This was published originally in the inaugural issue of ‘USP Age’, now no longer in circulation, Volume 1, Issue No 1, November 2003
The first casualty in war is truth, it is said. The real casualty in the increasingly impatient focus on quarterly earnings is the brand with potential. TJ Ravishankar examines how brand companies are likely to respond to the vagaries of a stock market, which doesn’t give a quarter
If Coca-Cola India were listed in India it would have gotten into serious trouble with investors, analysts or to put it simply, Dalal Street. Mercifully, it is a privately held entity and hence faces no piercing questions from equity analysts and the like over the losses it had accumulated, which were estimated at more than Rs.2,000 crore, according to media reports. It would not be surprising if many of the companies that are in similar businesses – businesses built on brands – envied Coca-Cola its private status in India. What a relief to be free of the prying eyes of others!
For a reason. The growth of the stock market, both direct and indirect, since the 1990s, and the regulatory requirement of quarterly earnings have extracted a heavy price; an obsessively intrusive interest from those who move the market, in the way a company goes about its business. Strategy, which is essentially long term, is tested every quarter. And this is particularly damaging for companies whose business is built on brands. Ramanujam Sridhar, CEO of Brandcomm, a brand consultancy firm, says, “More and more companies are being watched by investors, sometimes ever more closely than necessary. This could impact their branding efforts.”
The business of brands is long-term affair, with no certainty of success. Viewing such a business from a quarterly perspective just doesn’t make sense. But that tends to be the typical stock market response. A telling comment on the intrusive nature of the stock market comes from Hoshedar K Press, executive director and president, Godrej Consumer Products Limited: “Companies would be loathe to launch an expensive brand in the last quarter as that could affect annual results”! And one might add, the share price.
The stock market does two things – it allocates capital and is a source of income. Anand Halve, director of Chlorophyll Brand & Communications Consultancy Private Limited, says, “There is a conflict between the stock exchange as a surrogate measure for allocation of capital and as a means of income, especially short-term income.” The problem really is that the stock exchange as a source of income has become the dominant aspect, with stock prices grabbing far too much management attention than they should.
Bill George, CEO of the US-based Medtronic until 2001, now corporate director of Goldman Sachs, Target, Novartis, the Harvard Business School and author of the book, Authentic Leadership, in a signed article in Fortune International, makes a far stronger comment: “Myron Scholes, the Nobel-winning economist once told me straight out, ‘A company’s stock price is the value of the firm’. It is amazing that myths rise to that level.” With the Damocles sword of quarterly earnings hanging over their heads, there is no leeway at all for listed companies. Deferring brands or even shying away from launching them because of capital markets (quarterly earnings) is a possibility.
However; Dalip Sehgal, executive director new ventures and marketing services Hindustan Lever Ltd. (HLL), differs, “I am not sure if quarterly earnings is the issue,” he says. “Marketing plans of companies are normally cast in terms of monthly, quarterly, leading to an annual plan, especially in the case of MNCs which have always gone by quarterly budgets.” And if there has been pressure, this is perhaps indicative of fundamental issues that need to be addressed, but still need not come in the way of making appropriate investments. “We have been investing in new launches in existing business during the last three years and we will continue to do so,” he adds.
While HLL can perhaps make the market listen to what it wants to say, others are not so fortunate. Press argues that the stock market does affect companies because of its own goals and this has a special meaning for last moving consumer goods companies. “The stock market seems to be more interested in quick, short-term gain,” he says. “Slow maturing companies such as FMCG firms are at a disadvantage.” Most of the established brands from listed companies have been in existence for a long time, before the market turned to its long romance with the short. Raymonds, Vimal, Hamam, Thums Up, Titan, Lux, or Sunsilk, to name a few, were established brands much before the obsession with the short-term began. Corporate brands such as Tata, Reliance, Mahindra & Mahindra, Birla, Mafatlal too were built by the 1990s, when the mania over the stock market began.
