The Cash Cow has become a Cash Drain.
When I was running the marketing department at J&J with 15 different brand P&Ls, for me to hit my numbers, I used a simplistic portfolio management rule I called “One-Third…One-Third…One-Third”, where I needed one-third of my brands to have a great year and over-deliver the sales target, I needed one-third to have a fair-to-good performance and hit their number because I knew that no matter what I did, there would be this ugly one-third that would struggle, fall off the rails and miss their number. For this rule to work, I just needed the one-third that was doing great to be much better than the deficit from the one-third that was struggling.
I was lucky to have a Cash Cow in the mix, which gave me the luxury of a large source of steady growth kicking out cash that I could re-invest in the high growth brands to ensure they did well. That beautiful Cash Cow let me sleep at night, I’d hit my year-end numbers and get that sweet bonus cheque at the end of the year. The problem in today’s economy is the Cash Cow has been neglected to the point where that once-beautiful Cash Cow is now in the bottom One-Third and has now become a drain on the overall P&L. What was once the big saviour has now become a big problem.
Using the Boston Consulting Group Matrix, the definition of a Cash Cow is a high market share in a slower growth category. These brands generate more cash in the bottom line than they need to maintain the business. Sometimes marketers view these brands as boring because they have no fancy advertising or sexy investment programs. But in terms of running a portfolio, every company wants some strong cash cows. These brands are to be “milked” continuously with as little investment as possible since that investment would be seen as wasteful. Instead, the profits it kicks out should be re-invested in the Stars where there is a known pathway to growth or even the question marks where there is potential opportunity to gain a higher market share within the high growth category.
The problems with Cash Cows
These Cash Cow Brands, once sitting comfortably at the Like It stage have begun to fall back to the Indifferent stage. Most Cash Cows have been milked for too long without any investment that they now face neglect. They’ve lost the connection they once had with their consumers. In fact, if they’ve been milked for 10-15 years, they’ve completely missed out on connecting with an entire new generation of consumers. The Cash Cow sits on the shelf, looking old, tired and out of date. There’s been no messaging to the consumer which reduces their overall unaided awareness levels and might not even be in the consideration set. Minimal investment in R&D has seen missed opportunities for new formats or product advancements to keep ahead of the competition. It’s likely that other brands have caught up or surpassed the cash cow on quality which then throws the value equation into question for the Cash Cow.
In the retail channels, these Cash Cows have faced attack on all fronts. In these Cash Cow categories Private Label have gained as much as a 20-30% share. Because the Cash Cow didn’t want to invest in the Above the Line marketing programs like Advertising or Innovation, they’ve compensated by increasing the trade spend. For these Cash Cows, the percent sold on deal has steadily increased–going from 20-30% when operating as a true cash cow up to 40-70%.
Competitors have taken note of the Cash Cow and then look for the opportunistic kill. They can see your lack of investment, they have also noticed some untapped or missed opportunities in the marketplace. Competitors have attacked in four ways:
- New Entrants Going after younger targets who think of the Cash Cow as their Mom’s brand. This leaves the Cash Cow defenceless, unable to connect with these new consumers making the brand look irrelevant, worn out and just plain old.
- Competitors push the Innovation on new formats, which they leverage to generate a slight premium, helping to take a category that is flat on units and adds some dollar growth. Even if it’s a short-term win, they now have a new share position they can try to straight-line.
- Brands try to take on the value positioning between the Cash Cow and Private Label. Where the Cash Cow tries to take a premium price position, it open ups the opportunity for these brands to reduce their price mid-way between Private Label and the Cash Cow. They focus their innovation on the cost line with off-shore or third-party production, lower ingredient costs or reductions in packaging or even shipping. The Cash Cow is slow to react to the price threat, not wanting to cut into the premium price position they occupy or the give up the profit model that has worked to spin out the cash. Don’t you just hate when someone cuts the price on your Cash Cow!!!
- Some Brands Eliminate Distribution all-together, going towards a Direct to Consumer model–either through direct response media options or shipping through the internet. This catches the Cash Cow by surprise, because the data isn’t showing up the share reports. These become the competitors that you can’t see. It also confuses the Cash Cow because they are stuck with their distribution as their life-line, unable to try new distribution techniques for fear of retribution from retail partners.
The Cash Cow P&L is no longer working.
A brand can mainly leverage 4 main areas on the P&L to drive profits: price, costs, market share or the market size. And with the current Cash Cows in free-fall, all 4 are moving in the wrong direction. What once was a beautiful P&L is no longer working for the Cash Cow.
- Falling Prices: The Cash Cow has had to fight off private label expansion and the advent of Value Brands. Without any advertising, product innovation or promotional program dollars, these Cash Cows tried for years to avoid touching the price line. But with three major recessions in twelve years, these Cash Cows have been forced into slashing their price just to maintain their share lead, even as it continues to shrink.
- Declining Share: With the increase in Private Label over the last 20 years, the Cash Cow has likely lost 20-30% of their share to private label. The most vulnerable categories for Private Label are the slower moving categories that the Cash Cow is supposed to compete in. With little innovation, the store brands have been able to easily copy the brand leaders. On top of that, value brands have neatly found a way to occupy a position between private label and the Cash Cow.
- Uncompetitive Costs: Two major cost problems. First, the Cash Cow has seen cost per unit creeping up. While they always had the cost advantage due to their economies of scale, the shrinking volumes against the same production footprint means lower productivity and higher costs per unit. Second, trade spending has increased as these Cash Cows buckle to the pressure from distribution. They no longer have the power to command strong programs, shelf space or premium pricing. They need to be on deal all the time in order to sell.
- Shrinking Category: As the category share leader, the lack of investment by the Cash Cow puts the category into sleep mode and the declines accelerate.
Avoid letting your Cash Cow become indifferent
No longer can you just let a brand sit there for 5 years straight without any investment. That beautiful Cash Cow that has a steady share, kicks out profit with minimal investment isn’t really there any more. Instead of going to the near-zero budget, pick a fair margin that allows you to find a cost-efficient plan for how to stay connected with your most loyal consumers to avoid losing relevance. Watch the competition so you don’t let them catch you sleeping. Keep investing in R&D to ensure your brand stays in the leadership position. Attack costs at all levels–production, packaging, shipping to free up any wasted costs that you can use to stay relevant. And please, avoid just substituting top line marketing spend for crappy trade spend that just keeps throwing money at the trade. If you have a brand that needs to be on deal, just to sell the product, you’ve got a cash drain brand, certainly not a cash cow.
In terms of portfolio management, I don’t use the BCG Matrix, preferring to look at Market Attractiveness vs Consumer Perception of a given brand. The tool forces you to look from the vantage of the consumer. The Market Attractiveness could include criteria such as category size, growth rate, trend analysis, strategic fit for the brand or market dynamics including positioning, competitiveness and retailer strength. The Consumer Perception could include the size of the need state the brand satisfies, the health of the brand funnel (awareness, consideration, purchase, loyalty) and the overall opinion of the brand. This is a more progressive tool to enable you to invest in brands that are in a healthy category with strong possibilities for success.
Cash Cows need to attack themselves or they’ll become a Cash Drain.