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.
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.
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.
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.