Firm Value Effects of Global, Regional, and Local Brand Divestments in Core and Non‐Core Businesses

• Author: Gerrit H. Bruggen,Yvonne M. Everdingen,Baris Depecik
• Published date: 01 May 2014
• Date: 01 May 2014
• DOI: http://doi.org/10.1111/j.2042-5805.2014.1074.x

FIRM VALUE EFFECTS OF GLOBAL, REGIONAL,

AND LOCAL BRAND DIVESTMENTS IN CORE

AND NON-CORE BUSINESSES

BARIS DEPECIK1, YVONNE M. VAN EVERDINGEN2*, and

GERRIT H. VAN BRUGGEN2

1Faculty of Business Administration, Bilkent University, Ankara, Turkey

2Rotterdam School of Management, Erasmus University, Rotterdam, The

Netherlands

In this article, we investigate the effect of brand divestments on firm value. We integrate two

common motives for focus-increasing brand divestitures—global branding and refocusing on

core businesses—in a single common framework. In particular, we investigate the effects of

divesting local/regional/global brands in core businesses and local/regional/global brands in

non-core businesses on firm value. Analyzing 205 divestment announcements in the global food

and beverages industry, we find that, in most cases, brand divestments destroy firm value. Only

when firms divest local or regional brands in non-core businesses is the effect on firm value

positive. Copyright © 2014 Strategic Management Society.

INTRODUCTION

Many multinational enterprises (MNEs) operating in

the consumer packaged goods (CPG) industry, such

as Unilever, Procter & Gamble, Nestle, and Diageo,

own brand portfolios that span multiple country and

industry markets. Starting around the early 1990s,

these companies expanded their portfolios through

acquisitions and new brand introductions in multiple

geographies and industries. This was done to gener-

ate growth by reaching almost anyone around the

globe. It led to a profusion of brands, most of them

regional or national, with many brands making only

a small contribution to companies’ bottom lines. For

example, Unilever managed a portfolio of 1,600

brands in 1999, with 80 percent of these brands

generating less than 10 percent of their profits

(Kumar, 2003).

From a management viewpoint, the proliferation

of brands led to high costs and managerial complex-

ity (Hill, Ettenson, and Tyson, 2005). Furthermore, it

brought other ills, like inefficiencies in production,

distribution, and marketing (Knudsen et al., 1997;

Laforet and Saunders, 1999). The troubles of

supersizing brand portfolios were further exacer-

bated by a variety of retailer-related factors. The rise

of private label brands, difficulties in getting super-

market shelf space, and growing retailer power pro-

moted the need for a small set of strong brands rather

than a larger set of smaller ones. Pulling back from

gains achieved in the previous years, starting around

the mid-1990s, many firms realized the undesired

consequences of the proliferation of their brand port-

folios and started brand portfolio rationalization

(BPR) programs. A BPR program contains detailed

plans to divest particular brands from the brand port-

folio in order to release resources and reallocate

Keywords: brand divestments; brand portfolio management;

portfolio refocusing; event study; food and beverages industry

*Correspondence to: Yvonne M. van Everdingen, Rotterdam

School of Management, Erasmus University, P.O. Box 1738,

3000 DR Rotterdam, The Netherlands. E-mail: yeverdingen@

rsm.nl

Global Strategy Journal

Global Strat. J., 4: 143–160 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2014.1074.x

Copyright © 2014 Strategic Management Society

them to meet the needs of the remaining brands in

the portfolio (Aaker, 2004).

Companies followed different strategies in divest-

ing brands, leading to diverse outcomes. P&G, for

example, deleted several food and beverage brands

to strengthen its focus on personal care and health

care brands. An increased focus on laundry, baby

care, hair care, and feminine protection brands let the

company become the global leader in these busi-

nesses (P&G, 2003; USA Today, 2006). P&G’s

growth from the brands they kept outweighed the

revenue losses from divested brands and, as a result,

the company experienced both top- and bottom-line

growth (P&G, 2004). In contrast with P&G’s strat-

egy of shifting focus across industries, Unilever

shifted its focus toward the top brands in its portfo-

lio. Unilever divestednearly 1,200 brands to enhance

its resources behind a core portfolio of 400 brands.

The divested brands were relatively small within the

overall portfolio in terms of revenues, were available

in only a few country markets, and had a small

customer base. Most of the retained top brands, e.g.,

Knorr soup, Calvin Klein perfumes, Dove soap, and

Magnum ice cream, had a strong international pres-

ence. The five-year makeover resulted in increased

brand focus, improved global buying, cost savings,

and debt reduction. Yet, it failed to deliver on its

promises in terms of revenues and shareholder value

(Unilever, 2004).

These and other brand divestment examples with

diverse outcomes made the uncertainty about the

value-creating effects of different types of focus-

increasing brand divestiture strategies grow. The

objective of the study reported in this article is to

empirically investigate the effects of two types of

focus-increasing brand divestitures (i.e., focus on

core industries versus focus on global brands) on

firm value.

Findings in two different research fields are rel-

evant for our study. First, the divestment literature

discusses divestitures of non-core business assets

(not specifically brand assets, though) to overcome

problems of overdiversification (Haynes, Thompson,

and Wright, 2002) and to release resources to rein-

force core assets. It shows the value-enhancing effect

of these divestitures (Desai and Jain, 1999; John and

Ofek, 1995). Although this type of divestment is in

line with the P&G example discussed earlier, so far

the emphasis in these studies has been on tangible

assets. In our study, we focus on brands as intangible

assets. Second, the international branding literature

suggests the potential, mainly financial, advantages

of deleting local brands and subsequently enhancing

released resources behind a few core, global brands

(Kapferer, 2002; Schuiling and Kapferer, 2004).

This is the strategy outlined in the Unilever case. So

far, this literature fails to provide empirical evidence

of possible firm value-enhancing effects.

We contribute to the international business litera-

ture by empirically investigating brand divestitures

from a multidisciplinary perspective. We integrate

the effects of the two focus-increasing strategies, i.e.,

to refocus on core businesses (‘the P&G approach’)

and the global branding strategy (‘the Unilever

approach’), into a single common framework. Meyer

(2006, 2009) argues that both forces are simultane-

ously redesigning conglomerates’ business activities

and discusses the potential benefits of switching to a

so-called ‘global-focusing’ strategy. However, no

empirical evidence yet exists on the potential posi-

tive effects of this strategy on the firm value. Our

study addresses this gap and argues that the value-

creating effects of brand divestitures depend on the

divested brand’s industry relatedness (i.e., the relat-

edness of the brand to the primary or core business

activities of the company) and geographical scope

(i.e., the geographical reach of the brand in terms of

country markets). Wedistinguish four types of brand

divestitures, i.e., divesting: (1) a local brand in a

non-core industry; (2) a local brand in a core indus-

try; (3) a global brand in a non-core industry; and

finally (4) a global brand in a core industry.

To investigate the effects of these four types of

brand divestments on firm value, we conducted an

event study, i.e., a method that investigates whether

the announcement of an event—in this study,the sale

of a brand asset within the context of a BPR

program—creates an abnormal change in the firm’s

stock price and, hence, firm value. The stock price is

a forward-looking variable that reflects the present

value of all current and projected earnings of the

company. Any abnormal change in the stock price

reflects the effect of the event on firm value. Our

empirical findings provide evidence for our multidis-

ciplinary perspective in studying the effect of brand

divestments, which helps to understand how and

why brand divestments affect firm value.

The remainder of this article is organized as

follows: the next section presents our research

framework, followed by hypothesis development.

Subsequently, we describe the event study method-

ology and our data collection procedure. After pre-

senting the results, we conclude with a discussion of

the implications and areas for further research.

144 B. Depecik, Y. M. van Everdingen, and G. H. van Bruggen

Copyright © 2014 Strategic Management Society Global Strat. J., 4: 143–160 (2014)

DOI: 10.1111/j.2042-5805.2014.1074.x