The effects of product-harm crisis on brand...

International Journal of Market Research Vol. 52 Issue 4

443© 2010 The Market Research Society

DOI: 10.2501/S1470785309201399

The effects of product-harm crisis on brand performance

Baolong MaBeijing Institute of TechnologyLin ZhangTruman State UniversityFei LiTsinghua UniversityGao WangChina Europe International Business School

The. purpose. of. this. paper. is. to. offer. a. better. understanding. of. the. effects. of.product-harm.crisis.on.a.brand’s.performance.and.market.structure ..This.research.is. based. on. panel. data. on. milk. powder. sales. during. the. Nestlé. product-harm.crisis. in. China .. The. NBD-Dirichlet. model. is. used. to. evaluate. the. performance.of. Nestlé. 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.Nestlé’s. 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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medical. payments,. Sanlu. Company. was. declared. bankrupt. in. 2009 .. In.2005,.Nestlé.Company.mistakenly.sold.milk.powder.that.contained.more.iodine. than.Chinese. national. standards. permit. in. the. market ..When. the.news.broke,.Nestlé.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,. Nestlé. gave. out. samples. and. stationed. doctors. in.Beijing.supermarkets.to.deal.with.customers’.concerns .

These.examples.clearly.suggest.that.a.product-harm.crisis.can.seriously.imperil. a. brand’s. 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.interest .

The. 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.perspective .

Our.main.objective.in.this.paper.is.to.use.the.NBD-Dirichlet.model.to.monitor.the.leading.brands’.BPMs.during.the.2005.Nestlé.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.competitor’s.market.activities.(Heerde. et al .. 2007) .. The. crisis. may. also. affect. the. crisis. brand’s. 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.crisis’s.effects,.and.perhaps.provides.some.valuable. insights. (Dawar. &. Pilluta. 2000;. Vassilikopoulou. et al .. 2009) ..However,.external.validity.is.one.limitation.of.such.research .

Another. 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.brand’s.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.crisis .

This.study.contributes.to.the.third.research.stream.in.that.we.used.the.NBD-Dirichlet.model.to.quantify.the.product-harm.crisis’s.effect.on.BPMs.(including. penetration,. market. share,. purchase. frequency. and. share. of.category.requirement).and.market.structure.during.the.2005.Nestlé.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.(Ehrenberg et 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.circumstances .

In. 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 of product 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 brand’s 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,. Nestlé,. Wondersun. and.Mengniu .

The.Nestlé.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.(i .e ..April.2004–April.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,.+/–.0 .3.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.crisis’s.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. 1 .3. 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.brand’s.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. (i .e .. April. 2004–April. 2005) .. These. theoretical.BPMs.match.very.well.with.the.observed.values.(the.correlations.between.observed. and. theoretical. values. are. 0 .99. for. market. share,. penetration.and.SCR,.0 .92.for.purchase.frequency) ..This.result.shows.that.this.was.a.stationary.market .

The. 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

Nestlé 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 product category (more than 70 brands).


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share.among.different.brands.were.greater.(for.example,. the.penetration.from.maximum.24 .86.of.Nestlé.to.minimum.10 .29.of.Mengniu,.a.ratio.of.2 .4.to.1),.while.the.purchase.frequency.and.SCR.variation.were.relatively.smaller.(for.example,.the.observed.purchase.frequencies.are.all.within.the.1 .57.+/–.0 .1.range) ..This.is.consistent.with.previous.findings.(Ehrenberg et 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.distribution .

From. observed. values. during. this. period,. Yili. and. Nestlé. 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.significant .

Comparing. 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

YiliNestlé

NestléYili

Purc

hase

freq

uenc

y

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 values

Theoretical values

Linear regression values

y = 0.009x + 1.419R2 = 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.3 .

