Why Multi-Brand Companies Serve as More Attractive Investments Than Their Single-Brand Peers

Two brands offer more benefits than one. Multi-brand companies have exhibited consistent financial performances, which lends further strength to the argument of picking them over their single-brand counterparts.

Mar 19, 2014 at 4:49PM

Investors
Source: Yum! Brands

Nothing looks better for a consumer-focused company than a brand that helps the company retain old customers and attract new ones. If brands are so valuable, will owning more brands result in more benefits? Judging by the strategies and financial performances of multi-brand companies Yum! Brands (NYSE:YUM), Iconix Brand Group (NASDAQ:ICON), and Spectrum Brands (NYSE:SPB), this seems to be the case. 

Geographical expansion
As the largest quick-service restaurant, or QSR, globally in terms of units, Yum! Brands has a portfolio of very strong brands such as KFC and Taco Bell. It has cleverly leveraged the respective strengths of these two brands in its geographical expansion strategies.

While KFC has been losing market share to its rivals in the U.S. in recent years, it has had far better success outside of America. The results speak for themselves. KFC grew its operating profit from emerging markets by a compound annual growth rate, or CAGR, of 18% from 2009 to 2013. Operating profit from developed markets, which includes the U.S., Canada, U.K., Australia, and Japan, only increased by 3% over the same period. KFC has also established a stronger emerging market presence than its rival McDonald's. KFC has more than double the store count of McDonald's in countries like Indonesia, Pakistan, Thailand, Malaysia, and South Africa. 

One key emerging market success story for KFC has been China. In 2013, Millward Brown named KFC China's most-powerful brand, following a study which interviewed about 60,000 Chinese consumers in 10 Chinese cities between 2011 and 2013. KFC not only beat McDonald's (seventh place) in the rankings, it also beat out other consumer giants like Apple (sixth place) and Coca-Cola (ninth place). If you consider the progress that KFC has made since it opened its first store in China in 1987, this result would hardly come as a surprise. KFC currently boasts a store footprint of about 4,500 stores in more than 90 cities, which is more than double that of its nearest competitor.

In contrast to KFC, Taco Bell has been U.S.-focused, as it accounts for two-thirds of Yum! Brands' domestic profits. Taco Bell's impressive financial metrics speak volumes about its popularity with U.S. consumers. While same-store sales for the QSR industry at large were almost flat in 2013, Taco Bell grew same-store sales by 3% over the same period. Its operating margin in excess of 18% is also among the best in the industry.

Looking ahead, Yum! Brands has set ambitious goals for Taco Bell to double its revenue to $14 billion over the next 10 years (by 2022) and hit the 8,000 restaurant mark in the U.S.   

A multi-brand strategy gives Yum! Brands more flexibility in terms of how it executes its international strategy. While KFC has not been performing as well in the U.S., it has turned in an excellent report card for its overseas ventures. As for Taco Bell, Yum! Brands has focused its energies on exploiting the full potential of Taco Bell in the domestic market, with an eye on gradually extending the brand overseas.

Brand pyramid
Iconix Brand is the second-largest brand licensor in the world, and it only loses out to Walt Disney. Peanuts, Material Girl, Umbro, and Ocean Pacific are among the notable names on its list of 30+ brands. Its financial track record puts many of its peers to shame. Iconix Brand has delivered positive earnings and free cash flow for every single year from 2005 to 2013. For the past five years, it has increased its revenue and net income by CAGRs of 14.8% and 12.8%, respectively.

The key to Iconix Brand's consistency lies in its portfolio of brands, diversified across the luxury, mid-tier, and mass market segments. As a result, Iconix Brand avoids the problems associated with being a single-brand company positioned as either value or premium.

Premium brands could lose customers if they choose to trade down during a recession. Value-for-money brands face stiff challenges from private labels and low-cost foreign brands. In contrast, Iconix Brand's pyramid of brands ensures that the company remains unaffected by consumers either trading up or down in varying economic conditions.

Spc
Source: Spectrum Brands

Diversification and economies of scale
Spectrum Brands is another global consumer products company which has benefited from a multi-brand strategy. It has grown its top line in every single year for the past five years and it has remained free cash flow positive during this period.

Firstly, it owns brands in different consumer product categories such as batteries and appliances, pet supplies, home and garden, and hardware and house improvement. Although Spectrum Brands mostly sells non-discretionary and replacement products, the diversification doesn't hurt.

Secondly, Spectrum Brands has increased bargaining power with big retailers because it supplies multiple brands across many categories. For example, the company has been a category manager/advisor to Wal-Mart and Target for more than a decade in aquatics and pet supplies.

Thirdly, Spectrum Brands benefits from economies of scale by spreading its fixed costs such as back-office functions over a larger revenue base derived from multiple brands.

Furthermore, although Spectrum Brands is known for its "value" brand positioning, a multi-brand strategy allows the company to up-sell to more-affluent customers. Its No. 1-ranked luxury locksets brand Baldwin doesn't dilute the branding of its other brand Kwikset, the overall market leader in U.S. locksets.

Foolish final thoughts
The adage 'less is more' doesn't apply to branding strategy. The three aforementioned multi-brand companies have clearly reaped the fruits of their work. Going forward, portfolios that contain multiple brands should provide these companies with the same upside potential and downside protection enjoyed by any investor with a diversified investment portfolio.  

What's the Fool's favorite stock?
Top consumer stocks hedge their bets with multiple brands, like Yum! Brands, Iconix Brand Group, and Spectrum Brands. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Apple, Coca-Cola, Iconix Brand Group, McDonald's, and Walt Disney. The Motley Fool owns shares of Apple, Coca-Cola, McDonald's, and Walt Disney and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers