How many brands is the perfect number? It's a delicate balance for management and is more of an art than a science. If you expand too much, it's costly for the additional marketing and attention needed. If you don't have enough brands, you miss opportunities to gain market share and incremental revenue. This is where the line in the sand is drawn between automotive giants.
Ford and General Motors have drastically cut their number of brands since the recession, helping them return to profitability. On the other side, Volkswagen and Chrysler have drastically increased the amount of brands under their respective umbrellas. Which strategy will position the companies for future success? I'll explain two key topics -- brand portfolio and architecture -- and show you why companies on one side of the strategy could be in trouble.
Portfolio and architecture
With my background in marketing, I'll take a quick second to brief you on the difference of these two factors. A brand portfolio, as you probably guessed, is how many brands are under a company's umbrella. Think how Coca-Cola also owns Sprite, a different name brand. The problem with having numerous brands is creating an efficient architecture. If Coca-Cola has five spinoffs of coke -- Vanilla Coke and Coke Zero, to name two -- and only regular Sprite, it is competing more with itself rather than expanding its market share. At some point, the cost in creating additional spinoffs outweighs the revenue that it can generate. Crossing that line in the sand would hurt Coca-Cola's ability to generate maximum profits.
Ford and GM are taking the opposite strategy. because they learned a valuable lesson during the recession. They found that their brands were too costly and inefficient and lacked compelling marketing to stay profitable. It wasn't until then, when sales practically disappeared, that they were forced to cut slacking brands and refocus on their core to rebuild a strong portfolio. Let's dig into the details and see the change in brand numbers.
By the numbers
GM went from nine brands in the U.S. market 10 years ago down to four currently. It killed off Pontiac, Saturn, and Hummer in 2010. It also sold off Saab, which has since been killed. Before the recession, it closed the doors on Oldsmobile. Ford has made similar moves to cut five of its brands, now sitting at only two -- Ford and Lincoln.
With the opposite strategy, Volkswagen is up to 12 distinct brands after adding Porsche last year. Chrysler has increased its brand count up to nine, including the Alfa Romeo, which has been absent since the mid-'90s.
"We're going against the grain," Chrysler-Fiat CEO Sergio Marchionne said. "Ford has decided to go with an oval strategy across the whole range, and we're the only ones that keep on carving up or have carved up our brand-name portfolio into more distinct pieces."
The soda analogy was nice and simple. However, it's much more complicated in the automotive industry -- not to mention that the costs and risks are amplified greatly. I asked my old chief marketing officer-- from an automotive aftermarket company -- for some insight on costs associated with maintaining multiple brands. These three stood out to me.
- Tooling. The capital required to design, engineer, and tool product parts for different brand appearances would add up quickly, reducing margins. Ford is able to share platforms between models more easily, with fewer brands to differentiate between one another. By the end of 2013, it plans on having 85% of global sales from nine platforms. Volkswagen can share some pieces, but no matter how hard it tries, a frame for an Audi won't work for a Beetle.
- Marketing. The costs incurred to create different themes, logos, and awareness add up quickly per brand. On top of that, with each brand representing a different segment, it would require research and information to target a specific consumer. It can get expensive for VW to target such different consumers between the Beetle, Audi, and high-end Porsche.
- Complexity. More brands, more problems? It isn't always the case, but the complexity of juggling numerous models and inventory does become more difficult. It also increases the dealer network needed to support in sales and advertising.
These are all very real factors that come into play with numerous brands. If not juggled properly, you can get into an unprofitable mess similar to Detroit's Big Three before the recession. With the additional costs, why do VW and Chrysler continue to create brands?
Fewer brands, less share
The argument I hear the most is that if you have fewer brands, you inevitably lose market share. People then point out that Ford and GM have indeed lost market share since cutting their number of brands. But I think GM in particular has lost market share because it has the oldest vehicle portfolio in the world. That's a weakness it's addressing this year, with the busiest redesign schedule in its history.
Ford, meanwhile, speaks for itself. In 2007 -- a time when Ford still owned Volvo, Jaguar, Land Rover, and Aston Martin -- its market share was 15.8%. Now after removing those brands, and shutting down Mercury, its share is at 15.5%. That's a small price to pay when that portfolio trimming has allowed Ford to bounce back to its best financial shape in more than a decade.
For the fewer brands/less share argument to hold some weight, adding multiple brands as Chrysler and VW have done should increase market share. In 2007, Chrysler's market share stood at 12.9%, but in 2012 it was down to 11.4%. Volkswagen has had more success, moving from 2% to 4.2%, but I'm still not convinced that it's all from expanding its number of brands.
In my opinion, for both Ford and GM, less is more. I think you'd be shocked at how few brands you actually need to get all the revenue you want. If you like extra costs, complexity, and juggling inventory -- then more power to you. VW and Chrysler would be the option you would prefer. Volkswagen has proved to be a valid investment, but it has extra risks with so many brands going forward. I prefer lean operations, focused marketing, and brand portfolios that produce impressive profits. That's the strategy Ford and GM chose, and that's where I'm placing my bet for the future.
Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.
The article Are Ford and GM Using the Right Strategy? originally appeared on Fool.com.Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends Coca-Cola, Ford, and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.