How to Grow a Brand? Spin It Off

Look at the current M&A (Mergers & Acquisitions) scene in U.S. business and you'll see signals, especially in the food industry, that big conglomerates are falling out of favor: 

• In June, Sara Lee jettisoned its famous name, splitting the company into two units: Hillshire Brands, focusing on mostly meat products, and D.E. Master Blenders 1753, a European maker of coffees and teas. 
• Last week, the country's largest dairy company, Dean Foods, said its Whitewave unit, which accounts for about 40 percent of Dean's operating income, would split from the company and file an IPO. Whitewave produces Horizon Organic milk and the Silk brand, which includes soy and almond milk, products that have been growing faster than Dean's regional milk brands.
• In October, the giant Kraft Foods will split the company in two, separating its U.S. business (Kraft Foods Group) from its international snack foods business (Mondelez International). 

Corporate breakups are on the rise, according to Bloomberg Businessweek, which reports that there were 19 U.S. corporate public company spinoffs in 2011 vs. 16 in 2010. Eleven spinoffs have already been finalized in 2012 and thirteen more have been announced. 

Why the flurry of activity? Apparently, the business strategy of consolidating companies into conglomerates is now being viewed as a drag on profits. Instead, big companies are seeing a bump to shareholder value when they play a different corporate game: divide and conquer. Bloomberg Businessweek's Larry Popelka explains: "Not long ago many of these companies were chasing acquisitions in the belief that scale was critical to their success and that acquisitions would bring synergies. But in many industries that's changing. The synergies garnered by large companies today are shrinking, while organizational inefficiency from size has become a greater burden."

Small brands seem to be getting more attention from big retailers. In the food industry, for example, Costco Wholesale, Walmart, and Whole Foods "go out of their way to support products from smaller companies as a way of increasing competition and reducing the clout of big, inflexible manufacturers," according to Popelka. Of course, dominant players like Walmart can also call the shots with smaller companies when it comes to setting the wholesale price they're willing to pay.

The big company breakup phenomenon extends beyond the food industry into travel (Expedia spun off TripAdvisor in 2011), pharmaceuticals (Abbot Laboratories plans to split into established and proprietary pharmaceutical divisions this year), and manufacturing (Tyco International will spin off its North American residential and small business security company and its flow control business). The media industry has made great note of News Corp's plans to split its entertainment from its newspaper divisions.

Big companies may find that unbundling their business holdings actually increases efficiency -- the opposite argument to economies of scale. In fact, smaller, more nimble brands are starting to compete more effectively. Big companies are harder to manage and grow, while smaller organizations can move faster.  Because of the online global economy, small companies increasingly have access to the same sources as big companies. Often, smaller companies can provide better customer service as well because they are focused on just one or two brands instead of a large brand portfolio.

Small brands take heed: Bigger isn't always better.