David Reibstein: House of brands vs branded house

While financial markets tend to reward a “branded house” approach to doing business, David Reibstein says there are also advantages to being a “house of brands”

Over the past 50 years there has been a remarkable transition in the determinants of a firm’s value. Fifty years ago, nearly 80% of a typical firm’s value was made up of tangible assets – for example, its plant, equipment, inventory, land and work in progress. Today, nearly 50% of a firm’s value is determined by intangible assets – items that generally don’t appear directly on the books and are harder to measure. One of the largest of these assets is the firm’s brand or brands. Companies will invest to establish, grow and fortify their brand or brands, but often not directly measure what has happened with their investment and the overall health of their brand. Further, we have not figured out how to value our brand in our books. Nonetheless, financial markets have worked out that what the company is developing is a real, albeit intangible, asset that contributes to the value of the firm.

Brands matter

Brands are an important asset. We should measure them. We should manage them. Every year Business Week publishes the Interbrand ratings of the world’s top 100 brands and their values. The list is interesting. The perennial leader is Coca-Cola (see table 1). The brand alone is worth nearly $70 billion, a significant share of the company’s value.

It is also worth noting, by looking at the next four brands – Microsoft, IBM, GE (General Electric) and Intel – that although many people think that the brand is important for consumer packaged goods, it is also significant in other products. Examples include: Microsoft in software; IBM in business-to-business services; GE, primarily in business products and services; and Intel, a business-to-business, microprocessor manufacturer. In other words, brands are not of concern just to consumer packaged goods manufacturers

A global brand?

As a company develops its international presence it is faced with a decision: should it have a single, global brand? This seems, on the surface, to have an obvious answer – of course it should. But there are several reasons – apart from the risk of using a name that translates into a rude word in another language – why a firm might decide not have a global brand. Let’s first explore what it means to have a global brand.

To have a global brand, it is necessary not only to use the same name in all markets, but also to have the same target and positioning in all markets. This might not always be achievable given differences in competition. Wal-Mart is renowned in North America as the prime low-price provider of branded goods and for always carrying fresh produce. However, in China, it is difficult for Wal-Mart to position itself as the “guaranteed low-price” provider or even the supplier of the freshest produce, given the local farmers and vendors with whom it competes. The company’s position in the two markets is different.

Further, it might not even be desirable to offer the same position and benefits in all parts of the world. The segments might be different, and the relative sizes of these segments, and, hence, their attractiveness will differ.

For a brand to be a true brand, it must be consistent. For a global brand to be a true global brand, it must also be consistent, not just in name, but in position and what it offers.

There is a spectrum in the degree to which brands are global (chart 1). At one end are companies that are identical in all parts of the world. Good examples include Starbucks, Coca-Cola, Siemens, Philips and Sony. Other companies, such as Toyota, offer different brands in different parts of the world. Many others have an intermediate branding strategy, offering some international brands and others that are marketed in specific markets, such as Unilever. Another interim stance is to have the same name and positioning, yet to offer a different product. An example would be MTV, which offers branded live pop music programming but whose output uses local music and artists in specific regions. In China and Vietnam, for example, nearly 70% of the content is unique to those markets. In short, being a global brand involves more than just having a common name around the world, and to attempt to have it might not always be desirable.

One brand or many?

Another major branding question is whether to have a single umbrella or master brand, or a portfolio of brands. Examples of firms that have a house of brands include Unilever and Procter & Gamble (P&G;). Several business-to-business firms also have a portfolio of brands, for example, Dupont’s Kevlar, Kalrez, Lycra, Teflon, Thinsulate and Stainmaster. Such companies have a wide portfolio of branded products, and most consumers do not know the parent company’s name or suspect that the products are affiliated with one another.

The brands cover different product categories as well as different segments within any one category. P&G; has shampoos (Head and Shoulders, Pert, and Pantene, for example), mouthwash (Scope), deodorant (Sure), dental floss (Glide), toilet paper (Charmin), toothpaste (Crest) and tampons (Tampax), to name a few of its categories and a sample of brands. In the detergent category, P&G; has, for example, Tide, Gain, Cheer, Ivory, Ariel, Daz, Bold, Fairy and Dreft. Each offers different value propositions to different customer segments.

In contrast, we have such companies as GE, Intel, Sony, Nike or Hewlett-Packard that have multiple products, but almost all of these carry the corporate brand. GE is in widely different product categories, but stretches the brand name to cover each of the categories – GE Lighting, GE Financial Services, GE Appliances and GE Turbine Engines, for example.

These are distinctly divergent strategies. There are trade-offs with each approach. For the house of brands, it is expensive to establish a new brand. There are substantial costs involved in introducing a new name and defining its meaning to its targeted customers, and it takes time to establish the product. Whenever Intel, a branded house, releases its latest computer microprocessor, it does so under the Intel name, even if it also uses a sub-brand, such as Pentium V or Centrino. Such product introductions cost significantly less than if the company did not have the Intel name – and the instant brand recognition, acceptance and image of “latest technology” associated with it.

