Brand Proliferation Is Costly

Finer market segmentation clearly warrants some brand proliferation. However, mergers and acquisitions, as well as uninhibited brand propagation aimed at alleged market and growth opportunities, account for a fair share of the mushrooming. To justify its existence, each brand in the portfolio must link to a specific target segment and have a unique positioning. The cost of maintaining each individual brand in the portfolio must be less than the revenues that it generates through greater segmentation. The ten questions presented in the following box help managers to determine whether their company has too many brands.

Managing mammoth multibrand portfolios, especially within the same product category, presents the following major problems.

4. Management Complexity

Finally, brand proliferation pressures management to coordinate the complicated and larger portfolios of products, package designs, R&D projects, marketing plans, and distributor relationships. Marginal brands end up consuming a disproportionate amount of a company’s time and resources, and exacerbate tensions between the narrowly focused brand and country managers. In annual marketing strategy and budget meetings, top managers find themselves focusing internally on resource allocation across the different brands, rather than externally on battling competitors and serving customers.

TABLE 6-1

The Forces Behind Brand Consolidation

	Past	Future
Corporate	Acquisitions and mergers	Search for synergy
	Search for top-line growth	Search for profitable top-line growth
	International expansion	Global strategy
	Brand-management structures	Category-management structures
	Power of country managers	Corporate HQ resistance
Competition	Copycat strategies	Need for differentiation
	Worldwide deregulation and mushrooming media outlets	Emergence of global media giants
Channel/ Consumer	New distribution channels	Consolidating distribution channels
	Demand for exclusive products and shelf space productivity	Demand for category management
	Desire to avoid channel conflict	Growth of private labels
	Multiple consumer segments	Cross-national segmentation
	Local marketing	Emergence of global consumers
	Growing Brand Portfolios	Shrinking Brand Portfolios

CEOs are distressed to discover that their most valuable asset, the burgeoning brand portfolio, is devouring company profitability and hampering growth. Moreover, the surge in global media, global segments, and international distributors all reduce the logic behind many brands that were unique to single countries (see table 6-1). CEOs see the wisdom in fewer, larger, and more global brands and realize that brand rationalization provides a critical path to higher profitability and growth.

The Challenge of Brand Rationalization

Deleting brands is easy, but retaining their sales and customers is not. Therein lies the managerial dilemma: How can brand portfolios be pruned without losing the customers and sales revenue of the doomed brands?

Overwhelmingly, firms lose market share, sales volume, and customers to their competitors during brand portfolio rationalization. To stem such losses, managers often try to merge two brands instead of deleting one. Still, studies indicate that only one in eight attempts to consolidate two brands ever delivers the original market shares of the two brands. Consider the following failures:

• Kal Kan and Crave, two of the three leading brands in the U.S. cat food business in the 1980s, merged in 1988 to create a new brand called Whiskas .⁸ Five years later, Whiskas had still failed to reach the combined market share of Kal Kan and Crave. To salvage sales, Kal Kan Foods, Inc., finally reintroduced the Kal Kan name on the Whiskas packaging but with limited success.
• In 1987, Mars, Inc., merged the brand Treets, a European candy quite unlike M&Ms, into the M&Ms brand without warning customers.⁹ M&Ms suddenly came in two packages, containing very different products, neither of which enticed British and German palates. Sales dropped 20 percent in the first year. In 1991, Mars reintroduced Treets in Germany, as M&M’s Treets Selection.
• In 1996, Rite Aid Pharmacies acquired the 1,000 Thrifty/ PayLess drugstores, a western U.S. regional chain, and converted them all to Rite Aids. To raise local awareness about the new brand, Rite Aid invested several million dollars in advertising the rebranded chain. However, Rite Aid executives underestimated the value of Thrifty/ PayLess’s walk-in business, attracted by a product mix that included “award winning” ice cream, beach balls, cosmetics, and magazines. Rite Aid struggled to recapture former Thrifty/PayLess customers who did not equate pharmacies with such impulse buys. Immediately after the rebranding, the acquired stores’ sales started declining 10 percent monthly. In 2000, Rite Aid hired two former Thrifty/PayLess executives to manage its western region.
• In 1999, Hilton International acquired four-star U.K.based Stakis (fifty-four hotels and twenty-two casinos) for £1.5 billion and then killed the Stakis brand. The overnight name change confused and disappointed Hilton International guests, who found that some of the newly acquired hotels did not meet their expectations of the Hilton brand. Despite claims of spending £100 million to upgrade standards to unify its hotels under the Hilton brand, sales fell 6.6 percent in 2000. So, in 2001, when Hilton acquired Scandic’s 154 hotels in the Nordic region, it wisely retained the Scandic brand and rebranded only twenty of the properties under the Hilton name.

Brand rationalization hurts. Remember that even weak, money-losing brands have devoted channel members, customers, and prospects—not to mention brand and country managers—who will vigorously defend them. A proposed brand deletion could endanger a distributor’s or employee’s livelihood, if not a lifetime of commitment to the brand. What will that familyowned Oldsmobile dealership do if General Motors does not offer a replacement brand from its portfolio?

Brand rationalization is neither straightforward nor well understood. No one can easily determine which brands to retain, merge, sell, or delete altogether in a portfolio, and no marketing textbook covers the decision-making process. Without clear methodology and an actively engaged CEO, strategy sessions will likely suffer from politics and turf wars. Antony Burgmans, cochair of Unilever N.V., observed in a meeting with top executives, “Focusing the brand portfolio is the single biggest issue facing Unilever today. This is not something we can delegate to others. It is too important. We have to do it ourselves—quickly.”¹⁰

The Brand Rationalization Process

Based on the experiences of several successful firms, a shrewd brand rationalization process has four essential steps: (1) Conduct a brand portfolio audit; (2) determine the optimal brand portfolio; (3) select appropriate brand deletion strategies; and (4) develop a growth strategy for the survivors. Managers who plunge directly into brand rationalization (steps 2 and 3) without preparing the organization (step 1) or outlining a growth strategy (step 4) will fail.

Conduct a Brand Portfolio Audit

To succeed, a brand rationalization program must win the support of front-line managers. Managers, especially of the brands targeted for deletion, often fear brand rationalization because they fear losing their independence and drowning in the larger company. This anxiety leads them to overstate the downside of eliminating the brand. To enable an unbiased decision, the brand rationalization program should first conduct a brand portfolio audit.

The brand portfolio audit objectively exposes managers to the corporate perspective on the portfolio. The audit raises issues concerning positioning overlap, synergies, and benchmarking, which help country and brand managers see the big picture. Without such an audit, these managers could make a case to justify the existence of every brand. But the goal is to optimize the portfolio, rather than optimizing each brand in the portfolio. Table 6-2 provides a template for a brand portfolio audit. Initially, groups of managers complete the audit independently, and then pool their data. The audit identifies the brands and their global market share. Geographic or other segment markets fall along the columns. For each brand in each market, managers enter two pieces of information: (1) the market position—characterized as “dominant,” “strong,” “weak,” or “not present in the region”—to denote brand strength in the specific market, and (2) a single-word description of the brand positioning to indicate the brand’s value proposition. Examples of frequently used words appear in the exhibit, but participants are usually quite creative when completing this column.

TABLE 6-2

Brand Portfolio Audit

Managers can add columns that track the percentage of corporate profits that each brand generates and whether the brand is a cash generator, cash neutral, or a cash guzzler if data are available prior to the exercise. Without hard data, however, these additional two columns can spark long internal debates that detract from the process. Better to use best guesses and verify data later. Remember, brand deletion is an art, not a science.

Obtaining detailed brand-level profitability numbers requires complex allocations of fixed and shared costs, and thus the validity of the resulting data is uncertain. The current profitability of a brand is not the ultimate indicator of which to delete. More important, the brand rationalization decision is strategic: Managers must consider what could occur, not what is actually occurring . They must imagine the profit and loss for the firm and each surviving brand after the purge of marginal brands and the adjustment of the marketing mix for survivors.

Frequently, the results of the data pooling surprises managers: Very few of the company’s brands in any category enjoy global market shares greater than 1 percent. Group discussion generally moves through various reasons for sparing pet brands to more balanced observations that many brands in the corporate portfolio

• have small market shares,
• suffer from poor or negative profitability,
• consume rather than contribute to cash flow,
• lack support from important channel members,
• exhaust disproportionate amounts of managerial resources, and
• add little strategic value to the firm.

The audit makes the need for brand portfolio rationalization apparent, impersonal, and broad-based. Top management can use it to outline the remaining three steps of the rationalization program.

Bottom-Up Segmentation-Based Approach at Electrolux

Electrolux, based in Sweden, is one of the world’s leading consumer durable products companies. Its products include white goods, such as refrigerators, cookers, washing machines, vacuum cleaners, and outdoor equipment like mowers, trimmers, and chain saws. Over the past twenty-five years, the company has made between three and four hundred acquisitions, resulting in a very large brand portfolio.

Under CEO Michael Treschow, the company cut costs with modest success through plant rationalization and a reduction in the number of product platforms. In 1998, Electrolux examined its portfolio of over seventy brands. It discovered that, in almost every country, one of its brands was among the top three, but it was never the same brand across borders. Not surprisingly, the company’s fragmented marketing efforts could not achieve economies of global scale or scope.

The brand portfolio’s complexity raised a fundamental question about Electrolux itself: Was it a manufacturing company that should just let retailers and others build brands, or was it a branding company? Ultimately, the firm’s board of directors favored the latter, and the firm launched a brand rationalization project to create fewer but stronger brands.

The name of the company, Electrolux, would become the master brand. By phasing out weak local brands and having Electrolux endorse strong local brands, executives resolved to generate two-thirds of the company’s sales from its master brand by 2007. Within this overall rationalization program, Electrolux’s effort in one category—the professional food service equipment business—richly illustrates the bottom-up segmentation-based approach.

In 1996, Electrolux had a 4.2 billion Swedish Kroner (SEK) business selling food service equipment across Europe to professional kitchens in hospitals, restaurants, airports, and cafeterias.¹² The European food service equipment market was highly fragmented, with fifteen to twenty-five competitors per country, and little overlap among the players across countries.

Over the years, Electrolux bought several small individual companies, each of which had a brand and a factory. By 1996, more than fifteen different Electrolux brands (including Molteni in France, Senking in Germany, CryptoPeerless in the United Kingdom, and Nordton in Italy) clamored for Europe’s food service equipment business. Only one brand, Zanussi, had a pan-European profile. Given so many local brands, Electrolux ran a decentralized business. The small size and weak coverage of the fifteen individual brands meant that Electrolux was losing money overall with operating losses of 1.3 percent in its food service equipment business in 1996. An Electrolux survey demonstrated that leading brands generate higher price premiums. Hence, brand rationalization in food service equipment became central to restoring profitability and sustaining the company’s overall strategic direction: Reduce the number of brands and strengthen the remaining few.

In order to eliminate brands, Electrolux had to decide how many brands it should have in food service equipment. It conducted a major cross-national, needs-based segmentation study to inform this decision. Similar to many other professional markets, the food service equipment industry segmented the market into “low,” “medium,” and “high” according to price and product specifications. Brands tended to target one of these segments by claiming to be good, better, or best. Electrolux positioned its brands across these three price bands and segmented further by customer profile, such as hospital, canteen, bar, school, convenience store, restaurant, and hotel.

This study pinpointed two problems with the conventional industry approach to segmentation:

1. Customer type did not really predict customer needs. For example, restaurants varied significantly in terms of needs; lumping all restaurants within one segment made little sense. No institution was “average.”
2. Each customer sought the best solution for that customer’s needs. Why should customers want a good or a better brand rather than the best for their purposes?

Electrolux realized that developing the best solution for each customer required starting from customer needs. The pan-European needs-based segmentation study revealed four distinct segments across countries. Furthermore, each of the four segments had different customer types, product specifications, pricing indexes, distribution needs, and contexts in which customers used the equipment.

