How ‘Big Groups’ and ‘Niche Brands’ Survive acquisitions and Thrive

In order to be credible and thrive, ‘niche brands’ (be they ’boutique’, ‘craft’, ‘local’, ‘organic’…) must make sure that they let their particular brand myth and engaging mission guide them in everything they do. They must do this not only to live up to their own ambition but – most importantly – to deliver on their customers’ expectations.  And, for the most ‘authentic’ of them, ‘everything’ ranges from the company set-up through sourcing and production, organization and culture all the way to marketing and creating meticulously crafted brand experiences across all touch points.  We call brands which do this best ‘Ueber-Brands‘ and you might have read some of our case studies on brands from Australian Beauty brand Aesop, via Freitag bags from Switzerland and Patagonia American active wear to the Chinese healing products of Yuan.

But one question we often get when we bring any of these examples up in our work with bigger CPG groups is:  “How do you preserve this kind of ‘authenticity’?  And – How do you ‘scale’ it?”  These questions indicate the conundrum large mass manufacturers find themselves in today.  They see the shares of their formerly market-dominating ‘mega-brands’ like Budweiser, Cover Girl or Kellogg’s being nibbled away by these ‘niche players’. Players which often sell at a significant premium to the mass market average, making things even more embarrassing.  But when the big groups try to ‘join’ rather than fight these pesky challengers – through acquisition – they find it hard to accelerate or even just maintain the growth.  Instead, many of the acquired brands languish after an initial ‘sugar high’ from gaining access to broad distribution and adverting dollars post acquisition.

We know about the problem but also about potential solutions. We have witnessed the challenges of ‘integrating’ a Eukanuba premium dog food business into Procter & Gamble (see reading below) or a premium Scharffen-Berger chocolate into Hershey and have worked on ‘de-tangling’ a Fekkai or Sebastian premium hair care business from P&G again.  And, to do it right, we have studied the relative successes of a Ben & Jerry’s/Unilever, Honest Tea/Coca Cola or Kiehl’s/L’Oréal. And by client demand we have also dissected and implemented ways for big groups to grow their own ‘niche brands’ internally without smothering them shortly after birth – as Nestle has successfully done with Nespresso, for example.

The Ring-Fencing Concept

Yvon Chouinard, Dietrich Mateschitz or the Hermès family  have reportedly or famously declined many offers to sell their Patagonia, Red Bull and namesake brands, respectively – even though it would have made billions. Invariably, their reasoning reveals a fear that integration into a larger company and the pressures to deliver competitive returns to external shareholders would somehow threaten the uniqueness of their brands and organizations. Does this suggest these Ueber-Brands have to be privately owned to protect their authenticity, desirability and future?

We certainly found Ueber-Brands that are part of some of the largest public corporations around and that nevertheless flourish. One thing their corporate owners seem to have in common is that they found ways to ensure critical parts of the brand myth and mission are protected, rather than ‘normalized’ away for the sake of scale and higher short-term returns. We call it ‘ring-fencing,’ for lack of a more elegant term, and it may occur from birth within a large corporation or as they are acquired. The acquiring company may incubate a small start-up before admitting it or hold developed Ueber-Brands in a network of largely independent ‘houses’. All will review their portfolio regularly to find efficiency gains in integrating ‘back-office’ processes and operations that they see are not core to the brand myth.  Sometimes they might undo these changes if they find them to have gone too far (an example here is Ben & Jerry’s).

Separated at birth – Nespresso and Nestlé

Nestlé’s CEO, Peter Brabeck-Letmathe, intuitively understood that the fledgling idea of selling single-unit gourmet coffee made in special machines needed a business model and culture different from the main mass-packaged goods business at Nestlé. He sought early on to separate the new Nespresso unit organizationally and culturally. Agreeing to a separate physical location was relatively easy since a purpose-built plant was needed anyway. Licensing the machine design and sale to outside suppliers also made sense to everyone, given the corporation had no experience with small appliances. Hiring a total industry outsider, Jean-Paul Gaillard, to lead the new unit created an internal stir. However, Gaillard had proven unconventional thinking before when he launched a fashion line under the Marlboro Classic brand, and he did the same again at Nespresso. It was he who turned the original business-to-business idea into a prestige consumer brand model – on a hunch and against Nestlé’s forecast and many internal stakeholders. Brabeck had to defend these and other departures from the Nestlé norm repeatedly over the next decade and fight off suggestions that he divest the ‘non-strategic’ unit. Today, of course, the billion-dollar brand is a jewel in the Nestlé crown. Recent Nespresso CEOs are Nestlé-grown and numerous back-office operations like buying, payroll or IT have been integrated with the mother corporation. However, Nestlé has learned to protect and nurture unique elements of the Nespresso model, such as the ‘Club’ member care organization, which make up the differentiating edge of this Ueber-Brand. Nestlé certainly learned from their experience in creating their own prestige brand as they ring-fenced others they acquired, like Italian fine-dining water San Pellegrino in 1997. But it is beauty giant Estée Lauder that has mastered the art of acquiring prestige brands and letting them shine as part of their universe.

