What Is a Corporate Umbrella?
A corporate umbrella is a large, generally successful brand name that oversees smaller companies belonging to the same corporation. It adds structure and credibility to the smaller brands without needing to make key organizational decisions regarding products and services. This allows the subsidiary to distinguish itself from the corporation, but with the financial backing and support of a much larger company.
Many large companies employ a corporate umbrella strategy to diversify revenue streams and realize greater profits. For example, Procter & Gamble (PG) sells various products under different brand names like Bounty paper towels, Crest toothpaste, and Downey detergent. Each name brand operates independently of Proctor & Gamble but is also part of the larger company.
- A corporate umbrella is a large brand name, or company, that oversees smaller companies belonging to the overall corporation.
- A corporate umbrella is most often structured as a parent company and its subsidiaries.
- The subsidiaries under a corporate umbrella benefit from the brand name, financial backing, and support of the parent company.
- A corporate umbrella allows a parent company to diversify its business and generate larger profits from multiple subsidiaries without having to be involved in its day-to-day operations.
- Consumer staples companies commonly use a corporate umbrella structure.
- Risks associated with a corporate umbrella structure include the parent company being negatively impacted by any adverse situations regarding its subsidiaries.
- If a subsidiary under a corporate umbrella is performing poorly or causing other issues, a parent company will usually sell it.
Understanding a Corporate Umbrella
A corporate umbrella is employed to raise the credibility of smaller brands launching new products and services. In doing so, the subsidiary can target a larger customer base or audience previously unaware of its products and services.
Transferring brand value to the smaller company also creates synergies for the corporation. If different divisions improve their brand equity and monetary situation, the large company reaps those rewards. They no longer have to devote greater financial and marketing resources to establish a positive reputation for the umbrella brand.
Consumer staples companies often use a corporate umbrella strategy to manage and support different products used daily. Some popular umbrella brands include Unilever, Pepsi (PEP), and Coca-Cola (KO). For instance, Pepsi manages the operations of its core soft drink business but also oversees and promotes snack food produced by Frito-Lay.
It is common for the average consumer not to realize that a specific brand name is actually a subsidiary of a larger, parent corporation. Sometimes the brand name of the subsidiary is so well known, a consumer may think it is its own company. For example, Procter & Gamble owns 65 brands, a majority of which are well known to consumers.
Investors, of course, are aware of the parent companies and their brands, as an investor can only purchase the stock of the parent company, whose performance depends on the performance of all of its subsidiaries.
Disadvantages of a Corporate Umbrella
Corporate umbrellas offer large corporations many synergies but some risks still remain. It becomes difficult for the larger company to manage all of the moving parts of the corporation and the individual brands.
If a subsidiary fails to sell a product or becomes a victim of a scandal, it can be a poor reflection of the corporation. This can result in lost sales, a drop in share price, or a more drastic move, like changing management. In the end, the parent company is the one held responsible for the actions of its subsidiaries.
Having dissatisfied customers with one brand can impact the sales of other products sold under the corporate umbrella. Here, the negative brand equity isn't confined to just one company but many. For this reason, the corporate umbrella strategy requires a company to be attentive to the quality of all its products and people. Otherwise, customers and target audiences will begin to associate the corporate brand and its subsidiaries with poor service.
If a parent company is struggling with a subsidiary within its corporate umbrella, it will most often sell it. The divestiture can take many forms but can be sold to another parent company of a separate corporate umbrella or to a private equity firm that believes it can turn the fortunes of an ailing subsidiary around.