Ten Brands That Will Disappear in 2012
by Douglas A. McIntyre
Friday, June 24, 2011
24/7 Wall St. has created a new list of brands that will disappear, which
includes Sears (NASDAQ: SHLD - News), Sony Pictures (NYSE: SNE - News),
American Apparel (NYSE: APP - News), Nokia (NYSE: NOK - News), Saab, A&W
All-American Foods Restaurants, Soap Opera Digest, Sony Ericsson, MySpace
(NYSE: NWS.A - News), and Kellogg's Corn Pops. (NYSE: K - News).
Each year, 24/7 Wall St. regularly compiles a list of brands that are going to
disappear in the near-term. Last year's list proved to be prescient in many
instances, predicting the demise of T-Mobile among others. In late May, AT&T
(NYSE: T - News) and Deutsche Telekom announced that AT&T would buy T-Mobile
USA for $39 billion. The deal would add 34 million customers to the company and
create the country's largest wireless operator.
Other 2010 nominees including Blockbuster bit the dust, while companies
such as Dollar Thrifty are on the road to oblivion. Last September, after
finally giving in to competition from Netflix and buckling under nearly $1
billion in debt, Blockbuster filed for Chapter 11 bankruptcy protection. In
April of this year, Dish Network acquired the company for $320 million. Car
rental chain Dollar Thrifty is still entertaining buyout offers from Avis and
Hertz. On June 6, the embattled company recommended that its shareholders not
accept Hertz's recent offer, valued at $2.24 billion, or $72 a share.
Meanwhile, on June 13th, Avis Budget announced that "it had made progress in
its discussion with the Federal Trade Commission regarding its potential
acquisition" of the company. Although Dollar Thrifty can remain choosy, a sale
is a matter of when, not if.
We also missed the mark on a few companies. Notably, Kia, Moody's, BP, and Zale
appear to be doing better than we expected.
Brands that have stood the test of time for decades are falling by the wayside
at an alarming rate. For instance, Pontiac, a major car brand since 1926, is
gone, shut down by a struggling GM. Blockbuster is in the process of
dismantling, after it once controlled the VHS and DVD markets. House & Garden
folded after 106 years. It succumbed to the advertising downturn, a lot of
competition, and the cost of paper and postage. Its demise echoed the 1972
shutdown of what is probably the most famous magazines in history Life. That
was a long time ago but serves to demonstrate that no brand is too big to fail
if it is overwhelmed by competition, new inventions, costs, or poor management.
This year's list of The Ten Brands That Will Disappear takes a methodical
approach in deciding which brand would walk the plank. The major criteria were
as follows: (1) a rapid fall-off in sales and steep losses; (2) disclosures by
the parent of the brand that it might go out of business; (3) rapidly rising
costs that are extremely unlikely to be recouped through higher prices; (4)
companies which are sold; (5) companies that go into bankruptcy; (6) firms that
have lost the great majority of their customers; or (7) operations with rapidly
withering market share. Each of the ten brands on the list suffer from one or
more of these problems. Each of the ten will be gone, based on our definitions,
within 18 months.
1. Sony Pictures
Sony has a studio production arm which has nothing to do with its core
businesses of consumer electronics and gaming. Sony bought what was Columbia
Tri-Star Picture in 1989 for $3.4 billion. This entertainment operation has
done poorly recently. Sony's fiscal year ends in March, and for the period,
revenue for the group dropped 15% to $7.2 billion and operating income fell by
10% to $466 million. Sony is in trouble. It lost $3.1 billion in its latest
fiscal year on revenue of $86.5 billion. Sony's gaming system group is under
siege by Microsoft (NASDAQ: MSFT - News) and Nintendo. Its consumer electronics
group faces an overwhelming challenge from Apple. The company's future
prospects have been further damaged by the Japan earthquake and the hack of its
large PlayStation Network. CEO Howard Stringer is under pressure to do
something to increase the value of Sony's shares. The only valuable asset with
which he can easily part is Columbia which would attract interest from a number
of large media operations. Sony Entertainment will disappear with the sale of
its assets.
2. A&W
A&W Restaurants is owned by fast food holding company giant Yum! Brands (NYSE:
YUM - News) which has had the firm for sale since January. There have been no
buyers. The chain was founded in 1919. The size of the company grew rapidly,
and immediately after WWII 450 franchises were opened. The firm pioneered the
"drive in" fast food format. A&W began to sell canned versions of its sodas in
1971 the part of the business that will survive as a container beverage
business which is now owned by Dr. Pepper/Snapple. The A&W Restaurant business
is too small to be viable now. It had 322 outlets in the U.S and 317 outside
the U.S at the end of last year. All were operated by franchisees. By contrast,
Yum!'s flagship KFC had 5,055 stores in the U.S. and 11,798 overseas. Two
massive global fast food chains are even larger. Subway has 35,000 locations
worldwide, and McDonald's has nearly as many. A&W does not have the ability to
market itself against these chains and at least a dozen other fast food
operators like Burger King. And, A&W does not have the size to efficiently
handle food purchases, logistics, and transportation costs compared to
competitors many times as large.
