John Lewis the landlord? Welcome to brand extension nirvana

“As a business driven by social purpose, we have big ambitions for moving into property rental,” Nina Bhatia, the executive director of strategy and commercial development for the John Lewis Partnership, announced earlier this week.

You read that right, John Lewis is going to try being a landlord. The struggling retail giant will aim to build about 10,000 homes in the coming years on locations within the retailer’s existing land bank. After construction, the homes will be rented out and the income used to bolster the company’s precarious revenue stream.

Precarious might seem an odd adjective to hang around a star brand like John Lewis. But, alas, it’s the right one for the job these days. The formerly imperious retailer announced its first ever annual loss of £648m earlier this year and the company has been busy closing a third of its total retail network as Amazon, Covid and a general assortment of 21st Century challenges malign the once brilliant 20th Century icon.

The unlikely move into property makes a lot of sense if you understand brand extension theory, which most well-trained marketers certainly do. It’s one of the few areas of marketing where experimentation, evidence and empiricism mean we have a pretty solid playbook for how and when to extend a brand out of its original category and into the green fields of new possibilities. And in the case of John Lewis, the move from department store to real estate rental looks like a fantastic strategic move.

To understand why you must start with the origins of John Lewis and the category of department stores. It is, to use the technical term, fucked at the moment. Covid has killed off foot traffic and while most department stores have attempted the omnichannel swing to the left, they have found the challenge of moving from brick to click harder than they might have anticipated.

When your core category is booming, brand extension makes little sense because resources – both strategic and financial – should stay close to home. But when you are staring down the barrel of a second year of titanic losses in your core business, but find yourself operating one of the strongest brands in Britain, it’s time to consider the flashing red light on your dashboard that says ‘diversification’.

And brand strength is what this move is all about. Bhatia referenced it when she announced the move this week and made it clear that trust, service and brand equity were at the core of the strategic shift to home rentals. She is bang on the money. The shift from department store to landlord ticks three crucial boxes in the search for brand extension nirvana.

When you are staring down the barrel of a second year of titanic losses in your core business, but find yourself operating one of the strongest brands in Britain, it’s time to consider the flashing red light on your dashboard that says ‘diversification’.

First, the jump is a big one. That is important because umpteen experiments dating all the way back to Aaker, Keller and Loken have all shown the same thing. If you leap far from your original line of business to a completely different category on the other side of the commercial planet you probably won’t damage your brand back on home turf.

I learned this lesson the hard way about a decade ago working for an iconic American DIY brand. The marketers at the company wanted to leverage its enormous following among the trade with a line of industrial clothing. It was far enough from the brand’s core to make it safe, but still looked tasty in terms of sales and gross margin.

But the CEO intervened because he saw the move as “risky”. He demanded something closer to the brand’s core instead. Sure enough, the brand diversified into a sister category, did a crap job and ended up not only failing to make any money, but also losing a smidgeon of trust and equity back home as a result too. The lesson is counter intuitive but essential nonetheless: go long and you go safe. Stay close, and risk brand blowback.

Go long

But going long still hinges on a second success parameter – brand image. While marketers need to look for a distant, unassociated category they also need to find one in which the brand’s existing associations strike a relevant and attractive chord with target customers.

And here, again, John Lewis is in a very strong position. It’s a superb brand blessed with giant awareness and strong associations of being never knowingly undersold, while offering unwavering, first class quality. The bullseye in other words.

Simply writing ‘A John Lewis Home’ at the bottom of a new rental property propels it to a higher level of demand and price insensitivity. That is partly because the presence of the John Lewis brand is so valuable. But it is also a function of a third advantageous factor that makes this new move so attractive: the competition is shithouse.

Just because you can enter a category, and just because your brand adds some value to it, does not mean you should actually extend into that area. Ask Virgin how successful their Cola was back in the 90s. I would argue any brand dumb enough to enter a category dominated by Pepsi, Coke and private label deserves to have its ass handed back to it, with a straw.

The lesson here is you should pick your fights. Look for categories that you can not only enter, but, once there, dominate thanks to weaker, smaller incumbents.

John Lewis brings salience, value and quality to its rental proposition. But it also brings those advantages to a category replete with anonymous operators that have close to zero brand equity to counter them. Name me a famous, trusted property rental company? Me neither.

John Lewis’s diversification strategy smacks of fanciful thinking

At this point your average marketer, the kind that opines on marketing after three pints and has very little else to lean on other than the bar, brings up the risks of hurting the core brand in the eyes of customers if the new diversification fails.

But it turns out, with a few caveats, that this concern is almost entirely bogus. I remember spending a morning at a French university with the then CEO of Tag Heuer, Jean-Christophe Babin. Babin was just about the most dynamic and entertaining CEO on the planet at the time and he regaled the MBA class that morning with his mission to diversify Tag Heuer from watches into other categories like phones, leather accessories and jewellery.

When he finished almost every student asked about the risk to Tag Heuer of failure. For the first two or three questions Babin answered politely. But eventually he grew exasperated and exclaimed to the class: “Why? Why always the focus on the failure? What if we win?”

Learn from Ferrari

Babin would go on to lose the brand extension battle, but win the ultimate war. None of his brand extensions were especially successful. But none did any damage to the Tag Heuer brand.