But there are also several advantages to being a house of brands. This strategy enables the company to take different positions with different products, as marketing ploys are unconstrained by the corporate brand or other brands in the portfolio. Kitchen appliances maker Whirlpool has a mixed strategy, with both a corporate brand and other brands. In America, it has four brands: Whirlpool, KitchenAid, Kenmore and Roper. In other parts of the world, it has additional, different, brands. Why would it have multiple brands rather than just Whirlpool? Roper is positioned as a “value” brand, relatively low priced and aimed at the middle-to-low income household. It would be extremely difficult to offer a high-end product under the Roper name. Even if the company had used the Whirlpool brand name for the entire line, it would be difficult to stretch the brand far enough to reach both extremes of economy and prestige images.

Multiple brands in the same house also enable companies to have different brands for different market segments. Marriott maintains the Marriott name for its main hotel chain; has sub-brands for other segments, such as Courtyard by Marriott; and even uses the Marriott name in association with lower-end hotels, such as Fairfield Inn by Marriott. However, Marriott has been careful to maintain a distance from its premium brand, Ritz. Most people do not know that Marriott owns Ritz, and the company prefers to keep it that way.

Sometimes appealing to one segment makes the brand less attractive to other sets of customers, a situation that is termed “target conflict”. Mercedes-Benz has a long-standing premium image that appeals to the wealthy. When the Smart car was first introduced in Europe as a joint venture between the Swiss company Swatch and Mercedes-Benz, it was associated with Mercedes and carried the Mercedes logo. This helped the Smart car gain some legitimacy in the economy segment as not just a car for under $10,000, but also as one that must be safe and reliable. On the other hand, it threatened Mercedes’ main customer base, which now saw a different set of customers driving Mercedes. It did not take Mercedes long to distance itself from the Smart brand. This was only possible because the product was introduced under a different brand name.

Brand attributes

The value of a brand is that it communicates to the customer a set of attribute associations. When we see the brand name Virgin, we think “fun” and “renegade”. Intel communicates “latest technology”. Yet, we may want to buy products where the brand’s attributes are not appropriate. Campbell Soup Company, for example, has elected not to associate its name with some of its products, such as its upmarket chocolate maker Godiva.

Introducing a product under the same name induces relatively high levels of cannibalization. People who have a positive affinity with the existing brand will be more prone to switch to the new brand. If the new product in the same category enters with a new brand name, there is a greater likelihood of a new positioning, and not as much appeal to the customers who are already attached to the brand’s franchise.

Companies often worry about different distributors competing against each other by selling the same product, but at lower and lower prices. This is known as “channel conflict”. Such “over-distribution” often disenfranchises the distributor from pushing the product, as it would rather promote products for which it has some level of exclusivity. Sony and other branded houses try to deal with this issue by having different stock-keeping units, and they try to allocate different models to different distributors.

It is often good to select a brand name that communicates to the customer the benefit or function of the brand. This helps customers position more quickly in their minds what the brand delivers. Examples would be Glide (dental floss), Rotorooter (drain unclogger), Toys ‘R’ Us (toys) or Skin So Soft (a skin moisturizer). However, having a brand that helps communicate the function of the product limits how far you can stretch the brand.

A clear advantage of having a portfolio of brands is that if there should be a public “failure”, other products in the company’s portfolio will be protected. When aspects of the businesses of Audi, Firestone, Perrier or Coca-Cola faced challenges, the entire company was threatened. Yet, when there was a scare about the proprietary drug Tylenol, a Johnson & Johnson brand, there were minimal effects on other J&J; products.

Brand value

How do financial markets view the difference between a house of brands and a branded house? It would appear that the branded house is valued more highly. Looking back at table 1, we see that all of the top brands are corporate brand names used for multiple products in their companies’ portfolios. Other firms that have well-established brand names do not have brands whose value is nearly as high as those of branded houses. The clear exception is Marlboro. Philip Morris has elected to have different brand names for each of its cigarette products with Marlboro being recognized around the world. Yet, for the most part, companies with well-established names, such as Unilever, Procter & Gamble and DuPont, do not have brand names whose value rivals that of the top corporate brands.

Even if you add up the value of the portfolio of brand names, it still does not reach the level of the branded houses. As can be seen in table 2, the well-known houses of brands have values that are significantly lower than the branded houses. This disparity has led some companies to reconsider whether to maintain a portfolio or move to a branded house approach.

As there is a continuum (chart 2) in the extent to which brands are global, the reality is that there are not two options – houses of brands and branded houses – but rather a range of positions. GE, which brands almost everything under the corporate name, occasionally offers some products under other brand names, for example, Hotpoint. The Coca-Cola Company has more than 300 brands, including Sprite. It could have been named Limon Lime Coca-Cola. And it sells Dasani water, not Coca-Cola Water.

Although financial markets seem to be rewarding the branded house end of this continuum, caution should be taken before everyone jumps on to this trend. There are several reasons to be a house of brands. This may not be rewarded in the short run in the financial markets, but does allow a company to develop another brand to establish itself with a different position and appeal to a unique segment.

David Reibstein
David J Reibstein is the William S Woodside Professor at the Wharton School, University of Pennsylvania, where he is also a professor of marketing. He was the executive director of the Marketing Science Institute from 1999 to 2001.