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According to reports earlier this week, AG Barr has issued a group profit warning after identifying an anticipated fall in total sales by 10% for the current financial year. Having seen the financial impact of this – with the group’s share price plummeting by almost 30% as trading commenced on Tuesday morning – it is important to look at how IP can play a fundamental role in AG Barr’s situation.
Since the introduction of the Soft Drinks Industry Levy (commonly known as the ‘sugar tax’) in April last year, companies have been faced with crucial product decisions to be made in order to maintain financial success. Faced with the prospect of forcing cost-push inflation which risks hampering sales, drinks companies such as AG Barr have instead looked to alter their historic secret recipes – the main factor behind their heritage and competitive advantage in the market – in order to keep prices consistent. However, consumers notice the difference, and the sudden change in the famous Irn Bru recipe was met with a frosty Scottish reception, with the change leaving a bitter taste in the mouths of patrons. With AG Barr’s brand negatively affected by the resulting lower customer satisfaction, coupled with declining sales and profits, we see the financial importance of recognising the value and competitive advantage that trade secrets such as secret recipes can bring to a business.
The sugar tax has also played a damaging role in the fortunes of Lucozade in recent years. In an attempt to better the competition, the Suntory Group looked to alter its famous Lucozade energy and sports drinks recipes to be prepared for the implementation of the sugar tax regulations. That financial year saw the company’s sales fall £25 million, of which the majority has been attributed to the change in recipe, and the resultant damage to the brand due to lower levels of customer satisfaction, complaints and social media backlash.
The importance of maintaining a distinguishable secret recipe is further highlighted when in 2015 Cadbury reported a change in the chocolate used in its renowned Creme Eggs. This cost-cutting measure proved to be a false economy, with the sales of the famous treat falling by over £6 million during the Easter period. It’s safe to say that the previous recipe, despite higher costs, carried a much greater IP asset trade secret value than had likely been anticipated.
This displays the importance of identifying and appreciating the real value of trade secrets within an organisation and how these can impact upon positive brand reputation and goodwill. With consumers being ever-more vocal on social media when confronted with unsatisfying brand experiences and the negative publicity that can spiral out of this, one can only hope that companies take steps to ensure that the true value of the intellectual property behind their most successful products is considered before abandoning their secret recipes in future.