3. Saab
The first Saab car was launched in 1949 by Swedish industrial firm Svenska
Aeroplan. The firm produced a series of sedans and coups, the flagship of which
was the 900 series, released in 1978. About one million of these would
eventually be sold. Saab's engineering reputation and the rise in its
international sales attracted GM to buy half the company in 1989 and the
balance in 2000. Saab's problem, which grew under the management of the world's
No.1 automobile manufacturer, was that it was never more than a niche brand in
an industry dominated by very large players such as Ford and Chevrolet. It did
not build very inexpensive cars like VW did, or expensive sports cars as
Porsche did. Saab's models were, in price and features, up against models from
the world's largest car companies that sold hundreds of thousands of units each
year. Saab also did not have a wide number of models to suit different budgets
and driver tastes. GM decided to jettison the brand in late 2008, and the small
company quickly became insolvent. Saab finally found a buyer in high-end car
maker Spyker which took control of the company last year. Spyker quickly ran
low on money because only 32,000 Saabs were sold in 2010. Spyker turned to
Chinese industrial investors for money. Pang Da Automobile agreed to take an
equity stake in the company. But, the agreement is not binding, and with a
potential of global sales which are still below 50,000 a year based on
manufacturing and marketing operations, and demand, Saab is no longer a
financially viable brand.
4. American Apparel
The once-hip retailer reached the brink of bankruptcy earlier this year, and
there is no indication that it has gained anything more than a little time with
its latest financing. It currently trades as a penny stock. The company had
three stores and $82 million in revenue in 2003. Those numbers reached 260
stores and $545 million in 2008. For the first quarter of this year, the
retailer had net sales for the quarter of $116.1 million, a 4.7% decline over
sales of $121.8 million in the same period a year ago. Comparable store sales
declined 8% on a constant currency basis. American Apparel posted a net loss
for the period of $21 million. Comparable store sales have flattened, which
means the firm likely will continue to post losses. American Apparel is also
almost certainly under gross margin pressure because of the rise in cotton
prices. The retailer raised $14.9 million in April by selling shares at a
discount of 43% to a group of private investors led by Canadian financier
Michael Serruya and Delavaco Capital. According to Reuters, the 15.8 million
shares sold represented 20.3 percent of the company's outstanding stock on
March 31. That sum is not nearly enough to keep American Apparel from going the
way of Borders. It is a small, under-funded player in a market with very large
competitors with healthy balance sheets. It does not help matters that the
company's founder and CEO, Dov Charney, has been a defendant in several
lawsuits filed by former employees alleging sexual harassment.
5. Sears
The parent of Sears and Kmart Sears Holdings is in a lot of trouble. Total
revenue dropped $341 million to $9.7 billion for the quarter which closed April
30, 2011. The company had a net loss of $170 million. Sears Holdings was
created by a merger of the parents of the two chains on March 24, 2005. The
operation has been a disaster ever since. The company has tried to run 4,000
stores which operate across the US and Canada. Neither Sears nor Kmart have
done well recently, but Sears' domestic locations same store numbers were off
5.2% in the first quarter and Kmart's were down 1.6%. Last year domestic
comparable store sales declined 1.6% in the total, with an increase at Kmart of
.7% and a decline at Sears Domestic of 3.6%. New CEO Lou D'Ambrosio recently
said of the last quarter that, "we also fell short on executing with
excellence. We cannot control the weather or economy or government spending.
But we can control how we execute and leverage the potent set of assets we
have." D'Ambrosio needs to pull a rabbit out of his hat soon. Sharex are down
55% during the last five years. D'Ambrosio's only reasonable solution to the
firm's financial problems is to stop supporting two brands which compete with
one another and larger rivals such as Walmart (NYSE: WMT - News) and Target
(NYSE: TGT - News). The cost to market two brands and maintain stores which
overlap one another geographically must be in the hundreds of millions of
dollars each year. Employee and supply chain costs are also gigantic. The path
D'Ambrosio is likely to take is to consolidate two brand into one keeping the
better performing Kmart and shuttering Sears.
6. Sony Ericsson
Sony Ericsson was formed by the two large consumer electronics companies to
market the handset offerings each had handled separately. The venture started
in 2001, before the rise of the smartphone. Early in its history, it was one of
the biggest handset manufacturers along with Nokia (NYSE: NOK - News), Samsung,
LG, and Motorola. Sales of Sony Ericsson phones were originally helped by the
popularity of other Sony portable devices like the Walkman. Sony Ericsson's
product development lagged behind those of companies like Apple (NYSE: AAPL -
News) and Research In Motion (NASDAQ: RIMM - News) which dominated the high end
smartphone industry early. Sony Ericsson also relied on the Symbian operating
system which was championed by market leader Nokia, but which it has abandoned
in favor of Microsoft's Windows mobile operating system because of license
costs and difficulty with programmers. In a period when smartphone sales
worldwide are rising in the double digits and sales of the iPhone double year
over year, Sony Ericsson's unit sales dropped from 97 million in 2008 to 43
million last year. New competitors like HTC now outsell Sony Ericsson by
widening numbers. Sony Ericsson management expects several more quarters of
falling sales and the company has laid off thousands of people. There have been
rumors, backed by logic, that Sony will take over the operation, rebrand the
handsets with its name, and market them in tandem with its PS3 consoles and
VAIO PCs.
