Profitable Growth through Brand Rationalization

Companies spend vast sums of money and time launching new brands, leveraging existing ones and acquiring rival brands. They create line extensions and brand extensions, not to mention channel extensions and sub-brands, to cater to the growing number of niche segments in every market, and they fashion complex multi-brand strategies to attract customers.

The surprising truth is that most brands don't make money for companies. Year after year, businesses earn almost all their profits from a small number of brands, smaller than even the 80/20 rule of thumb may suggest. To give you an example, Unilever had 1,600 brands in its portfolio in 1999, when it did business in some 150 countries. More than 90% 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. Many corporations don't realize that when they slot several brands into the same category, they incur hidden costs because multi-brand strategies suffer from “diseconomies of scale”. Naturally, those hidden costs decline when companies reduce the number of brands they sell. In the extreme cases, brand managers in the company can see one another as their biggest rivals.

The question is then “why haven't most companies put systematic brand deletion process in place?” One of the explanations is that mainly because executives believe that it is easy to kill brands. They only have to stop investing in a brand and it will die a natural death. We don't think that it is the right approach! When companies drop brands clumsily, they antagonize customers, particularly the loyal ones.

Despite its growing importance in today's ever-competitive era, brand rationalization is not an easy process. A systematic and participative process needs to be put in place to ensure effective brand deletion that will not affect the customer base and, most important of all hurt overall sales performance. In general, you should go through a four-step process to rationalize your portfolio.

1. Brand Profitability Analysis. The rationalization process can be started by orchestrating groups of senior executives in joint audits of the brand portfolio. Such audits, which are often conducted by third party consultants, 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 can prove to be a complicated task resulting in long and bitter debates between managers, who will view each brand from their own 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 hard-facts and big picture together, problems can be uncovered.

2. Trimming The Portfolio. Once brand portfolio audit is conducted, companies have to decide how many brands they want to retain. There are two ways that can be used to achieve this. The first approach is to keep only those brands that conform to certain broad parameters set by a committee of senior executives. Parameters that can be used include: (a) to retain only those brands that are number one or number two in their segments, as measured by market share, profits, or both, or (b) to keep brands that display the potential to grow rapidly. Or both parameters can be used in conjunction.

In the second approach, companies can identify the brands they need in order to cater to all the consumer segments in each market. By identifying distinct consumer segments and assuming only one brand will be sold in each segment, executives can infer the right size of the portfolio for a particular category. In doing this, it is also important to consider new segmentation parameters rather than the traditional ones. For example, firms can segment markets based on consumer needs and behaviors rather than the usual segmentation by price levels and product features.

3. Liquidating Brands. After companies have identified all the brands they plan to delete, executives need to re-evaluate each of them by categorizing them into four groups. The first group is easy: simply “kill” them. They are those “loser” brands that can be dropped right away without fearing retailer or consumer backlash. To retain what customers they do have, companies can offer samples of the other brands, discount coupons or rebates on the replacement brands and trade-ins.

As to the others, there are three options. First, companies can opt to “merge” brands when the brands targeted for elimination have more than a few customers or occupy niches that might grow in the future. Second, companies can “sell” brands that are profitable when they don't fit in with the corporate strategy. Third, companies can also “milk” some of the brands that are to be deleted but may still be popular with customers. In this case, sales growth is sacrificed for profits by stopping all marketing and advertising support for the brands, or to keep them at a bare minimum to keep the products move off the shelves.

4. Growing the Core Brands. The last step is an important one, but often forgotten. At the same time that companies delete brands, they should invest in the growth of the remaining brands. There may be hesitation in doing this because profits would soar as brands are dropped. But we should not forget that the business is also shrinking in terms of sales and people, which can cause as much trouble as the proliferation of brands did. Thus, companies can only reap the benefits of brand deletion only if they reinvest the funds and management time they have freed into the surviving brands.

Establishing a brand portfolio rationalization program shouldn't be a priority solely for marketers but, more importantly, it is a top management mandate. While the profit payoffs come early in the program, it normally takes firms everywhere from 3-5 years to recoup revenues, depending on the number of brands deleted. Done right, however, a brand portfolio rationalization project will result in a company with more profitable brands that is poised for growth.

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