.observed.SCRs.were.significantly.higher.than.the.estimated.SCRs.Third,.its.observed.SCR.increased.from.the.pre-crisis.period.to.the.during-crisis.period,.while.all.the.other.brands.experienced.SCR.drop.Fourth,.its.observed.purchase.frequency.always.led.the.market.with.a.significant.margin.All.these.may.relate.to.one.fact..that.Yili.was.the.biggest.brand.in.the.pre-crisis.market.Our. research.indicated. that,.even. though. all. non-crisis.brands. benefited.

from.Nestls.crisis,.different.brands.gained.differently;.the.most.dominant.brand.gained.more.in.terms.of.market.share,.even.increasing.SCR,.while.the. smaller. brands. had. smaller. gains. in. market. share. and. also. had. to.sacrifice. SCR. This. looks. like. another. double. jeopardy. smaller.brands.may.have.to.face.in.reality.Interestingly,.according.to.Heerde et al.(2007),.smaller. brands. are. more. damaged. than. bigger. brands. after. a. product-harm.crisis.Our.research.is.consistent.with.that.of.Heerde et al.(2007).in.supporting.that.it.is.always.good.to.be.a.bigger.brand.and.it.is.always.bad.to.be.a.smaller.brand

Conclusion

To. the.best. of. our.knowledge,. this. study. is. one.of. the. first. attempts. to.apply. the.NBD-Dirichlet.model. to. investigate. the. effects. of. a. product-harm. crisis. This. paper. provides. a.methodology. by.which. to. assess. the.impact. of. a.product. crisis. in. a. quantitative.way,. and. applies. the.model.to.a.product-harm.crisis.for.Nestl.milk.powder.in.the.Chinese.market.The.research.shows.that.this.model.is.a.great.tool.by.which.to.monitor.

or. track. the. development. of. a. product-harm. crisis. The.modelling. and.estimation.processes.are.straightforward,.and.the.required.data.can.easily.be.collected.Using.this.model.helps.us.to.monitor.the.crisiss.influence.on.the.crisis.brand,.non-crisis.brands.and.even.the.entire.category.marketOur.research.shows.that.a.product-harm.crisis.can.greatly.damage.the.

crisis.brands.market.share.and.penetration.However,.purchase.frequency.and.SCR.were.not.damaged.at.similar.levels.These.combined.data.indicate.that. the.market.was.not. steady,.and.a.product.crisis. changed.customers.purchase.behaviours.More.specifically,.a.product-harm.crisis.drove.away.some.customers.of.the.crisis.brand.and.these.switched.customers.did.not.make. up. their. minds. about. which. brand. to. eventually. switch. to. The.


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periods.during.and.after.the.crisis.were.critical.to.both.of.the.crisis.brands.and. non-crisis. brands. For. crisis. brands,. they. need. to. maximise. their.

efforts.to.attract.back.this.group.of.customers.before.they.commit.to.other.brands.However,.for.non-crisis.brands,.even.though.they.had.improved.their.market.share.and.expanded.their.customer.base,.they.should.realise.that. this. is. just. a. temporary. improvement. They. need. to. try. their. best.to. keep. these.new. customers. satisfied,. and. eventually.make. them. loyal.customers.Their.strategies.and.practices.during.this.period.will.eventually.affect.whether.they.can.keep.these.new.customers

Limitations

This. study.has. its. limitations. First,. it.used.data.only. from.336. families.in. the. Beijing. area,. so.probably.cannot. represent. the. entire. population.Future. research. collecting. data. from. a. more. representative. population.might. provide. greater. insights. Second,. our. data. covered. just. seven.months. after. the. outbreak. of. the. crisis,. and. the. market. was. still. not.steady.Future.research.with.a.longer.period.of.data.might.provide.more.detailed. information. Third,. we. focused. only. on. the. product. category.of. milk. powder,. which. is. characterised. by. high. purchase. frequency.

Therefore,. caution. needs. to. be. exercised. before. the. conclusions. in. our.study.are.applied.to.other.products.with.lower.purchase.frequency.(cars,.for.example)

References

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About the authors

Baolong.Ma. is. Assistant. Professor. of. Marketing. at. Beijing. Institute. of.Technology. and. a. primary. researcher. of.The. Retailing.Research.Center.at. Tsinghua. University. He. works. primarily. in. the. areas. of. customer.relationship.management,.brand.management.and.crisis.management.and.has.written.numerous.scholarly.articles.on.topics.in.these.areasLin. Zhang. is. Assistant. Professor. of. Marketing. at. Truman. State.

University. She. completed. her. PhD. in. Marketing. at.Mississippi. State.


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University. in. 2006. Her. research. interests. include. brand. management,.comparative. advertising. and. unhealthy. consumption. behaviour. Her.

research. has. been. published. in. journals. such. as.Marketing ManagementJournal.and.Management Research News.and.AMA.proceedings

Fei.Li.is.Professor.of.Marketing.at.Tsinghua.UniversityGao. Wang. is. Professor. of. Marketing. at. China. Europe. International.

Business.SchoolAddress.correspondence.to:.Lin.Zhang,.School.of.Business,.Truman.State.

University,.Kirksville,.MO.63501,.USEmail:.linzhang@trumanedu


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the effects of product-harm crisis on brand performence

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