Success Means Slimming Down

Package-Goods Companies are Learning That Bulky Portfolios Can Be Costly, but Cutting the Fat Can Be High-Risk Surgery

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There has been a wave of supersizing in the consumer-package-goods industry, as firms have spent decades growing in every direction, sometimes through acquisitions that doubled or tripled portfolios overnight. Now, though, they've discovered the economic health hazards of portfolio obesity. Among them: swollen costs, poor circulation of information, inflexibility, slow decision making and stressful relations with shareholders impatient for returns.

Yet a few CPG contrarians have raced past their overweight peers. For example, Wrigley runs revenue growth at rates better than double the CPG-sector average. What makes the difference? Instead of bulking up brand portfolios to meet every possible consumer taste and whim, the fast-growth CPG companies identify a distinctive, brand-linked value proposition and build strategically differentiated businesses around it. Guided by sound economic analysis, they know how to harvest cash from businesses with lower growth potential in order to fund high-growth opportunities-and it goes without saying that they execute with discipline.

The good news is that CPG companies have awakened to the risk of supersizing portfolios and begun to cut the fat with a vengeance. The bad news-as the experience of Unilever and others proves-is that brand-portfolio liposuction can be high-risk surgery. In order to make the operation a success, CPG companies need to:

Identify their "advantaged capability"- what it is they can do better than anyone else.

Devise a coherent strategy to grow in businesses where that advantaged capability can make a competitive difference, and divest where it can't.

Be economic realists with a clear understanding of the costs and benefits of investment and divestment in brands, categories and segments.

The devil is in the details

The days when brands could multiply faster than disposable income and retail shelf space are gone. Retailers now manage category volume and quickly drop brands that fall below increasingly strict sales and profit hurdles. Meanwhile, retailers are promoting their own private labels more aggressively than ever.

Second- and third-tier brands are in trouble. But simply dropping brands is not a smart strategy. Paradoxically, big is often better. Only CPG competitors with strong portfolios and great geographic breadth are able to swing their weight around as partners of major retailers. They need big brands to capture the scale benefits of globalization.

So CPG companies have been simultaneously thinning portfolios and building strategic muscle. In many cases, the starting point is to define the categories in which the company wants to compete, expand there, and divest elsewhere. Campbell Soup divested frozen-food, salad-dressing and pickle brands but acquired new soup and sauce brands to grow internationally. Nestle divested fragrance and flavor brands but invested in new ice-cream, frozen-food and water brands.

This focused strategic approach is equally applicable in single-category companies.

But streamlining the brand portfolio is a complex undertaking fraught with thorny strategic challenges and economic risks. To understand how brand streamlining can go wrong, consider the example of Unilever (see above).

The key to getting it right

Effectively harnessing the power of the brand portfolio requires advantaged capabilities, strategic coherence and economic logic.

The first step is to ask and answer the question: "What do we do better than anyone else?" That is the advantaged capability. Most successful companies have one or more advantaged capabilities. For example, Frito-Lay has invested in building a unique direct-store-delivery capability that ensures its dominance in retail. Wrigley "owns" the front end-particularly in the hard-to-reach, fragmented convenience-store and gas-station channels. Nike is the king of "image" marketing. Starbucks is synonymous with the "coffee experience."

Building a brand portfolio around capabilities has been a common theme among CPG players as an anchor in harnessing the power of their portfolios. Some have clearly succeeded in doing so. For example, P&G not only has leveraged its significant innovation capabilities to build dominant positions in strategic categories but has, at the same time, consciously exited businesses where innovation played a smaller role. In the case of others, the jury is still out. Kraft has identified scale as its advantaged capability and the key driver of performance. During the past few years, Kraft has divested brands that did not fit the advantaged capability. Brands that are to be retained or acquired must be brands in core categories that provide more than 5% of total revenue and enhance a sustainable competitive advantage that can be leveraged across the business. So Kraft has sold its confectionary and grocery businesses, disposing of Farley's & Sathers, Intense Fruit Chews, Mity Bite and Fleischmann's Yeast in 2002 and Life Savers/Creme Savers/Altoids, Bird's, Angel Delight and Dream Topping in 2004. ConAgra, operating in mature and "commodity" sectors, is undergoing a major transformation focusing on "branded, value-added food opportunities." That's why it exited such commodity-manufacturing operations as pork and beef processing, turkey hatchery and breeding, crop inputs and feeds, as well as noncore brands such as Treasure Cave and Nauvoo cheeses.

Strategic coherence

The second question most companies need to ask is: "Which brands/categories/segments are we the best in?" This allows management to focus on a set of categories or segments in which the company has clear advantages. Those advantages may include strong trademarks, a well-positioned portfolio within the category and/or greater opportunities to capitalize on adjacency expansion.

This is a logical but unconventional approach. More typically, companies identify the segments where they tend to outperform, then invest in strengthening brands within those segments. As a result, they wind up spending management time and resources on businesses that have no strategic justification for being in the portfolio.

Recognizing this weakness, a number of CPG companies have begun to put more emphasis on strategic coherence. Sara Lee decided its best chance for success was to focus on core food, beverage and household-product segments. In 2005, based on that strategic logic, the company sold branded apparel, coffee and its direct-selling businesses, exiting from 40% of its annual revenues. H.J. Heinz, after many years managing a large and diverse business portfolio, has placed its bets on ketchup, condiments and sauces, and frozen foods. As a result, it has exited selectively from such nonstrategic businesses as Starkist seafood, pet foods and pet snacks, private-label soup, baby food, and College Inn broth.

Economic logic

The last question is: "Are there sufficient growth opportunities, and are we best able to capture them or are others in a better position?"

No matter how bad brands are, no matter how nonstrategic, they do generate earnings. Companies that perform brand-portfolio liposuction must replace the earnings for the operation's net present value to be neutral-or, preferably, positive. Disposing of a brand removes associated fixed and variable costs, but it is necessary to grow sales from the rest of the portfolio to compensate for the lost earnings. Essentially, the trade-off is between portfolio growth and cost reduction. Cash harvested from divested brands certainly affects the trade-off. The more cash realized on sale, the less cost cutting and growth will be necessary to make the operation NPV-neutral.

The objective of brand-portfolio restructuring is not merely to divest brands. Brand-portfolio liposuction removes some brands to achieve higher rates of growth for the brands that remain. So firms need to place resource bets on remaining brands where they can reasonably expect to accelerate growth.

It also has to be recognized that one portfolio liposuction is not enough. Cutting fat and building brand muscle is a continuing effort and requires focus and discipline. Companies should view the portfolio-management process as a continuing economic fitness program, where portfolio metrics are tools for regular "gut checks" and the strategic planning process is the annual "health check" to identify borderline brands to trim. The reason to create a healthy portfolio has never been greater, and ultimately the rewards will go to those that make portfolio liposuction an everyday part of their businesses.

About the Authors

Nikhil Bahadur is a principal with Booz Allen Hamilton in Cleveland. He advises consumer-focused organizations on growth and brand strategies.

Edward Landry is a VP with Booz Allen Hamilton in New York. He focuses on strategy and sales and marketing effectiveness for CPG and health-care companies.

Steven Treppo is a principal with Booz Allen Hamilton in Cleveland. He has worked in growth-strategy development with CPG companies.
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