And that is very much the lesson of brand extension – despite what the untrained marketing manager (now on his fourth pint) might claim in the pub. The data is clear: there is relatively little risk of John Lewis building these new homes and their failure, if they turn out to be uninhabitable or unpopular, coming back to hurt the brand in the department store category.

If you need evidence to make this point consider Exhibit A, Scuderia Ferrari Forte: a new fragrance for men. The Eau de Parfum carries the emblematic prancing stallion and is “dedicated to a natural winner, a man who loves competition, power and exclusivity”. It’s currently available online for twenty quid and smells like a disco in Grimsby.

If we subscribed to the ‘brand extension damages the core’ thesis, this olfactory abomination would do untold damage to the Ferrari brand and its subsequent commercial appeal.

A man of a certain age and inclination who had spent an indecent amount of time ogling the new 296 GTB and its hybrid electric powertrain and V6 engine would suddenly pause, shake his head at the disgrace that is Scuderia Ferrari Forte, and then announce to the world: “That poorly made men’s fragrance has completely changed how I now feel about Ferrari’s ability to make a supercar. I am no longer interested.”

People, of course, are not that stupid. They know that an inability to make a decent fragrance has nothing to do with the Ferrari’s total capability to build supercars.

And, back to Babin’s original point, I have deliberately picked an example of a shithouse extension. Too often we forget that many brand extensions succeed. Indeed, their success is so extreme and embedded they are long forgotten as brand extensions and are seen instead as the dominant core of their respective categories.

There is relatively little risk of John Lewis building these new homes and their failure, if they turn out to be uninhabitable or unpopular, coming back to hurt the brand in the department store category.

Many of us shave with Gillette shaving cream despite the fact that making sharp blades never gave Gillette any formal capability to make moisturising skin foam. We use Nivea sun lotion this week on the beach despite the fact the company had no original expertise in sun care. We hire Chubb to collect our cash every Friday even though forging small metalwork pieces has no obvious link to driving vans filled with money. Only brand equity makes any of these examples successful.

And stories of success are important because they underline perhaps the biggest advantage of brand extension – its ability to grant eternal life to a few lucky, adventurous brands. Almost every category will eventually desiccate and disappear. Without brand extension so too would the brands within it.

Apple would have disappeared around 1980 when the fad for self-made circuit boards ended. Nokia would have gone out of business when timber exports from Finland became uncompetitive. Lamborghini would have faded from existence when Italian farmers realized the foolishness of an Italian made tractor. Virgin would have disappeared along with the rest of the record business.

Look at the long, long, long of it and it is clear that the biggest advantage of building brand equity is not price premium or intangible asset value. It is the creation of a magical portal that enables a brand to teleport to other places, thus avoiding imminent extinction as their original home planet ticks down to implosion.

Embracing ‘good scary’

So, why do we not see more brands doing more extension? A lack of downside and the apparent enormous upside should make it a business no-brainer.

Well, there is a catch. But not where you might expect it. While consumers are open to brand extensions and forgiving when they fail, the same cannot be said of internal resources. The real risk of brand extension is the draw on funds, people, advertising spend, R&D and all the brain cells and precious minutes of the leadership team.

These resources are incredibly limited. And they become even more invaluable when a company is in the shit. Opening up a new front with new products and challenges and competitors and channels is exactly what many companies don’t need when their core category is dwindling or under attack.

Again, it’s another reason to step back and admire Ferrari, and their fantastically bad perfume. The Italian luxury brand has no direct involvement in any of the fragrances or cameras or toys or skis that it sells. Everything is made under license. Ensuring that Ferrari can avoid the internal distractions of extension while reaping all of its outrageous fiscal advantages.

The real risk of brand extension is the draw on funds, people, advertising spend, R&D and all the brain cells and precious minutes of the leadership team.

And – make no mistake – they are outrageous. In a typical year Ferrari will generate a quarter of its sizeable revenues from products other than cars. Almost all of them designed, made and sold under license. And unlike all that pesky supercar revenue that has a mass of gigantic costs associated with it, the best thing about licensing income is that it usually comes at a 100% gross margin. Pure money. The purest you will ever see on a P&L. So, good it’s scary.

Seen this way, the move into property makes a lot of strategic sense for John Lewis. Their own category is challenged both in terms of short-term growth and long-term longevity. The new target category is filled with unknown, neo-commodity rivals that hardly even qualify as brands. And John Lewis brings big brand salience, associations and trust that work beautifully in this new, very vulnerable category. And even if they end up cocking up their rentals the blowback will be limited, perhaps non-existent in their department store business.

The only concerns are with resources and strategic focus. In a decade where all eyes need to be on revolutionising and saving the department store model for a new generation of British shoppers, the key question is whether John Lewis can afford to expend so much on such a new business at such a fraught time. The company needs new, diversified revenue streams – I get that – but it also needs all hands on the till.

But perhaps the company has no choice. Like a thousand businesses before them, John Lewis now realises that staying put exclusively in retailing is probably more risky than pressing the red button of diversification and jumping through the magical, dangerous, critical teleportation door that just opened up in front of them.

Founder of the Mini MBA in Marketing and Brand Management, Mark Ritson is the PPA 2021 columnist of the year