FMCG companies spends enormous sums on building a brand equity by way of
- advertisements/ publicity
- free samples
- low entry price
- promotions (schemes for dealers, consumers etc)
Advertisement and promotion can induce trials but for sustained loyalty, the manufacturer has to offer superior quality and value for money. Most successful brands are founded on a chance discovery of a new product/ process or assiduous research and development work. Major players invest in R&D on their existing brands and improve the product quality continuously to maintain their edge over competitors.
a) Individual brands Vs Umbrella brands
Individual brand has its own identity and the corporate or common name is not used to promote its equity. In case umbrella brand, there is a generic brand with association of some values. For instance, Hindustan Lever follows individual branding strategy and has several brands in the same category such as Lux, Liril, Rexona soaps etc. Competitor Nirma has mainly followed the umbrella branding strategy such as Nirma Bath, Nirma Beauty, Nirma Super, Nirma Shikakai soap etc. Only recently, the company for the first time diverted from its strategy of umbrella branding with the launch of Nima.
Advantages of Individual branding strategy are
- Some of the products which flop in the market, do not have negative spill over impact on other brands. For example, Nirma is associated with popular end of products, which becomes a major deterrent for its expansion in the premium segment.
- Consumers looking for a change are offered distinctly new brands by the same manufacturer.
But individual branding requires expensive advertisements and brand building exercises. Also, each new brand does not benefit from the positive perceptions of earlier brands.
In umbrella branding, manufacturers have advantage of
- Establishing a new product quickly with association of quality/ benefits of the mother brand (a classic case in Indian context has been Godrej).
- No need for name research, expensive advertisement for creating brand names, recognition and preference.
b) Brand extensions
Brand extensions are used for a group of products such as Clinic Plus Shampoo, Clinic All Clear., Clinic Plus hair oil or Close Up Renew, Close Up Oxyfresh, Close Up Sensation, etc. The brand has some unique USP and there are cosmetic/ functional variations in the extensions. The strategy is to build upon initial success of a brand entry by creating flanker it ems and minor variants of the basic brand. Brand extensions may be used within product categories (In some products like shampoos, there can be natural variants such as shampoo for normal hair, dry hair or for specific problem solving like anti-dandruff). It may also be used for different product segments (eg Sunsilk brand being extended to hair oil)
c) Multi brands
Marketer introduces brands mostly in large markets, which compete with each other in almost the same segment. In multi branding, there is cannibalization but overall result is greater market share. Net incremental market share is enough to justify the investment in the new brand. For instance Hindustan Lever has several brands (Lux, Breeze, Hamam, Rexona, etc) in the same category ie toilet soaps.
Accounting for brand expenses
Expenses incurred by way of advertisements, free samples, promotions etc are treated as revenue expenditure by accountants, as they do not create any tangible assets. The intangible assets created in the form of a brand pays back in the form of repeat buying and pricing power over a long period of time. An established brand is a precious asset and when sold, fetches a price several times the value of tangible assets required to manufacture the product.
There is no generally accepted methodology for valuing and accounting for brands. Also, all methods recommended for valuing brands suffer from lack of objectivity and consistency. There is considerable risk as expenses incurred on a unsuccessful brand has to be written off almost entirely. But the same are paid back several times in case of successful brands. In case of FMCG companies, assets are considerably understated as they do not include value of brands. Inclusion of brands in assets will
- dilute return on networth
- reduce gearing ratio.
It can be argued that high return on networth shown by established companies is overstated as assets (ie Brands) are understated. Similarly, in case of companies in investment phase, making extensive investment in new brands, would exhibit depressed return on networth as investment in brands is being written off, pulling down the profits.
Some companies defer writing off a part of the expenditure for brand building. The expenditure not written off in the year is treated as deferred revenue expenditure