New keys for new locks

Let’s read a few quotes to start off. They are all very recent and as you read them you can already make out what they are referring to (I have deliberately left in blanks):

“ ___________ has a great following in _______ and strengthens our food portfolio, allowing us to accelerate our expansion in the high-growth naturals and organic segment.”

“___________ has strong values and a clear purpose that aligns fully with our own sustainable growth model. There’s a clear strategic, philosophical and cultural fit for us.”

“ Job №1 is taking it global. Job №2 is what other categories either are we already in or we can easily get into that meet the ______ promise?”

It is not important to fill in the blanks. Obviously all the quotes refer to some form of brand(s) or company acquisition. The focus is not on the brands acquired, but the reasons behind these acquisitions (there have been a wave of them recently).

The global marketplace is now continuously buffeted by changes that are not its own creation. Some of these changes have a deep impact and are structurally dynamic. Examples can include the rise of the health & wellness industry, evolving notions of ownership, subscription services, indirect selling (positioning a brand as a solutions provider), evolving definitions and attitudes towards debt, curiosity to understand the environmental footprint of our existence and consumption and, the tilt towards expressing loyalty for experiences (and not brands). These are deep changes that a brand repositioning exercise simply cannot tap into. It requires organisations to rethink how their entire brand portfolio is structured and positioned. It is not about individual brands anymore, but the leverage of your current portfolio and the strategies you employ to strengthen it

No one will admit it in their media facing statements, but an important change that has silently creeped through and established itself is the fact (and thinking) that “brands have lost their ability to stretch into categories, which they could do previously”. On the top of this no one is willing to take the risk and put a substantial investment behind a brand stretch, when the leverage can be achieved by buying out a startup or a high-growth local player.

  • The Unilever acquisition of Pukka Herbs is a consequence of a similar structural change in behaviour. The UK consumer is drinking less black tea now and preferences have shifted towards drinking more natural flavours, herbal infusions etc. PG Tips (Unilever’s core portfolio brand) launched a new range of specialty teas and infusions in January 2017. The reported growth rate was estimated to be 6% YoY. Pukka Herb’s growth rate at the time of acquisition — 30% with a portfolio of organic fusion brews (some of which are highly eclectic). Suddenly the range extension investment in PG Tips stopped making commercial sense

Commercial pragmatism and the decline in brand stretchability are two factors. There is another intangible factor that drives global M&As around brands — increasing levels of consumer rejection of the “old wine in new bottle” phenomenon. One of the unavoidable fallacies of brand building is that consistency of brand positioning drives consistency of perceptions. It is hard to shake-off or adjust a brand’s legacy to leverage opportunities that arise due to deep changes in consumer behaviour.

  • Mondelez (very practically) have never endeavoured to take Oreo into the health and wellness domain. Even though the brand has format innovation in the form of Oreo Thins, but that’s about it. To leverage the opportunities coming out of the health & wellness trend they have done the following — launched Véa (a healthier snacking alternative), expanding the range of belVita (already has serious breakfast health credentials) and revamping the line of Triscuit products (by removing artificial ingredients). So no Oreos, Ritz and Cadbury’s anywhere near this health and wellness domain

The Mondelez strategy towards being a prominent player in the health & wellness domain (when it is a traditional snacks manufacturer) is by launching altogether new brands or by expanding portfolios of brands that already have a ‘health’ positioning.

In this 2000 article in The Harvard Business Review, Kevin Lane Keller constructs the essential Brand Report Card:

It is precisely for the reasons outlined in Point 4 (The brand is properly positioned)and Point 5 (The brand is consistent) that new brands are required to tap into opportunities that arise from deep changes in consumer behaviour. Below is another example of a structurally dynamic trend and responses of different companies:

Alcohol consumption levels in the UK has fallen by a fifth in the last decade and are now at 1979 levels

If consumers are drinking less, then companies in the traditional alcohol business need to re-invent. This is not possible through existing portfolios, in line with the rejection of the “old wine in new bottle” parable. So here are a few responses:

  • In July 2016, the first time in its 257 year old history, Diageo invested in a non-alcoholic drinks business by buying a minority stake in Seedlip, a British company that manufactures non-alcoholic drinks
  • Heineken is already eyeing a global domination of the NOLO category through the launch of Heineken 0.0 (a move, in my opinion, is going to be a spectacular failure)
  • ABInBev acquired US-based organic drinks maker Hiball to strengthen its move into the non-alcoholic segment

Having a portfolio strategy towards brand management also helps on another critical dimension — having the hedge or a cushion to absorb the bumpy rides of new bets. If underneath the veneer of a brand you are actually selling a product, then a product lifecycle is much shorter now. This make the initial rides on new bets extremely bumpy. Moving away from traditional brand building notions — a new brand launch in its initial months requires a balanced mix of long-term and short-term initiatives. A global organisation launching a brand can (still) push high-levels of funding behind it, but it cannot buy brand awareness. The necessary building required at the top end of the funnel (to allow it to filter to the bottom) is the primary reason behind the turbulence. When you buy a local brand with high growth or an upscale startup, the funnel is already built and beating healthily. You add it to your portfolio, beef the funnel up through your existing distribution machinery and take the brand beyond quite a few borders. This may sound overtly simplistic, but that is exactly how portfolios are being strengthened now, and which the three quotes in the beginning are also saying.

All these factors come together to increasingly justify the need to acquire a brand when the objective is to move into uncharted territories (where you don’t have any navigational knowledge + don’t have the boat meant for such waters). Calling this phenomenon ‘new keys for new locks’ is quite justified because you always struggle to open new locks with old keys. Not only are new locks being opened, but the journey beyond is also increasingly charted. This is by allowing founders / owners of acquired businesses to stay on the board of the acquired company. Acquirers are very hesitant to stamp their old logos on new packaging (a case of old keys for new locks), which completely defeats the purpose of the acquisition and artificially creates the “old wine in a new bottle” phenomenon.

The rules of brand building may have remained the same, but approaches are being redefined and evolved in light of changes that go beyond a single brand’s positioning or functional / emotional capability to comprehend. These approaches are different in quite a few ways:

  • The focus is on building portfolio strength and longevity and not necessarily brand architecture revamps / re-orientation
  • De-stressing the internal innovation pipeline by allowing the acquired brands to fill in the gaps
  • Almost working towards an independent P&L structure wherein acquired brands are given the freedom to continue doing what they have been doing (with more distribution muscle at disposal)
  • Willing to de-prioritise / withdraw / kill weak brands in the portfolio to allow acquired brands to occupy that positioning spaces

These changes in approaches are also evident in the foundries and incubators global organisations have put in place for them to identify and invest in breakthrough (and potentially high growth) brand ideas or brands themselves. Till this point, these changes have been embraced with the intention of spurring growth. If growth does not happen, there is always a danger of the “bought quickly discarded quickly” mindset to come back.