The “performance specialization” segment, comprising firms such as airlines, five-star hotels, and hospitals, produced large volumes of meals under circumstances that involved complicated logistics. Customers needed high performance, integrated systems, and a price index of 100 compared to the other segments.

The “basic solution, fast return on investment” segment, consisting of firms such as pubs and convenience stores, used catering as an auxiliary activity geared to generating fast ROI through basic menus. Customers sought conformity with legal and sanitary regulation and very low prices (price index of 25).

The “gastronomy partnership” segment, comprised of firms such as staff canteens, family restaurants, and elderly homes, produced fewer than two hundred meals daily in a normal environment and had low technical competence. Customers required modular solutions, close supplier relationships, and proven technology at reasonable prices (price index of 50–75).

The “prestige gourmet” segment, consisting of gourmet restaurants, independent or within five-star hotels, with celebrity chefs who produced signature dishes. Customers wanted to create a prestigious kitchen—with a very reliable stove—as a status symbol (price index of 200–300).

Electrolux decided that, in the short run, it would forgo the second segment because of the prevailing low prices, fragmented customer base, and lack of an appropriate product range. Instead, it would target the other three segments with unique brands that focused on fulfilling the particular segment’s needs. Since it needed only three brands, Electrolux chose the brands Electrolux, Zanussi, and Molteni to serve the performance specialists, gastronomic partners, and prestige gourmets, respectively. Managers arrived at these three brands based on scale and proximity to the desired positioning of the respective target segment.

After the segmentation and deletion, division managers decided that each of three brands should invest in building a brand image appropriate to the target segment. Electrolux used a fivelayer brand pyramid to examine each brand’s personality, values, rewards, functional benefits, and features.

Thanks to its brand rationalization program, Electrolux now has three pan-European brands smartly positioned as the best for each needs-based segment. Two of the remaining twelve brands, Juno and Therma, had pockets of strength and were temporarily converted into subbrands of Electrolux, while the other ten brands were eliminated.

Three robust pan-European brands instead of fifteen local brands enabled Electrolux to centralize brand management. For consumers to perceive each brand as the best solution for their target segments, Electrolux developed a number of international marketing and communication tools including new advertising concepts, Internet and extranet sites dedicated to the brands, customized commercial documentation, newsletters, road shows, and exhibition and showroom concepts. Most local brands could not have developed these tools due to the costs and competence requirements.

Since managers understood the needs-based segments explicitly, they could develop fewer but more appropriate products for customers. Twice a year, about twenty of the one hundred designers and engineers from the European product development centers work three days alongside restaurant staff in hospitals, hotels, and office canteens.¹³ This on-site research unearths useful insights, such as simpler ways to clean the equipment. The needs-based segmentation has also helped the division to redefine itself from an engineering company to an “orchestrator of gastronomic events.” In fact, Electrolux insists that all divisions use a needs-based segmentation approach to new product development.

The resulting economies of scale and scope have turned the fortunes of the professional food service equipment business at Electrolux. Its operating income has increased by almost 10 percent, from negative 1.3 percent in 1996 to positive 8.1 percent in 2001—an increase in the bottom line of 390 million SEK.

Electrolux has largely managed to retain sales at 4.2 billion SEK between 1996 and 2001 despite deleting twelve brands. Its next challenge involves increasing revenues by investing substantially in marketing these three brands and targeting the initially ignored fourth segment with a new brand, Dito.

Top-Down Portfolio-Based Approach at Unilever

In 1999, Unilever, the Anglo Dutch consumer products giant, suffered its third straight year of declining revenues. After a 6 percent increase in 1996, revenues had declined by 11, 9, and 0.2 percent respectively in 1997, 1998, and 1999 to a worldwide total of £27 billion. In the 1990s, the underlying annual sales growth of 3 to 4 percent was below the firm’s aspiration of 5 to 6 percent. Operating margins at 11 percent, while healthy, were still unacceptable to management. The pending acquisition of U.S.-based Bestfoods in 2000 would bring additional brands such as Hellmann’s and Knorr.

On examining its worldwide portfolio of 1,600 brands, the top management discovered that the 400 core brands generated 75 percent of the firm’s revenues; the other 1,200 brands contributed only 8 percent. Managers agreed to pursue radical steps.

Unilever embarked on a five-year program, “Path to Growth,” that would stress the 400 core brands and, more dramatically, dispose of, delete, or consolidate the remaining 1,200 marginal ones. This strategy had two objectives: (1) increase annual sales growth to the 5 to 6 percent range and operating margins to 16 percent plus by the end of 2004, and (2) generate earnings per share growth over the period of the plan in the low double digits.

First, Unilever developed a process for identifying the 400 core brands. It set the following three selection criteria:

1. Brand scale: The brand must have adequate scale and margins to justify further investment in communication, innovation, and technology at competitive levels.
2. Brand power: The brand must have the potential to be number one or two in its market and be a must-carry brand to drive retailers’ store traffic.
3. Brand growth potential: The brand must have the potential for sustainable growth based on current consumer appeal and ability to meet future needs. Unilever favored brands that tapped into global consumer trends (for example, health and convenience) and could potentially stretch across categories. For example, it repositioned Bertolli from Italian olive oil to Mediterranean-inspired food.

Managers established an iterative process whereby each regional brand team proposed candidates for inclusion in the core list, then negotiated with the corporate center. Through this process, the core 400 brands were identified. Since different brand names in different geographies sometimes had similar positioning and innovation, these 400 actually occupied only 200 distinct brand positions. In other words, Unilever had only 200 core brands, 40 of which were global—such as Dove, Flora, Knorr, Lipton, Lux, and Magnum. Another 160 brands, such as PG Tips and Marmite, became “local jewels,” strong in a particular region or country.

Brand rationalization efforts succeed only when companies grow the top and bottom line by focusing intensely on the remaining brands. On its “Path to Growth,” Unilever had to invest disproportionately in the core brands on four fronts—advertising and promotion, innovation, marketing competence, and management time—financed through two sources. First, it reallocated resources from the 1,200 non-core brands to the 400 core brands. For example, Unilever reassigned innovators and brand marketers once responsible for non-core brands to the core brands, and redirected more than 500 million euros of annual advertising and promotion money to the core brands. Second, Unilever attacked costs. Brand rationalization sparked a restructuring plan that entailed closure of 130 of its 380 factories worldwide; 113 have already been shuttered. Unilever also set out to reduce the 330,000-person global workforce by 10 percent in five years. When combined with the additional savings from consolidated purchasing power and shared services, annual savings through procurement (1.6 billion euros) as well as supply chain restructuring and simplification (1.5 billion euros) yielded approximately three billion euros.

Unilever directed some savings toward improving the bottom line to meet the operating margin target. However, Unilever decided to increase the marketing and promotion expenses from 13 to 15 percent of sales—more than a billion euros a year of additional marketing support—during the five-year period. Combined with the 500 million euros redirected from non-core brand marketing, the core 400 would get more than 1.5 billion euros of additional annual investment by 2004. Given the high levels of marketing support that most brands receive in the consumer packaged goods industry, managers determined that only such a substantial shift in resources would discernibly affect the marketplace.

For each of its core brands, Unilever systematically searched for, and continues to seek, unexploited growth opportunities. It begins by reviewing current positioning as well as related competitive intelligence and consumer insights. It seeks avenues for growth by asking how the brand can:

• reach new customers,
• launch new products and services,
• develop new delivery systems,
• penetrate new geographical markets, and
• generate new industry concepts.

As figure 6-1 illustrates, identifying growth entails a significant switch from a category to a brand mind-set. Knorr can springboard across categories from its dry soup brand heritage.

In some cases, such as with Dove, managers conducted brand growth sessions and dubbed the results “three horizons of growth”:

• Extend and defend core business—to achieve within the next two years (for example, moving Dove into eighty-four countries)
• Build emerging business—to occur in the two- to three-year time horizon (for example, launching Dove deodorants)

  FIGURE 6-1

  Leveraging Knorr

  

  Source: Adapted from Unilever, 2000.