Network of houses – The Estée Lauder Company

The Estée Lauder brand is a legend in its own right and, together with other prestige brands it developed like Aramis, Clinique and Origins, it forms the core of this 10 billion dollar-plus corporation. But since the mid-90s, the company has also been on a hunt for unique brand stories from the outside. In the autumn of 2014 alone, Lauder acquired boutique perfumers Le Labo and Frédéric Malle and skin care icon Olio Lusso. It has shown skill in selecting, acquiring and letting them grow as part of a network of semi-autonomous ‘houses’ – with most consumers unaware that Bobby Brown, MAC, Smashbox, BECCA, Too Faced (all make-up) or Jo Malone, Aveda or Bumble and Bumble are part of the same holding. The last, a fashion-forward hair-care brand, literally operates out of ‘The House of Bumble’, which includes brand headquarters, a salon and a stylist school and is located in the hip Meatpacking district of New York. That is across town from Estée Lauder Group headquarters but a culture-shock away from the opulent, upper-crust elegance and hushed atmosphere that reigns there. Estée Lauder is careful to preserve the ‘smell of the place’, often retaining the brand founders as creative leaders – for example make-up artist Bobby Brown – or at least as ‘spiritual guides’ like the late Horst Rechelbacher. The latter was a pioneer in introducing the ideas of aromatherapy and Ayurvedic healing to hair and beauty care through his brand Aveda in the ‘70s. He sold the brand to Estée Lauder in 1997 but was convinced by chairman Leonard Lauder to stay on for another six years and transmit the legacy to the organization. Today, Aveda still operates out of a holistic wellness campus in Minneapolis and has become a centre of expertise for nature-related brands in the group, like the home-grown Origins. Expertise that is not essential to the essence of the brand, on the other hand, is housed at other offices of the group. For example, the global director for Aveda e-commerce is co-located with other brand colleagues in New York.

The incubator approach – The Coca-Cola Company

Coca-Cola’s interest in ‘quirky and niche brands’ does not stem from a desire to add unique stories to a premium brand portfolio. In Coke’s case it is the realization that many new trends start with such brands, which can create mainstream segments if they garner enough influencer support, told us Deryck van Rensburg, then President of Global Venturing and Emerging Brands (VEB) at the Coca-Cola Company. So Coke’s VEB division is managing a portfolio of initially non-controlling stakes in what could be a next Red Bull. Their insight is that the authenticity of a small team of founders on a mission would be hard for Coke to replicate. Rather than absorb or copy the brands, Coke ring-fences the ‘seedlings’ and provides measured amounts of funding and expertise on request. The ultimate goal is that the brands grow enough in scale that it – literally – make sense for them go on the Coke truck and be distributed together with the other big brands. When that happens, the company will take on full ownership. This has been the pattern with investments in Innocent smoothies in the UK or Zico coconut water and Honest Tea in the United States. As the name implies, Honest Tea is about transparency in the use of all-natural ingredients, a limited amount of cane sugar in particular. High-fructose corn syrup, the key ingredient of most soft drinks, is frowned upon, and the brand makes this very clear on their kid packs and to moms – at a premium of 2–3 times the price of those regular soft drinks. However, allowing the tiny brand to continue this campaign and with it the potential to hurt their infinitely bigger mainstay brands, shows that Coke understands the importance of this point for the integrity of Honest Tea – and possibly the future of the Coca-Cola Company as a whole, since consumer concern in this area is rising. Coke boosted their stake from 40 per cent in 2007 to 100 per cent in 2011 and Honest Tea is now an independent unit operated by one of its remaining co-founders Seth Goldman.

From the graphic novel “Mission in a Bottle: Making Honest Tea” by co-founders Seth Goldman and Barry Nalebuff recounting their journey from niche brand to growing-up… with Coke.

So this is the rather long answer as to how a large, even mass-marketing oriented group can succeed in incubating or acquiring niche brands – without crushing them but rather (gently at first) scaling them. 

FURTHER READING:

For the Kiehl’s or Ben & Jerry’s case studies and to learn about all the the success drivers of Ueber-Brands, read our book “Rethinking Prestige Branding – Secrets of the Ueber-Brands” and other articles and case studies on this blog.

For an example of what we mean by ‘crashing after an initial sugar high’ above, read this WSJ article by Emily Nelson on the post-P&G acquisition issues at IAMS (maker of Eukanuba).

Here is our full case studies of Nespresso practicing in-group Ueber-Brand incubation.

For more detail on how large corporations can harness disruptive brands and their spirit , read Deryck van Rensburg’s paper (then Coca Cola and now Dean of Pepperdine University Business School) In-Sourcing disruptive brands as a corporate entrepreneur strategy‘.

 

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About JP Kuehlwein

JP Kuehlwein is Co-Founder and Partner at ‘Ueber-Brands’ a New York consulting firm that helps elevate brands in the minds of people and above competition to warrant premium pricing and profits. He previously was Executive Vice President at Frédéric Fekkai & Co, a prestige salon operator and hair care brand and worked at multinational Procter & Gamble as Brand Director and Director of Strategy. JP is a recognized global business leader and brand builder with a 25+ year track record of translating consumer and brand insights into transformational propositions that win in market. His experience spans from developing a global communication strategy for the world’s leading detergent to introducing a new-to-the-world food wrap, disposable diapers as a category in India and a premium skin care brand in China to turning around a luxury lifestyle brand in the US. JP’s latest book is the bestselling “Rethinking Prestige Branding – Secrets of the Ueber-Brands” which he co-authored with Wolfgang Schaefer.
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