During the last decade or so, there have been variants and acquisitions galore but few organically grown brands. Jagdeep Kapoor, CEO of Samsika, a marketing consultancy, stresses the importance of building new brands:” To start with companies should concentrate on market share not on share market. It is as important to create organic brands as it is to buy, lest companies forget how to give birth to new brands.” Halve observes that Ayush is Hindustan Lever’s first new brand in 15 years. One simple reason could be that about seven or eight years ago, it used to cost between Rs.5 crore and Rs.6 crore to launch a brand, but it now costs between Rs. 10 crore and Rs. 12 crore.
Will we hen see more new brands emerging from companies that are privately held or funded by private equity or venture capital, rather than from listed companies? The division between the two is deep. One thinks long, if not very long, at least reasonably long. The other thinks short and very short, or at least is compelled to do so. Press admits that publicly quoted companies are on a treadmill to deliver growth in sales and profits quarter after quarter, whereas unlisted companies will be better placed to invest and develop brands. Perhaps we will see more cases like Nirma or Ujala or Killer or Indigo Nation or Dandi or Daksh or Airtel or Maruti or Colour Plus, none of them listed, with the exception of Airtel and Maruti, which built their brands well before their initial public offers (IPOs).
Take Ujala. Funded by CDC Capital Partners, a private-equity fund and Credit Lyonnais, Ujala has been built over 20 years with significant advertising spend. Or take Dandi, salt funded by a successful saree maker from Surat. According to media reports, Dandi spent Rs.39 crore on advertising alone. Nirma, we all know, owed it to the tenacity of one man, Karsanbhai Patel. Amul took years to build, but that is a co-operative venture.
Perhaps this is the future. Even abroad no brands have been built overnight. Some internationals brands that are household name in India took several decades to be accepted. For instance, Barbie was launched in 1959, Sony 1955, Ray-Ban 1937, Cocoa Cola 1886, Pepsi 1898, Maggi 1886, Bata 1894, Gillette 1905, Kitkat 1935, McDonald’s 1937. These famous brands clearly point out that you cannot build brands overnight. You have to keep investing to success in the market place.
This is why people kike Halve see the future being driven by entrepreneurial companies, as they are free from answering to anyone but themselves.
Brand building is not an easy job, as any brand manager will tell you. Patience and conviction, more than staying power; are necessary Brand building has always been and still is an act of courage. The COO of a private-equity funded FMCG firm says, the odds are better in horse racing, except that his private equity fund has been willing to take that risk. More important, the COO is clear that his comply will not move towards an IPO until it is confident the brand-building phase is over and the company is ready to move to the brand-maintenance phase.
Sehgal believes brands always make investments in an uncertain world. In fact, the degree of uncertainty is low today, though investments needed are larger. “We have better measures of advertising effectiveness, benchmarks of what will succeed,” he says. The key is getting a fix on input-output measures, which is feasible because causality between input and output is far better established now. “For us the launch of new brands is a question of finding the right opportunity,” he says. And nothing can really shake you in one quarter: Try telling that to the pharmaceutical companies that did not do well in the last quarter of the last financial year; experiencing a tough time explaining why results did not go the way the market expected.
For a private investor; owner or otherwise, strong brands are a gateway to wealth, their perfect exit vehicle. Ujala’s investors gave it the time it needed to develop into a full-potential brands, as it should be. Ironically, that should be the logic of Dalal Street, with all the talk about wealth creation, but its perceptions clearly lie elsewhere. Perhaps, matters will improve if disclosure of a brand’s value becomes the norm. Tejpavan Gandhok, senior vice-president, Stern Stewart Pte. Ltd. a management consulting firm recommends disclosure of brand values under different scenarios, which will give shareholders an idea of what they stand to gain (or lose).
Not only are companies shying away from launching brands, they are rationalising their existing portfolios. In addition to the pressure from the stock market, the huge advertising expenses involved in maintaining the brand is itself a deterrent to introducing brands. Those particularly hit are small and medium-sized firms that do not have a large portfolio of brands to cushion the unevenness in earnings that may arise from taking a punt on new brands.
Even Sehgal, who otherwise questions the impact of quarterly earnings, concedes that a company like HLL is better off, given its portfolio of brands. The problem really is that the market doesn’t like surprises. But surprises are what the market will get from companies that take the risk and launch brands. George says in the article in Fortune referred to earlier; “There is nothing natural about an earnings chart that rises in an unbroken line. Kids don’t grow that way. Neither do companies.” Wise words worth heeding!
