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Whoever heard of multinational consumer product companies divesting themselves of category leading brands? Rumors have been flying for some time in business circles about CPG giants Kraft and P&G doing just that. In a recent Advertising Age article, Billion-Buck Brands on the Block, it seems this is more than just talk.
The rationale? Apparently, investors are seeking more top-line sales growth from category leading #1 and #2 brands in some quarters. Translation: some highly profitable cash cows will probably go on the block because they either aren’t growing fast enough, or have seen their sales plateau over the past couple of years.
The article states: “. . .multinational marketers increasingly realize it doesn’t pay to fight for share in slower-growing U.S. categories”.
This has to make some of us wonder. With recent price increases, many of the brands in question have been more profitable than ever. Dropping smaller, under-performing brands from company portfolios is a fact of business life. However, it seems to me that it would have been inconceivable for consumer product companies to sell off some of their largest volume, profitable brands a few short years ago. How times have changed!
Some of the billion dollar brands in the U.S. included in the magazine article’s list of possible divestments: P&G’s Duracell batteries, Folgers coffee and Pringle’s snacks; Kraft’s Maxwell House coffee and Post cereals; Unilever’s laundry brands including All and Surf. With great growth potential seen overseas and a weaker dollar, these same multinationals are investing in some of the very same brands for global distribution that they’re looking to divest themselves of here in the U.S.! Another interesting tidbit.
“Emerging categories offer faster growth—higher than 10% in personal care and some food categories—compared with flat to 1% to 2% growth in the U.S. in such categories as coffee, alkaline batteries and laundry detergent,” the article states.
And, of course, if companies are looking to sell some of their units, it makes perfect sense to sell them while they’re at their peak.
It’s going to be interesting to see how the following things unfold:
• Will these brands attract the investment dollars of private buyers?
• How will P&G, Kraft and Unilever move forward, sans some of their marquee brands? Will they make inroads in developing markets abroad with the very brands they divest themselves of stateside?
• How will these same companies position their brands here at home in future? And will they cave in to investor pressure to sell off even well-performing brands if these don’t continue to meet high annual sales growth rates?
What is your take on this new trend? I’d love to get your input.
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Comments
Ted, just a guess but maybe some smaller manufacturers (even outside the US) looking to establish a global brand might be potential buyers. It takes a lot of $$ to build a brand these days, and in low margin businesses, probably easier to buy one.
Posted by: Paul Barsch | 08.30.07
Paul,
You're probably right. Smaller manufacturers in the U.S. and abroad will find established brands that offer high volume and solid profit margins attractive investments. And you're also right in saying that this can be cheaper than launching new brands from Point A. I guess I'm more amazed at the fact that these brands are on the block since they represent higher margin businesses! That's my point.
Posted by: Ted Mininni | 08.30.07
I would expect higher margin brands to bring a higher multiple of earnings when they sell. Thus the selling companies are well rewarded for both the value of the brand names AND the earning potential of the brands. In a sense, it's a way for the selling companies to sell the "goodwill" in their brands at a premium. Not an all bad strategy.
If you were P&G, wouldn't you like to get paid for having built a strong brand without having to deal with all the admin and maintenance issues? Sounds like a smart move to me ... and I say that as a former P&G brand manager who at first was scratching my head over the sell-off strategy. Now, as a stockholder, I'm thinking the management there is really smart.
Posted by: Michael Goodman | 09.01.07
Let's not forget the continued growth of private label / store brands. As these brands continue to grow retailers are realizing they only need to stock 1 or 2 national brands at best. Better to sell off a brand today than allow it to languish on the store shelf and not be able to acheive the same ROI of a top, #1 brand such as P&G's Tide or Kraft's Jell-O brand
Posted by: Mark Hunter | 09.02.07
This discussion brings to mind the move on the part of entertainment and publishing companies over the pat decade or so to streamline their (annual) portfolio of introductions so as to focus solely on "blockbusters." Book companies, for instance, introduce fewer and fewer individual titles every year, while paying huge bucks (called "advances")to proven brands like Tom Clancy and John LeCarre or known one-shot wonders like Alan Greenspan or Tony Blair.
Meanwhile, there is a constant churn as the publishing firms sell longstanding franchises (CPG types would call them brands) like Frommer Travel Guides or The Hardy Boys as each publishing firm determines for itself in which businesses it is advantged.
Posted by: John Rosen | 09.03.07
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Posted by: ricky | 09.04.07
Michael,
You're right in saying that management at P&G is very smart. And yes, it is an optimal time to sell off brands while they are profitable. This is very attractive to investors. However, P&G itself, as a publicly traded company, owes its shareholders a balanced portfolio of brands that are experiencing solid sales growth, but may be less profitable, with brands that are perhaps experiencing slower sales but have excellent profit margins. As a shareholder, I'm sure you expect both. Thanks, Michael, for sharing your very valid observations.
Posted by: Ted Mininni | 09.04.07
Mark,
Excellent point. Private label brands have really started to eat into national brands' market shares in some categories. Although store brands started off as competitors to more expensive national brands purely on price, they've matured and evolved. Many retailers have made significant investments of time, staffing, attention and money to grow their store brands with great results. Net result: much more pressure on national brands in some categories.
Thanks for a great observation, Mark.
Posted by: Ted Mininni | 09.04.07
Hi John,
Interesting parallel from one industry to anther. The publishing industry is not one that I work with, so it's nice to get the input of someone who clearly understands that business, which you obviously do.
Thanks for adding to this conversation with a substantive observation.
Posted by: Ted Mininni | 09.04.07