Companies that frequently launch new brands after killing existing ones generate sub-optimal profits.

Accounting rules mandate the treatment of marketing and brand-related costs as expenses — and successful, highly profitable companies have been able to convert these expenses into long-term investments by creating and nurturing brands over time.

While earnings and stock valuation (usually, a multiple of earnings) are low during the brand-building years, once the brands gain traction, there is a disproportionate return on advertising and marketing spend, as past expenses begin to pay back in the form of brand recall, boosting operating margins, ROCE and, hence, valuation.

The effect can especially be observed in consumer product companies that have been able to launch new products under existing brands or extend current brands. Such companies have been able to increase sales while reducing advertising and marketing costs as a percentage of sales. This translates to growth at incrementally higher margins.

Auto sector

Let’s consider the auto sector. Auto companies that have invested heavily to build strong sub-brands, such as the Alto, City, Pulsar, etc., capitalise on these by phasing out existing products and launching new ones under the same sub-brands — so that the brand life-cycle can be extended much beyond the individual product lifecycle.

This strategy has various advantages, especially with the product lifecycle constantly shrinking these days.

First, it takes years to build brand recall/goodwill. The only way in which the high expenses involved in establishing a brand during the initial years can be recouped is by leveraging it during the later years by gradually reducing the expenses associated with it (as a percentage of sales) to sustenance level.

Launching a new brand every time there is a product upgrade increases break-even costs and reduces margins. Moreover killing an existing brand means the company is writing off all the earlier investments in it.

Second, brands are usually associated with target customer groups.

As long as the new product caters to an existing group — the same brand might work better than a new one. By retaining existing brands, a pre-existing group can be cultivated and expanded.

Third, well-established brands not only offer themselves for brand extensions beyond the current product category but also help further segment target groups, creating new revenue streams for the company to pursue growth.

Upgrading steadily

Bajaj Auto is one of the players within the auto sector that has built well defined and focused brands — Pulsar, Discover and Platina — catering to the premium, executive and economy segments respectively.

By investing in these brands steadily over the years, while periodically refreshing/upgrading the products under them, the company has been able to reduce its advertising/ sales expenditure significantly compared to a decade back (see Graph).

The Pulsar today bears almost no resemblance to the original version, but the brand however has continued and is more relevant and popular today than ever.

Also, today the company has multiple product variants within these brands e.g. Pulsar (135, 150, 180, 200, 220) and Discover (100, 125. 150) etc. so that there is a seamless coverage of customer segments depending on their power requirement and budget.

Peers in the two-wheeler industry that have followed a more diversified and less consistent brand strategy, continue to bear higher advertising and marketing expenses relative to sales, as a result reducing their margins.

Brand extension

Dove is a great example of a company using a single product (soaps) to cultivate a target customer segment and gradually launching a slew of related products to expand sales and reap dividends from that segment. Brand extension is the secret sauce that has helped HUL, for long a sleeping giant, to begin galloping recently — both in growth and margins.

So has been the story with GSK consumer — which, by breaking the umbrella Horlicks brand into variants such as Horlicks Lite, Women’s Horlicks, Junior Horlicks, Mother’s Horlicks, etc., and new products such as Horlicks Oats and Nutribar, realised that the sum of the parts is much larger than the whole. Global product giants such as Microsoft and Apple too follow a focused long-term brand strategy.

Despite all the woes that usually tag along with a new version of, say, Windows or Office, Microsoft continues to retain the brands because it knows they have universal reach and brand recall built over many years and after billions of dollars spent on advertising and marketing.

Apple’s approach is no different with its now ubiquitous ‘i’ prefix, with numbers differentiating the latest versions of its phones, tablets and other gadgets from the previous ones. Given the speed at which Apple releases new products, the company must have saved a ton of money (and avoided confusion) by not giving every new product a unique name.