7. Kellogg's Corn Pops
The cereal business is not what is used to be, at least for products that are
not considered "healthy." Among those is Kellogg's Corn Pops ready-to-eat
cereal. Sales of the brand dropped 18% over the year that ended in April, down
to $74 million. That puts it well behind brands like Cheerios and Frosted
Flakes, each which have sales of over $200 million a year. Private label sales
have also hurt sales of branded cereals. Revenues in this category were $637
million over the same April-end period. There is also profit margin pressure on
Corn Pops because of the sharp increase in corn prices. Kellogg's describes the
product as being "crispy, glazed, crunchy, sweet." Corn Pops also contain mono-
and diglycerides, used to bind saturated fat, and BHT for freshness, which is
also used in embalming fluid. None of these are likely to be what mothers want
to serve their children in an age in which a healthy breakfast is more likely
to be egg whites and a bowl of fresh fruit.
8. MySpace
MySpace, once the world's largest social network, died a long time ago. It will
get buried soon. News Corp (NYSE: NWS - News) bought MySpace and its parent in
2005 for $580 million, which was considered inexpensive at the time based on
the web property's size. MySpace held the top spot among social networks based
on visitors from mid-2006 until mid-2008, according to several online research
services. It was overtaken by Facebook at that point. Facebook has 700 million
members worldwide now and recently passed Yahoo! (NYSE: YHOO - News) as the
largest website for display advertising based on revenue. News Corp was able to
get an exclusive advertising deal worth $900 million shortly after it bought
the property, but that was its sales high-water mark. Its audience is currently
estimated to be less that 20 million visitors in the US. Why did MySpace fall
so far behind Facebook? No one knows for certain. It may be that Facebook had
more attractive features for people who wanted to share their identities
online. It may have been that it appealed to a younger audience which tends to
spend more time online. News Corp announced in February that it would sell
MySpace. There were no serious bids. Rumors surfaced recently that a buyer may
take the website for $100 million. The brand is worth little if anything. A
buyer is likely to kill the name and fold the subscriber base into another
brand. News Corp has hinted it will close MySpace if it does not find a buyer.
9. Soap Opera Digest
The magazine's future has been ruined by two trends. The first is the number of
cancellations of soap operas. Long-lived shows which include "All My Children"
and "One Life to Live" have been canceled and replaced by talk shows, which are
less expensive to air. The other insurmountable challenge is the wide
availability of details on soap operas online. Some of the shows even have
their own fan sites. News about the industry, in other words, is now
distributed and no longer in one place. Soap Opera Digest's first quarter
advertising pages fell 21% in the first quarter and revenue was down 18% to $4
million. In 2000, the magazine's circulation was in excess of 1.1 million
readers. By 2005 it fell below 500,000 where it has remained for the last 5
years. Source Interlink Media, the magazine's parent, which also owns
automotive, truck, and motorcycle publications, has little reason to support a
product based on a dying industry.
10. Nokia
Nokia is dead. Shareholders are just waiting for an undertaker. The world's
largest handset company has one asset. Nokia sold 25% of the global total of
428 million units sold in the first quarter. Its problem is that in the
industry the company is viewed as a falling knife. Its market share in the same
quarter of 2010 was nearly 31%. The arguments that Nokia will not stay
independent are numerous. It has a very modest presence in the rapidly growing
smartphone industry which is dominated by Apple, Research In Motion's
Blackberry, HTC, and Samsung. Nokia runs the outdated Symbian operating system
and is in the process of changing to Microsoft's Windows mobile OS, which has a
tiny share of the market.
Nokia would be an attractive takeover target to a large extent because the cost
to "buy" 25% of the global handset market would only be $22 billion based on
Nokia's current market cap. Obviously, a buyer would need to pay a premium, but
even $30 billion is within reach of several companies. Potential buyers would
start with HTC, the fourth largest smartphone maker in the world. Its sales
have doubled in both the last quarter and the last year. HTC will sell as many
as 80 million handsets in 2011. The Taiwan-based company's challenge would be
whether it could finance such a large deal. The other three likely bidders do
not have that problem. Microsoft, which is Nokia's primary software partner,
could easily buy the company and is often mentioned as a suitor. The world's
largest software company recently moved further into the telecom industry
though its purchase of VoIP giant Skype, which has 170 million active
customers. Two other large firms have many reasons to buy Nokia. Samsung, part
of one of the largest conglomerates in Korea, has publicly set a goal to be the
No.1 handset company in the world by 2014. The parent company is the largest in
South Korea with revenue in 2010 of $134 billion. A buyout of Nokia would
launch Samsung into the position as the world's handset leader. LG Electronics,
the 7th largest company in South Korea, with sales of $48 billion, is by most
measures the third largest smartphone company. It has the scale and balance
sheet to takeover Nokia. The only question about the Finland-based company is
whether a buyer would maintain the Microsoft relationship or change to the
popular Android OS to power Nokia phones.
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