• Create options for the future—usually to accomplish in the three- to five-year time horizon by setting up a new team and developing competences currently lacking at Unilever (for example, the creation of Dove spa)

Each of the 1,200 non-core brands, designated the “tail,” were sentenced to one of the following four strategic fates:

1. Sell the brand. Unilever put up for sale those brands in categories outside its core. In 2000, it sold the Elizabeth Arden cosmetics and fragrance business to Miami-based FFI Fragrances; in 2002, it sold Mazola corn oil and eighteen related brands to ACH Food Companies, Inc., a subsidiary of Associated British Foods plc. By 2003, Unilever had divested eighty-seven businesses for 6.3 billion euros.
2. Milk the brand. Unilever allowed non-core brands with sufficient brand equity to linger so that it could “milk” them by sacrificing sales growth for greater profits. These brands received in-store marketing only, no advertising, and its marketers were reassigned to the core brands.
3. Delist the brand. Managers eliminated small brands such as Rosella Ketchup in Australia and Dimension Shampoo in Brazil while reallocating their shelf space to more profitable brands in the portfolio. Category managers helped to develop a program to migrate their customers to similar brands in the Unilever portfolio so that Unilever would retain its overall market share in the category.
4. Migrate the brand. The attributes of non-core brands that could enrich a core brand were carefully migrated to the target core brand. As Antony Burgmans reminded Unilever, “You are not migrating brands, but migrating consumers.” Besides communicating the change to consumers, marketers developed a promotional plan encouraging a trial of the updated brand—an expensive strategy, deployed discriminately.

   For example, Unilever positioned Surf, a core-brand laundry detergent with a 6 percent U.K. market share, as “good-hearted, down-to-earth, cuddly, affectionate, and quirky.” Unilever’s U.K. brand portfolio also included Radion, a non-core brand with a 2 percent share slated for elimination. However, research indicated that consumers clung to Radion’s “sun fresh” highly fragrant scent. So Unilever deleted Radion and migrated its scent to Surf by launching a new and improved Surf “with Sun Fresh.” This improved brand exceeded the 8 percent combined share of old Surf and Radion within six months.

Now, three years down its five-year “Path to Growth,” Unilever has met its operating margins and earnings per share growth targets. Although the sales growth is not yet in the 5 to 6 percent target range for 2004, the overall revenue for 2002 increased by 4.2 percent while the core brands grew 5.4 percent. So Unilever is making progress.¹⁴

The portfolio has already shrunk to 750 brands. The leading 400 that accounted for 75 percent of sales in 1999 now occupy 200 brand positions and account for 90 percent of sales toward the objective of 95 percent by the end of 2004. Of these, the 40 global core brands alone account for 64 percent of total sales.

Conclusion

With growing retailer power and more global customers, companies cannot sustain weaker brands and must embark on brand rationalization. Since deleting brands usually lowers the firm’s revenues in the immediate short run, brand rationalization is a top management concern. Few divisional, country, or brand managers will risk shrinking the firm. Senior executives must approve the financial objectives of the brand rationalization and the timeframe by which managers should achieve them. This program is geared to deliver long-term benefits, not an immediate earningsper-share increase.

Major brand consolidation programs, involving large numbers of brands or multiple categories, may take up to five years. Generally, the profit payoff comes early as unproductive marketing expenditures, inventories, and complexities are rapidly reduced. However, recouping the revenues and market share losses associated with the deleted brands takes time. Top management must be realistic and give managers adequate time to implement the program and demonstrate results (see “Brand Rationalization Checklist”).

Brand rationalization is profitable. It can catalyze broad-based restructuring that ruthlessly removes marketing support for marginal brands, rationalizes the supply chain, purges unprofitable products, and reduces organizational complexity and redundancy.

Imagine a brand portfolio where every brand is smartly positioned with a unique role to play. Only then will disproportionate investments of resources, talent, and innovation in the surviving brands deliver top-line growth.