Trim the Fat

Volume 3 Letter 12

Electrolux had a big problem. Operating in multiple countries with decentralized operations was giving this food services division a stomach ache. In Western Europe Electrolux was competing with 15 – 25 rivals in each country in the professional food services market. The company had 15 product brands only one of which was sold in more than one country. The business division did over 600 million dollars in sales and still lost money. Like too much left over Christmas turkey, too many brands in a company’s portfolio can upset the corporate tummy.

In a recent article, Nirmalya Kumar studied a number of large companies and analyzed their brand portfolios.* In case after case he determined that 80 to 90 percent of a company’s profits come from 10 to 15 percent of their brands. The staggering conclusion is that 85 to 90 percent of any company’s brands lose money!

The study looked at companies like Nestlé who’s majority of profits are generated by approximately 200 or 2.5% of their over 8000 brands. P&G had over 250 brands in 160 countries but only 10 brands accounted for more than 50% of their profits and almost all of their growth. Other companies had similar results including pharmaceuticals and telecoms. So why is withdrawing a brand so difficult?

Most companies have a process for introducing new technology but the reverse isn’t true. Most companies do not have a systematic methodology of removing brands from the market. Simply withdrawing resources from poorly performing brands and letting them fade away is not a strategy. Often these products remain in the portfolio and must be supported, stocked and counted each year. Additionally, underperforming brands that are left to die often upset loyal customers as the support and inventory needed to maintain the brand is no longer present. In general, it’s better to kill an underperforming brand and move the loyal users to other better supported products.

Like product introductions, companies need a systematic approach for product withdrawals. By removing weak products from the market, resources are freed up to better promote and position the stronger brands and better serve the customer. Here are some suggested steps to prune the portfolio tree:

Do an audit:
List all the company’s products on a spread sheet. On a five point scale score products that dominate (number one or number two in the market place) with fives and fours and score the followers with ones and twos. Next determine the profitability – score fives and fours to cash generators and ones and twos for cash consumers. Finally list any other reasons that may make the brand unique – give anything that indicates future potential a five or a four.

Decide which brands to keep and which to kill:
Add up the scores for each brand. Each brand kept should have the potential to become number one, or number two in its respective market and needs to have enough scale to justify future investments. (Only rarely is there a case for keeping a number 3 or 4 and most of those exceptions are in the pharmaceutical market).

Kill the underperformers:
For each product to be deleted develop a withdrawal strategy. Some product withdrawals must be handled with the same care as any new product introduction. Move loyal customers into other products.

Grow the core products:
At the same time the disinvestment is happening it is imperative to have a strategy in place to invest in the growth of the remaining products. Savings generated from the deleted non performing products must be reinvested in growing the core products!

Over time Electrolux replaced their 15 small brands with a few large brands that the company was able to support from key central locations. In so doing the company stopped the bloating and was able to turn a profit. Trim the fat off the Turkey and shape up your portfolio.

* For the full story see “Kill a Brand, Keep a Customer” by Nirmalya Kumar, HBR Dec 2003 pp 87-95

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