Obviously,. there. were. significant. deviations. between. the. predicted.measures. and. the. observed. measures. (see. Table. 3) .. For. example,. the.observed.SCR.of.Nestlé.was.9 .84%.less.than.the.theoretical.value,.while.the. observed. SCR. of. Yili. showed. a. positive. deviation. of. 17 .02% .. In.addition,. the.observed.purchase. frequencies.of.Mengniu.and.Wondersun.were. significantly. lower. than. those. predicted. values. (by. 0 .4. and. 0 .42.respectively) .. It. is.clear.that. the.Nestlé.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 three months)

Brand

Nestlé 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 1.54

During 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.Nestlé.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. crisis’s. 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. Nestlé. and. Yili.showed. –3 .99%. and. 12 .09%. deviation. respectively .. On. the. other. hand,.the.observed.purchase.frequencies.of.Mengniu.and.Wondersun.were.0 .31.and.0 .35.less.than.the.prediction,.respectively ..Clearly,.four.months.after.the.outbreak.of.Nestlé’s.product.crisis,.the.market.was.still.not.steady .

During.this.period,.Yili.maintained.the.highest.market.share,.while.Nestlé.had.the.lowest.market.share ..However,.the.difference.between.Nestlé.and.Wondersun.or.Mengniu.was.insignificant ..In.terms.of.penetration,.Nestlé.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.Nestlé.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.brands .

In.terms.of.market.share,.Nestlé.experienced.significant.changes.across.these.three.periods:.it.had.9 .19%.market.share.in.the.pre-crisis.market,.it.dropped.to.3 .86%.during.the.crisis.and.recovered.to.5 .17%.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.period .

Examining.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,.Nestlé’s.penetration.was.12 .57%.in.the.pre-crisis.period;.it.dropped.to.7 .62%.during.the.crisis.and.recovered.to.9 .57%.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.period .

One. 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,. Nestlé. did. not. seem. different. from.the.other.three.brands .

The.SCRs.of.these.four.brands.experienced.a.totally.different.transition.than.the.other.three.BPMs ..For.example,.Nestlé,.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.57 .33%.in.the.pre-crisis.period.to. 62 .07%. in. the. during-crisis. period. and. eventually. dropped. back. to.59 .09%.in.the.post-crisis.period .

To.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. Nestlé’s. 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 .


453

Discussion

This.study.focused.on.the.Nestlé.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.crisis’s.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.(Nestlé).were. significantly. lower. than. the. estimated.measures ..This.may.indicate.that.Mengniu.and.Wondersun.acquired.some.new.customers.from.Nestlé,.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

Nestlé (N)

Wondersun (W)

Yili (Y)

Mengniu (M)

MduringWduring

Nduring

Yduring

Ybefore

Nbefore

Mbefore Wbefore

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 (%)

Purc

hase

freq

uenc

y


454

post-crisis.periods.were.always.greater.than.the.predicted.measures,.even.though. the. difference. was. less. than. 0 .3 .. 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.competitors .

Second,. a. product-harm. crisis. hurts. the. crisis. brand. greatly .. Our. data.clearly.showed.that. the.market.share.and.penetration.of.Nestlé.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.Nestlé.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.brands .

Third,.the.crisis’s.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,. Nestlé’s. 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. 0 .3 .. Similarly,.the. observed. SCRs. of. Nestlé,. 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.brand’s.customer.loyalty .

Overall,.Nestlé’s.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.Nestlé’s.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.


455

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.Nestlé’s.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.Nestlé.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.crisis’s.influence.on.the.crisis.brand,.non-crisis.brands.and.even.the.entire.category.market .

Our.research.shows. that.a.product-harm.crisis.can.greatly.damage. the.crisis.brand’s.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.


456

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) .

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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.areas .

Lin. Zhang. is. Assistant. Professor. of. Marketing. at. Truman. State.University .. She. completed. her. Ph .D .. in. Marketing. at. Mississippi. State.


458

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 Management Journal.and.Management Research News.and.AMA.proceedings .

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

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

University,.Kirksville,.MO.63501,.US .Email:.linzhang@truman .edu

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