What this means in operational terms is that brand extensions receive full play, with companies becoming more focused on exploiting a reduced portfolio of existing brands. While welcoming the rationalization move, Brand-Comm’s Sridhar sounds a note of caution: “Extensions are cheaper; but many dilute the mother brand’s equity.”
Sehgal is unwilling to accept that rationalisation of brands and brand extensions are ‘caused’ by the intrusive influence of the stock market, ascribing it rather to what he calls strategic choice. But, according to C. R. Sridhar, CEO, SRS-ICON Brand Navigation India Pvt. Ltd., the attempt to ‘milk’ a brand for immediate benefits could well destroy its full potential. What is visible, at the cost of the potential, sways companies that allow themselves to be influenced by the quarterly perspective. Some companies fail even to make the distinction, displaying a suicidal blindness.
The name of the fame is then tweaking the brand, lending it variant features and persuading the customer to see its “newness”. And to succeed even with these tactics, it is critical to communicate this newness. Citing the example of Provogue, Halve comments that the brand was always communicated interestingly, with enough newness every time, be it fabric on one occasion or something else on other occasions. It is not just one more campaign.
While it is nice to talk about ‘out-of the-box thinking’, few have the courage to practice it. In behavioural terms, there is a distinction between entrepreneur-driven firms that seek to maximize the minimum profit, and organised companies that seek to minimize the maximum loss. Halve points out that most brand managers treat their jobs like a government posting and stick to a formula that seems tested enough not to be questioned: three or four promotions, one big commercial and so on, just tweaking the brand here and there. Brand managers became ‘babus’.
Strategy is thus replaced by a series of tactics that pretend to be strategy. In an attempt to build sales and shore up earnings, companies rush to promotions of all kinds, including finance schemes. The pay-off may be immediate, but that’s about all. The Big Three in the US car market realised this after having offered huge discounts and interest benefits in a move to boost sales. Toyota, on the contrary doesn’t resort to such tactics, as it believes they subtract from brand strength.
Readers might recall how years ago when Onida entered the television market it practised a very strict policy of not offering any discount at all. In fact, if any dealer did offer a discount out of his commission, he was simply banned. Onida a was building that aura without which no brand is really a brand. Ditto: Colour plus.
In a sense, the key to the dilemma is the answer to the question of how to operationalise brand equity. Brand Navigation’s Sridhar suggests a way where brand planning is a balancing act between brand management and brand strategy, with a clear demarcation of who should be entrusted with what. While brand managers can be entrusted with the task of brand management, the responsibility for brand strategy should be vested with the top management and no one else. And once a brand strategy (built on its basic characteristics) has been developed, it should be frozen, unless there is a deep and fundamental shift in the market, which calls for a change.
Logically, this demands that there be performance parameters other than commonly accepted financial and marketing goals. Halve recommends that managers be evaluated on how many new ideas they have contributed, not counting variants. Gandhok suggests that companies evaluate everyone’s performance including that of a CEO on the basis of how their actions affect brand value. Unfortunately, the problem is that there are no commonly accepted parameters. One possible way out is holding back a portion of the annual bonus payable to managers, against some transparently communicated medium term measure. Gandhok calls this ‘building a bonus bank’. To be sure, such measures are difficult to develop and install. But they could be the insurance against short-term temptations that can permanently hard a brand.
Finally, says Brand-comm’s Sridhar; we may see sharp contrasts emerging between companies like HLL and Procter & Gamble, which have multi-brand strategies and Britannia, which has consciously promoted an umbrella branding strategy. This actually has meant that Britannia has spent less because of a strong mother-band equity.
In all this it is crucial to effectively communicate to a whole lot of shareholders, each of who has his own expectations. Gandhok suggests that companies need to segment their investors, just as they segment their customers. George offers a categorisation: long-term investors who hold the stock through ups and downs, the retiree who counts dividends to meet expenses, the employee shareholder; the speculator or the short-seller: He says, “The shareholder; in fact, has no single voice. So which voice should you listen to?”
The answer is, your own, which means shutting out several voices that clamour for your attention. You need the strength and courage of a Warren Buffest who says the job of a CEO is to build long-term value.
USP Age magazine 2004
