P&G’s Risky Brand Strategy

P&G announced this week that it was dramatically shrinking its brand portfolio. According to an article in the Wall Street Journal, the company will drop almost 100 brands, focusing on just its top 70 to 80. This is a huge strategic move for the company and a significant change. It is also very risky.

On the surface, the strategy makes perfect sense. P&G is keeping brands that make up over 90% of its profit. After the pruning, it will still have dozens of brands. And P&G needs to try something different. In 2009 it had net income of $10.7 billion. Last year it net income of $11.3 billion. This is disappointing growth, so a change is in order.

The problem is that this strategy is more risky than it seems.

The first issue is that focusing on fewer brands assumes that you can hold onto customers as you trim the portfolio. In theory, when you drop a brand of detergent, customers will purchase one of your other brands. In reality, this just isn’t the case. A brand can’t be all things to all people. Some people like Old Spice. I don’t care for its fragrance positioning. If you drop Gillette, I won’t start buying Old Spice. I will buy something else.

The second problem is that having fewer brands opens up opportunities for competitors. Crest can appeal to certain customers but it won’t appeal to everyone. This gives other companies an opportunity to attack P&G by targeting specific customer segments and stealing share. For P&G’s competitors, the new strategy is great news.

Another issue is that getting rid of brands isn’t as simple as it sounds. If you stop using a trademark another company can start using it. P&G can’t get just rid of Era or Cheer. If they stopped using one of the brands a competitor could pick up the trademark at no cost and bring it back to life.

Finally, defending a business and innovating often require new brands. One way to address a competitive threat is to launch a similar brand. A big innovation often warrants a new name. With a narrow portfolio, P&G may not be able to react quickly as conditions change.

P&G CEO A.G. Lafley noted in the WSJ article, “I’m not interested in size at all. I’m interested in whether we are the preferred choice of shoppers.” This is a good thought. The problem is that focusing on fewer and bigger brands assumes that these will be the preferred choices for shoppers all around the world. I fear that won’t be the case.

8 Responses to “P&G’s Risky Brand Strategy”

  1. Procter and Gamble’s CEO is dismantling the behemoth he spent a decade building – Quartz Says:

    […] But even as the company gets more efficient, it is creating other problems for itself, Kellogg School of Business marketing professor Tim Calkins points out in a blog post. […]

  2. Vivek K Says:

    This sounds so similar to Unilever’s failed Power Brand Strategy in the late ’90s and early ’00s – the then Chairman Niall Fitzgerald called it the “path of growth”. Admitted that the plan made some sense in planning to cut down from 1600 to 400 brands – but that alone was never going to be the panacea for all of the company ills.

    Eventually the strategy was given a quite burial with Niall Fitzgerald’s departure. The subsequent restructuring and resulting focus on emerging markets has since powered Unilever well ahead of P&G.

  3. David Mallon Says:

    I would add to the list of challenges the impact that culling brands will have on capacity utilization (idle production lines) and supply chain efficiency (trucks that aren’t full).

  4. Thom Disch Says:

    I agree that this is risky from a marketing perspective. However the strategy may be driven from a finance perspective. The information that is not revealed by P&G is how much of their marketing expense is driven by these 100 brands that are being eliminated. If 50% of the marketing expense (not likely but work with me here) is used to support the 100 low margin brands and that money can either be saved or used to grow new rather than maintain the existing stagnant brands that might invigorate both the bottom line or sales in new brands in the long run, but building new brands does not happen overnight. We truly don’t know if this is the underlying strategy. The one thing we do know is that this will reduce sales and market share for P&G in the short run.

  5. Greg Linnemanstons Says:

    I would hope and assume that the culling of brands is an operational and finance strategy that may play to analysts happy to see P&G moving decisively to cull their brand herd. At the same time, it should offer more opportunities to deploy product development and marketing support resources to more aggressively introduce new brands, either organically grown or acquired. Because you can cut your way to efficiency, but you can’t cut your way to growth and the vitality that may bring.

  6. Andre Says:

    This is a classical portfolio optimization problem. There is only so many brands a firm can support in a given number of categories in a way that maximizes profit. Every one of these small brands takes away financial resources and time away from the organization. The hidden costs of complexity can be very significant. Not to mention the fact that some of these brands may be simply unprofitable from an operating margin perspective. If you can clean up the brand portfolio, free up resources, and reallocate some of those to fewer brands that have potential to gain market share at the same time that it helps increase the household penetration of the category, your bottom line becomes a clear beneficiary. There is more money for advertising, trade marketing… More time from management and the marketing / sales teams to focus on a limited number of brands and innovations… Less complexity costs in supply chain…

    You could start launching new brands to target lots of micro-segments of the population. In the end, you might even increase sales. Not sure about the bottom-line though. The difficulty people have is in seeing the imperative to do the reverse, once those brands exist already (which to me is the main problem of the main argument in this post). Obviously the trick is to figure out where to make the cut. I have to give P&G the benefit of the doubt they did their homework before deciding how many brands to keep and how many to get rid of…

  7. DB Wienke Says:

    Where is your CPG faith in a recognized leader?! P&G has already figured out the scenarios to make this strategy work and yes, we’re all a bit heavy with skepticism because we’re NOT sitting at the board table. I challenge our author, Mr. Calkins, to review this post after more information is released. As a shareholder myself, I am pleased that a behemoth is thinking about trimming down the category list of underperformers.

  8. Tim Calkins Says:

    Some excellent points. As Andre wrote above, “…the trick is to figure out where to make the cut.” There are benefits from narrowing a portfolio. To Thom’s point, you can redirect spending to more promising brands. But, as Vivek highlighted, simply trimming brands doesn’t drive growth and Unilever had mixed results with a similar strategy.

    This will all be interesting to watch. I’ll post updates as it plays out. It might all work and, to DB’s point, we don’t have access to all the data.

    Still, the more I read about it the more I think it is a strategy with significant risks.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


Follow

Get every new post delivered to your Inbox.

Join 1,784 other followers

%d bloggers like this: