Alan Mitchell: The dangers of hiving off brands from production

More companies are outsourcing production to focus on branding, but there are dangers in separating the two, not least brand value, says Alan Mitchell

Take two tiny straws in the wind. Nestlé is considering passing the manufacture of some of its ice cream brands to Richmond Foods, the own-label ice cream producer. Meanwhile Philips is handing over production of its digital video disc recorders to Japanese manufacturer Funai Electric. Moves like these cause little or no stir at all nowadays. But that shows how far the world of branding has come.

Manufacturers originally built brands as an efficient means of communicating the value that came out of their factories. The factory and its product came first. Brands were a definite second; a tool to realise the value created by this operational infrastructure.

Today that world is being turned upside down. Making and marketing are being separated. And in the tussle between the two, “making” is being outsourced and the brand is taking priority. Three models dominate so far.

The first is the franchise. In the US, franchises account for 35 per cent of all retail sales, and this number is growing fast. McDonald’s, for instance, doesn’t so much sell hamburgers as hamburger stalls. The company owns and builds the brand, the value propositions and the essential know-how: the skills and processes needed to deliver these value propositions. But it outsources operation of the actual assets (such as high street outlets) to franchisees. You could argue that Coca-Cola works by a similar model. It keeps the brand and the know-how, and passes the operational details (and investment) on to its bottlers.

The second model is licensing. Disney is a classic example. It retains firm control over its “core” business: intellectual property creation. But once it has developed its stories and characters, it licenses the manufacture of toys and related products to third parties.

The third model is own label, where the retailer designs and specifies the product details and takes responsibility for the branding and distribution; but where the actual manufacturing is outsourced. The core own-label concept is not confined to retailers, however. You could say that Nike is an own-label brander. It does exactly the same as Tesco and Sainsbury’s – it specifies, brands and distributes, but it doesn’t make.

All of these models are still evolving. Virgin, for one, is a hybrid, which is also pushing the boundaries in new directions. It owns and controls many of its operations. Yet many Virgin-branded products and services are also made by joint ventures and by completely separate companies. Richard Branson’s definition of Virgin as a “branded venture capital organisation which lends its brand to many different businesses” positions it as a sort of half-way house between franchising and licensing. (The question mark over the Virgin brand relates not to whether it is being stretched too far, but whether its brand values, such as challenging the status quo and being a consumer champion, are being diluted.)

The common factor uniting all three is that they chime perfectly with an emerging information age. For each of them, “idea” production has become more important than actual “thing” production. The value that we’re branding is not so much our ability to make stuff better and cheaper but our insight into changing consumer needs; our ability to create new intellectual property (such as a Disney blockbuster); cutting-edge technical or business process know-how; our ability to communicate and connect with consumers, and so on.

The benefits of giving such information-driven value priority are potentially huge. The concerns and priorities of “making” and “marketing” are very different, and there’s a lot to be said for focusing purely on one without being distracted by the other. There’s also a big financial plus: you can offload the cost of investing in fixed assets and infrastructure to a third party. One reason why the Coca-Cola company consistently reports a superior return on capital is merely an accounting trick: it slips the enormous cost of the Coca-Cola system’s day-to-day operational assets off its own balance sheet on to those of its bottlers.

Separating marketing from making also has its drawbacks, however.

Outsourcing operations means the company has fewer strings to its value bow: it’s far more reliant on fewer sources of added value such as new product development, or distribution prowess. And wherever and whenever there is competitive advantage to be gained by brute force operational superiority, there’s a good reason for keeping the connection with the brand. Car companies have often pondered outsourcing car assembly. No one has dared do it. Yet.

Also, if you pass operational power to an outsourcer, they may use it as a springboard for their own brand. In China, there’s many a PC and mobile phone manufacturer that gained critical mass by manufacturing for Western brands – only to launch their own home-grown brands on the back of these capabilities.

Great Wall PCs is one example. Great Wall’s argument was that “if we are good enough to make IBM computers, we are good enough to have our own brand”.

Another danger lies in throwing the value baby out with the operational bathwater. Brands are concentrated packages of information about unique value propositions. Separating the making from the marketing is not the same as saying the brand is now the actual source of consumer value. When advertising agencies started arguing that people bought the lager advertising, not the lager, they were peddling a cynical line that absolved their clients of the need to deliver superior consumer value. They were soon found out.

So where next? Separating making from branding is the product of a slow and quiet revolution that turns brands’ original purpose – to communicate the value of what comes out of our factories – on its head. The next step must surely be the separation of marketing from selling.

Marketing boils down to two core tasks: matching supply to demand, and connecting buyers to sellers. But there’s no God-given reason why these processes should be controlled by sellers, as opposed to buyers or their agents. If anything, this revolution will prove equally important. The big difference is it’s only just beginning.

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