In the 1930s, Neil McElroy was a rookie manager who supervised the advertising for Camay soap at Procter & Gamble. The consumer products giant ignored Camay but lavished money and attention on its flagship product, Ivory. Naturally, Ivory stayed the leader while Camay struggled for survival. Dismayed, McElroy drafted a three-page internal memo in May 1931. He argued that P&G should switch to a brand-based management system. Only then would each of its brands have a dedicated budget and managerial team and a fair shot at success in the marketplace.
McElroy rose to head P&G in 1948, and his memo became the basis on which most corporations, including P&G, have managed brands ever since. In it, McElroy posited that the company's brands would fight with each other for both resources and market share. Each "brand man's" objective would be to ensure that his brand became a winner even if that happened at the expense of the business's other brands. However, McElroy did not carry the argument to its logical end. The memo stopped short of articulating what companies should do with losing brands.
| The surprising truth is that most brands don't make money for companies. |
Seven-plus decades have gone by since McElroy wrote his famous memo, but brand killing has remained an unwritten chapter in the marketer's handbook and an underused tool in the marketer's arsenal. Companies spend vast sums of money and time launching new brands, leveraging existing ones, and acquiring rivals. They create line extensions and brand extensions, not to mention channel extensions and subbrands, to cater to the growing number of niche segments in every market, and they fashion complex multibrand strategies to attract customers. Surprisingly, most businesses do not examine their brand portfolios from time to time to check if they might be selling too many brands, identify weak ones, and kill unprofitable ones. They tend to ignore loss-making brands rather than merge them with healthy brands, sell them off, or drop them. Consequently, most portfolios have become chockablock with loss-making and marginally profitable brands.
Moreover, the surprising truth is that most brands don't make money for companies. My research shows that, year after year, businesses earn almost all their profits from a small number of brands—smaller than even the 80/20 rule of thumb suggests. In reality, many corporations generate 80 percent to 90 percent of their profits from fewer than 20 percent of the brands they sell, while they lose money or barely break even on many of the other brands in their portfolios. Take the cases of four transnational corporations whose brand portfolios I analyzed:
Diageo, the world's largest spirits company, sold 35 brands of liquor in some 170 countries in 1999. Just eight of those brands—Baileys liqueur, Captain Morgan rum, Cuervo tequila, Smirnoff vodka, Tanqueray gin, Guinness stout, and J&B and Johnnie Walker whiskeys—provided the company with more than 50 percent of its sales and 70 percent of its profits.
Nestlé marketed more than 8,000 brands in 190 countries in 1996. Around 55 of them were global brands, 140-odd were regional brands, and the remaining 7,800 or so were local brands. The bulk of the company's profits came from around 200 brands, or 2.5 percent of the portfolio.
Procter & Gamble had a portfolio of over 250 brands that it sold in more than 160 countries. Yet the company's ten biggest brands—which include Pampers diapers, Tide detergent, and Bounty paper products—accounted for 50 percent of the company's sales, more than 50 percent of its profits, and 66 percent of its sales growth between 1992 and 2002.
Unilever had 1,600 brands in its portfolio in 1999, when it did business in some 150 countries. More than 90 percent of its profits came from 400 brands. Most of the other 1,200 brands made losses or, at best, marginal profits.
The implications are inescapable. Companies can boost profits by deleting loss-making brands. What's more, even though revenues may fall in the process, brand deletion will provide a shot in the arm for an additional reason. Many corporations don't realize that when they slot several brands into the same category, they incur hidden costs because multibrand strategies suffer from diseconomies of scale. Naturally, those hidden costs decline when companies reduce the number of brands they sell. In fact, some businesses have improved performance by deleting not just loss-making brands but also declining, weak, and marginally profitable brands. They've used the resources they've freed to make their remaining brands better and more attractive to customers. Thus, killing brands may sometimes be the best way for companies to serve both customers and shareholders.
| There will always be pressure from senior executives to retain brands for sentimental or historical reasons. |
Why haven't most companies put systematic brand-deletion processes in place? Mainly because executives believe it is easy to erase brands; they have only to stop investing in a brand, they assume, and it will die a natural death. They're wrong. When companies drop brands clumsily, they antagonize customers, particularly loyal ones. In fact, most attempts at brand deletion fail; several studies show that after companies clubbed together several brands or switched from selling local brands to global or regional brands, they were able to maintain market share less than 50 percent of the time. Similarly, when firms merged two brands, the market share of the new brand stayed below the combined market share of the deleted brands in seven out of eight cases.
If a quick back-of-the-envelope calculation suggests that you may have too many loss-making or marginally profitable brands, you will have to prune your portfolio. (See the sidebar "Quick Test: Do You Have Too Many Brands?") Your first priority will be to get managers at all levels of the organization to back you because brand deletion is a traumatic process. Brand and country managers, whose careers are wrapped up in their brands, never take easily to the idea. Customers and channel partners defend even inconsequential and loss-making brands. There will always be pressure from senior executives to retain brands for sentimental or historical reasons. Indeed, brand rationalization programs have often become so bogged down by politics and turf battles that many companies are paralyzed by the mere prospect. It doesn't have to be that way. Over the last ten years, I have studied the brand rationalization programs at more than a dozen companies in the United States and Europe, including Akzo Nobel, Electrolux, Sara Lee, Unilever, and Vodafone. The best companies use a simple four-step process to optimize their brand portfolios. ...
Making the case
Smart CEOs begin the rationalization process by orchestrating groups of senior executives in joint audits of the brand portfolio. Such audits are useful because most executives do not know which brands make money or how many brands are unprofitable. To calculate the profitability of each brand, firms must allocate fixed and shared costs to them. That is often a complicated task resulting in long and bitter debates between managers, and few companies bother to do it right. Executives view each brand from their own particular perspectives and put forward arguments about the problems they will face if it is dropped. That collectively results in a justification for almost every brand in the portfolio. However, when executives look at the big picture together, they uncover the problems. They reluctantly extend a degree of support to the program despite their job- and turf-related concerns.
Senior executives from marketing headquarters, heads of region and product groups, and global brand managers usually meet to conduct the first brand audit. Here's how it works: Each executive has a work sheet that lists all the brands in the company's portfolio, their global market shares, annual sales, and other such data in tabular form. (See the exhibit "The Brand Audit Sheet.") The columns on the sheet indicate among other things the geographic regions where each brand sells. For each brand in each region, executives discuss and enter two pieces of data.
First, they characterize the brand's market position as "dominant," "strong," "weak," or "not present." Typically, if the brand is a market leader, it is dominant; if it is number two or number three in the category, it is strong; otherwise, it is weak. Second, executives use one word—such as "value," "upscale," or "fun"—to capture the brand's value proposition. Finally, the group debates each brand's profitability and indicates whether it is a "cash generator," it is "cash neutral," or it is a "cash user." I usually advise managers to fill in their best guesses if the data on brand-level profitability are not available at this stage and then generate them as a follow-up to the audit.
The results always come as a revelation to participants. Executives usually find that only a fistful of brands in the company's portfolio have clearly differentiated positions or have global market shares greater than 1 percent. Confronted by such data, they slowly shift from justifying the performance of pet brands to worrying about why so many brands have captured so small a share of their markets, suffer from poor profitability, and consume, rather than contribute to, cash flows. Later, the company's product divisions and country operations conduct similar audits to involve the next tier of executives in the rationalization drive. These audits make the need to prune brands apparent throughout the organization and serve as a springboard to the next step.