Why Pioneers Fail to Turn a Market Niche into a Mass Market


Twenty-three years ago, a pioneering Greek company named Fage introduced a strain-type of yogurt that didn’t have that watery taste of the traditional yogurt sold in American supermarkets.

In the beginning, FAGE yogurt was selling at Titan Foods in Astoria, Queens to Greek-American consumers. American consumers didn’t know about this product, and price was a major issue–$2.49 for a six-once container—about three times conventional yogurt was selling at that time. Yet sales were doubling every month.

Eventually, Word-of-Mouth did its magic, and FAGE expanded its sales to Manhattan and Long Island. Now, sales quadrupled, and Fage had yogurt shipped from Greece with every major airliner that flew from Europe to New York.

The turning point came in 2000, when Trader’s Joe and Whole Foods (NYSE:WFM) decided to carry the product, and sales jumped from $4 to 40 million. In 2007, FAGE opened its owned factory in upstate New York, across Efratis a feta cheese company that eventually got into the yogurt business of its own, but on a larger scale, dominating the Greek yogurt market that by now had turned from a market niche into a mass market. The name of the company is Chobani.” In just four years, Chobani saw its sales soar, leaving Fage in the dust. Chobani is now taking on giant yogurt companies like Kraft (NYSE:KFT) and General Mills (NYSE:GIS).

Fage’s and Chobani’s story provide an important lesson in business strategy: Pioneering is one of the conditions for creating a mass market. The other condition is merchandising. While pioneers develop a market niche, it is usually the merchandisers that turn it into a mass market, reaping off most of the benefits from the development of this new market.

The success story of Greek yogurt is neither new, nor unique. In almost every industry, market niches are developed by start-ups and turned into mass markets by merchandisers, larger established companies, which have the production scale, and the sales and distribution networks start-ups are lacking. In the pharmaceutical sector, large established companies like Pfizer (NYSE:PFE) and Bristol Myers Squibb (NYSE:BMY) use their scale advantage and sales networks to commercialize products from small biotech companies. In the consumer sector, large companies like PG (NYSE:PG) use their scale and marketing advantage to promote the products of smaller companies they acquire.

But there are exceptions to this rule. In the high-tech industry a host of start-ups, from Microsoft (NASDAQ:MSFT) to Apple (NASDAQ:AAPL), to Salesforce.com (NYSE:CRM) turned the market niche they first developed into mass market. In the fast food service industry, McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) turned from start-ups to world giants. What made the difference?

Sometimes, it was the genius of the company founder—Bill Gates in the case of Microsoft and Steve Jobs in the case of Apple. Other times, it was a seasoned executive who end-up buying up the start-up like Ray Kroc in the case of McDonald’s (NYSE:MCD) and Howard Schultz in the case of Starbucks (NYSE:SBUX). In a third case, it was a visionary CEO, as was the case with Cisco Systems (NYSE:CSCO), at least in the early days.

The bottom line: Better to be a merchandiser rather than a pioneer. It is less risky and more rewarding. The problem, however, is that this strategy may not be sustainable in the long run, as the market becomes crowded with competitors.

 

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