I’ve taken a bit of time off from blogging recently to focus on other things, but recently came across this article from the WSJ about the fall of VF Corp ($VFC) and it reminded me of other legacy brand aggregators, such as Newell Brands ($NWL), that have also struggled as of late. There is a common strategy across both companies – they chose to concentrate key decisions around marketing, product development, and sales at the corporate versus brand level. And the results clearly show that was a mistake.
When I was at Jarden (now Newell Brands) in 2016/2017 the stock was at an all-time high. We had methodically built a collection of over 100+ globally recognized brands by empowering our local teams and keeping corporate interference to a minimum. Apart from a marketing and supply chain counsel, the parent company was very hands off in the day-to-day operations of the businesses we owned.
When Newell acquired Jarden in 2016 for $16b, it became clear that Newell’s operating model could not be more different. Newell preferred a more centralized protocol – delegating decisions around marketing/branding, e-commerce, sales, and R&D to a few groups of executives at the corporate level. In 2018, Starboard (a well-known hedge fund) launched a proxy battle with Newell demonstrating all the wrong steps they had taken after the acquisition of Jarden. In that review they identified numerous areas that hurt the company. For example, by centralizing all product development and restricting communication among divisions, the result was high kill rates of new products and a disconnect between what retailers/customers wanted and what Newell was developing. One of the brands we owned was K2 Sports. Under Jarden, K2 was an edgy ski brand, a leader in the category. The brand managers and even many of the executives were the epitome of ski bums. They had close relationships with a cottage industry of mom-and-pop retailers that sold winter equipment and relied heavily on this insight to design new products. Newell’s approach was the antithesis. They wanted a centralized team making product development and marketing decisions that ultimately ended up having consequences as K2’s sales fell.
VF Corp, in a lot of ways, was quite like Jarden. Both companies were historically fairly hands off with their subsidiaries and kept corporate expenses low – instead focused on building supply chain efficiencies, finding great M&A opportunities to expand, and keeping investors satisfied through financial engineering tactics like multiple arbitrage. As in my example prior regarding K2, VF owns Vans, the iconic footwear brand. Vans grew through finding a niche subculture in skateboarding and music to become the largest brand in VF’s portfolio.
However, in recent years, VF has taken the same page Newell took by chipping away brand independence and consolidating more power at the corporate level. As a result, shares are down 75% since the end of 2021 and debt has climbed to nearly $7 billion. Prior to centralizing decisions, the company did extremely well. From 2000 through 2016, VF’s revenue more than doubled, while profits more than quadrupled. In 2021, they took Newell’s approach, and the results could not be more similar – a significant decline in net income and share price.
The WSJ article further calls out the same mistake Newell made around R&D. VF corp’s central product development team tried to impose new technologies and innovations on the brands that they didn’t always want. For example, the parent company tried to get Vans to make wool sneakers, even though Van’s executives said their customers didn’t want them. VF also declined to provide more resources for a popular program that allowed Vans customers to design their own shoes because other VF owned brands weren’t interested in this capability. Furthermore, also stopped sponsoring the Vans Warped Tour, which was a tremendous marketing driver for the company and kept the brand in the zeitgeist of their core customer base.
The outcome here between Newell and VF is not a coincidence – it’s a result of a strategy that ultimately is flawed and shortsighted. To be fair, there’s a lot of smart people looking at this stuff, but empirically the approach is very academic. It goes something like this: To grow you need to acquire more brands, in order to have better gross margins you need more pricing power which is difficult to achieve when you have new upstarts taking share and you lack brand relevance because you’ve lost your core base. So, what do you do? You cut costs – you centralize decision making because management consultants have shown you spreadsheets of where they can find savings by consolidating. For a little while the street rewards you because your net income is higher, but your growth has stalled, and inevitably your brands fall out of favor with consumers.