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  Local to Global: Easy as 1-2-3?   Local to Global: Easy as 1-2-3?  Randall Frost  
Local to Global: Easy as 1-2-3? Given the current trend among some global companies of spinning off local brand holdings, it seems worth asking whether local brands can compete effectively against global competitors by means of strategic branding.

For example, consider the airline industry. With the widespread consolidation of passenger airlines in the US, many of the most familiar airline brands have now disappeared. TWA, Pan American, Republican, Allegheny and Pacific Southwest are just a few of the brands that have now either been acquired by larger competitors or simply fallen by the wayside. Given that the US airline industry is today dominated by three major competitors (United, American and Delta), is there still room for direct competition from small or regional players?

Not everyone thinks so. Marketing Professor Jagdish Sheth of Atlanta’s Emory University, for example, believes that the number of competitors in most markets evolves to produce the best possible balance between efficiency and competitive intensity, and that mature markets typically consist of two unbridgeable sectors: generalists who cater to mainstream consumers, and local players who provide for everyone else. “Local brands focus on local or regional markets and coexist with the global brands as niche players,” says Sheth. In most cases, he adds, local brands must be satisfied with margin rather than market share. And above all, Sheth feels that local brands should never try to go head to head against the generalists.

In The Rule of Three (Free Press, 2002), Sheth and his co-author Rajendra Sisodia examine dozens of industries in the US and conclude that in most of them, market share is usually held by three major players, with one or two specialists in competition for margin share. According to Sheth, the limitation to three major competitors works to the advantage of consumers by reducing the number of choices that they have to consider when deciding to make a purchase.

But Robert Skitol, an antitrust attorney with Drinker, Biddle & Reath LLP in Washington, DC, is skeptical. “It might be best or a profitable result for the three big firms that end up in any given market but that doesn’t mean it’s a result that is consistent with general efficiency, or consumer welfare interests in any given market,” he says.

Skitol also questions whether there is any magic in the number three. He attributes the presence today of several dominant players in many US industries to the way that antitrust laws are currently enforced. “There certainly are industries around where there are five, six or seven major players,” he notes, adding “There was a time in the US when we did not have antitrust legislation, and the result was trusts and monopolies and cartels.”

Sheth admits his Rule of Three actually has limited applicability to many countries outside the US. Consolidation has been less of a driving force, for example, in the European Union, where he says something more akin to a Rule of Four has evolved. But Sheth attributes this difference to disjointed markets and economic nationalism, rather than to the way antitrust laws are enforced in the EU.

But there are significant differences in the ways the European Union and US enforce their antitrust rules. Last October, for example, Coca-Cola agreed to change its sales practices in the EU—specifically to give its rivals greater access to shelf space, in order to settle a long-running antitrust case. Says Skitol, “EU competition law tends to be significantly more protective of smaller rivals than is the case under U.S. antitrust law […] The kinds of practices that Coke will apparently now abandon in Europe but will be free to continue in the US are much harder to challenge and easier to defend under US as compared to EU law.”

According to Bert Foer, president of the American Antitrust Institute, “By and large, the small firm [in the US] must succeed by being a tough and smart competitor rather than by utilizing the tool of antitrust. Usually the key advantages for the local firm include better service, important personal connections to the customer and suppliers, strategies that focus on niches not of the most importance to large competitors, and the ability to make decisions quickly compared to complex bureaucracies.”

While Sheth holds to the notion that specialists should not try to compete directly with generalists, he does allow for the possibility that disruptions or changes in an industry might turn a local brand into a major player. One example of such a disruption might be the chaos created in the US airline industry in the wake of the September 11 attacks on the US. The nation’s three major airlines all suffered great losses, and each airline ended up cutting its workforce back by approximately 20 percent.

Only two airlines ended up making money in the post-September 11 economy. One of them was JetBlue, a start-up founded in 1999. The airline initially flourished by offering low fares and point-to-point rather than network service, and by focusing on second-tier airports rather than going head to head against established hubs. Today JetBlue has a market value that is nearly as large as that of United, American and Delta combined.

JetBlue’s success appears to be due to more than weakened competition, however. From the start, the airline has paid close attention to its identity as a brand. While it is true that the company’s business model, which included new planes, low fares, and non-unionized labor, had the effect of catching the big carriers off-guard, there has also been a consistency and coherency in the company’s brand ideology of putting a human element back into flying that has resonated deeply with passengers.

Says Gareth Edmondson-Jones, JetBlue’s Vice-President of Corporate Communications, “JetBlue has prospered more significantly by its brand work than by disruption after 9/11. It’s certainly a combination, but more so the brand. More importantly, it was the pre-9/11 era that did most damage to the legacy carriers—when they were making massive profits with poor quality, indifferent service and high fares. That was the platform upon which JetBlue launched. September 11 certainly meant that the big guys were distracted while we grew.”

JetBlue reportedly has plans to have 290 planes and 25,000 employees within seven years, putting it within striking distance of the majors. Meanwhile the airline is now focused on gaining market share in existing markets. The plan is ambitious—no new airline has managed to join the top three in many years. In fact, since industry deregulation in 1978, only a few startups have even survived out of more than 100 launched.

Can JetBlue succeed where others have stumbled? Given that the airline has grown at breakneck speed and now wants to take on its Big Three competitors—two cardinal sins in Sheth’s book, it is hardly surprising that Sheth is less than optimistic. “I don't believe JetBlue can become an integrated carrier,” Sheth told us recently. “More likely, it will slide into [unprofitability] with its aggressive growth strategy.”

There may be more at stake for those who follow brands than whether JetBlue ultimately becomes a dominant player in the US air transport industry, however. JetBlue’s quest for a major role in the industry could well end up as just the sort of litmus test that is needed to ascertain whether strong brand identity can counterbalance the ongoing trend toward brand consolidation.    



Randall Frost, a freelance writer based in Pleasanton, California, is the author of The Globalization of Trade. His work has appeared in Worth, The New England Financial Journal, CBSHealthWatch and a variety of educational publications.

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