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International Journal of Market Research Vol.

52 Issue 4

The effects of product-harm crisis on brand performance


Baolong Ma Lin Zhang Fei Li
Beijing Institute of Technology Truman State University Tsinghua 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

2010 The Market Research Society DOI: 10.2501/S1470785309201399

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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.concerns . These.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.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.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.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. 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.crisis . This.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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The effects of product-harm crisis on brand performance

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
Indicators

Brand performance measures


Explanation The percentage of the total sales of a given type of product that is attributable to a given company The proportion of the product category customers who buy a special brand at least once in a given period The average purchase rate for those consumers who buy this brand over a special period; this can indicate the customers loyalty The brands share among the group of consumers who bought the brand at least once during a special period

Market share Penetration Purchase frequency

Share of category requirements (SCR)

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International Journal of Market Research Vol. 52 Issue 4

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.(i .e ..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. productharm.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.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. 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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The effects of product-harm crisis on brand performance

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. (i .e .. April. 2004April. 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
Nestl Brand Market share (%) Penetration (%) Purchase frequency SCR (%) T 13.45 23.90 1.9 38.13 O 12.00 24.86 1.61 40.61 T 13.30 23.67 1.9 38.05 Yili O 11.83 24.29 1.67 35.89 Wondersun T 7.23 13.70 1.78 34.99 O 7.69 14.00 1.59 32.58 Mengniu T 5.41 10.44 1.75 34.10 O 6.59 10.29 1.48 37.04 Correlation 0.99 0.99 0.92 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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3.0 2.8 2.6 2.4 2.2 2.0 Purchase frequency 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0 7 9 11 13 15 17 Penetration (%) 19 21 23 25 27 Observed values Theoretical values Linear regression values Mengniu Wondersun Mengniu Wondersun Yili Yili Nestl Nestl y = 0.009x + 1.419 R2 = 0.717

Figure 1 Double jeopardy in the pre-crisis market

share.among.different.brands.were.greater.(for.example,.the.penetration. from.maximum.24 .86.of.Nestl.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.precrisis. 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.threemonth. 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. 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.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.

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Table 3

Part BPMs from the pre-, during and post-crisis periods (each period lasts three months)
Nestl Yili O 9.19 3.86 5.17 12.57 7.62 9.57 1.59 1.38 1.27 53.03 T 8.13 10.93 8.60 10.33 17.73 13.62 1.71 1.66 1.49 55.34 O 10.29 12.63 9.59 10.86 18.10 13.91 1.96 1.89 1.63 57.33 Wondersun T 8.85 9.28 8.27 11.21 15.23 13.12 1.72 1.64 1.48 55.61 44.32 46.87 O 7.35 7.37 6.64 12.00 16.19 13.91 1.43 1.24* 1.13* 55.90 45.65 49.25 Mengniu T 5.48 8.12 7.68 7.06 13.45 12.24 1.69 1.62 1.48 54.38 43.81 46.63 O 5.25 6.32 5.90 7.43 14.29 13.04 1.54 1.20* 1.17* 56.67 41.00 45.56

Brand Before Market share (%) During After Before Penetration (%) During After Purchase frequency Before During After Before SCR (%) During After

T 9.36 4.34 5.74 11.83 7.39 9.27 1.72 1.58 1.46 55.80

42.20 32.36* 45.84 41.85*

45.05 62.07* 47.00 59.09*

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

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.Nestl.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. Nestl. product-harm. crisis. disturbed.the. market.and.the.market.was.not.stationary.during.this.period .

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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. 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.Nestls.product.crisis,.the.market.was.still.not.steady . During.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.brands . In.terms.of.market.share,.Nestl.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.postcrisis. period .. This. indicates. that. the. product. crisis. resulted. in. a. market.

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The effects of product-harm crisis on brand performance

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,.Nestls.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,. Nestl. 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,.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.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. 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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2.2 2.0 Purchase frequency 1.8 1.6 Mbefore 1.4 Nduring 1.2 1.0 Nafter Mafter 7 9 11 13 Penetration (%) Nbefore Wbefore Mduring Wafter 15 17 19 Wduring Ybefore Yduring Yafter

Nestl (N) Wondersun (W) Yili (Y) Mengniu (M)

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

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.

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The effects of product-harm crisis on brand performance

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. 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.brands . Third,.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.postcrisis. period,. all. four. leading. brands. dropped. by. around. 0 .3 .. 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.loyalty . Overall,. 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. productharm.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. productharm. 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.market . Our. 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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The effects of product-harm crisis on brand performance

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
ABC.News.(2005).Nestl.apologizes.for.excess.iodine.in.baby.milk,.7.June ..Available.online. at.http://www .abc .net .au/news/stories/2005/06/07/1386244 .htm ..Retrieved.on.12.September. 2009 . Advertising Age.(2000).Firestone.woes.create.opportunity,.18.September . Bhattacharya,.C .B .,.Fader,.P .S .,.Lodish,.L .M ..&.DeSarbo,.W ..(1996).The.relationship.between. the.marketing.mix.and.share.of.category.requirements ..Marketing Letters,.7,.1,.pp ..518 . Chatfield,.C ..&.Goodhardt,.G .J ..(1975).Results.concerning.brand-choice ..Journal of Marketing Research,.12,.1,.pp ..110113 . Cleeren,.K .,.Dekimpe,.M .G ..&.Helsen,.K ..(2008).Weathering.product-harm.crisis ..Journal of the Academy of Marketing Science,.36,.2,.pp ..262270 . Dawar,.N ..&.Pilluta,.M .M ..(2000).Impact.of.product-harm.crisis.on.brand.equity:.the. moderating.role.of.consumer.expectations ..Journal of Marketing Research,.37,.2,.pp ..215 226 . Ehrenberg,.A .S .C ..(1988).Repeat Buying, Facts, Theory and Applications ..New.York:.Oxford. University.Press . Ehrenberg,.A .S .C ..&.Goodhardt,.G ..(2001).New.brands:.near-instant.loyalty ..Journal of Targeting, Measurement & Analysis for Marketing,.10,.pp ..916 .

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Ehrenberg,.A .S .C .,.Goodhardt,.G .J ..&.Barwise,.P ..(1990).Double.jeopardy.revisited ..Journal of Marketing,.54,.3,.pp ..8291 . Ehrenberg,.A .S .C .,.Hammond,.K ..&.Goodhardt,.G .J ..(1994).The.after-effects.of.price-related. consumer.promotions ..Journal of Advertising Research,.July/August,.pp ..1121 . Ehrenberg,.A .S .C .,.Uncles,.M .D ..&.Goodhardt,.G .J ..(2004).Understanding.brand.performance. measures:.using.Dirichlet.benchmarks ..Journal of Business Research,.57,.12,.pp ..1307 1325 . Fader,.S .P ..&.Schmittlein,.D .C ..(1993).Excess.behavioral.loyalty.for.high-share.brands:. deviations.from.the.Dirichlet.model.for.repeat.purchasing ..Journal of Marketing Research,. 30,.4,.pp ..478493 . Heerde,.H ..Van,.Helsen,.K ..&.Dekimpe,.M .G ..(2007).The.impact.of.a.product-harm.crisis.on. marketing.effectiveness ..Marketing Science,.26,.2,.pp ..230245 . Kahn,.B .,.Kalwani,.M ..&.Morrison,.D ..(1988).Niching.versus.change-of-pace.brands:.using. purchase.frequencies.and.penetration.rates.to.infer.brand.positioning ..Journal of Marketing Research,.25,.4,.pp ..384390 . Meyer-Waarden,.L ..&.Benavent,.C ..(2006).The.impact.of.loyalty.programmes.on.repeat. purchase.behaviour ..Journal of Marketing Management,.22,.1,.pp ..6188 . Mitroff,.I ..(2004).Crisis Leadership: Planning for the Unthinkable ..New.York:.John.Wiley.&. Sons . People Daily.(2008).The.number.of.baby.sufferers.of.milk.powder.incident.reached.6244,. among.which.158.suffered.from.acute.renal.failure,.17.September ..Available.online.at.. http://society .people .com .cn/GB/86800/8060739 .html ..Retrieved.on.12.October.2008 . Rungie,.C ..&.Goodhardt,.G ..(2004).Calculation.of.theoretical.brand.performance.measures. from.the.parameters.of.the.Dirichlet.model ..Marketing Bulletin,.15,.2,.pp ..19 . Salin,.V ..&.Hooker,.N .H ..(2001).Stock.market.reaction.to.food.recalls ..Review of Agricultural Economics,.23,.Spring/Summer,.pp ..3346 . Schmittlein,.D .C .,.Morrison,.D .G ..&.Colombo,.R ..(1987).Counting.your.customers:.who.are. they.and.what.will.they.do.next?.Management Science,.33,.pp ..124 . Sharp,.B ..&.Sharp,.A ..(1997).Loyalty.programs.and.their.impact.on.repeat-purchase.loyalty. patterns ..International Journal of Research in Marketing,.14,.pp ..473486 . Siomkos,.G .J ..&.Kurzbard,.G ..(1994).The.hidden.crisis.in.product-harm.crisis.management .. European Journal of Marketing,.28,.2,.pp ..3041 . Uncles,.M .D .,.Ehrenberg,.A .S .C ..&.Hammond,.K ..(1995).Patterns.of.behavior:.regularities,. models,.and.extensions ..Marketing Science,.14,.3,.pp ..G71G78 . Vassilikopoulou,.A .,.Lepetsos,.A .,.Siomkos,.G ..&.Chatzipanagiotou,.K ..(2009).The. importance.of.factors.influencing.product-harm.crisis.management.across.different.crisis. extent.levels:.a.conjoint.analysis ..Journal of Targeting, Measurement and Analysis for Marketing,.17,.1,.pp ..6574 .

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.

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The effects of product-harm crisis on brand performance

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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