MARKETING PROTECTION:

A JUSTIFICATION FOR FUNDING OF TOTAL ASSET PROTECTION PROGRAMMES?

Two new concepts could ensure the survival of your organisation.

The first is Total Asset Protection. What is Total Asset Protection and why should we fund it? Protecting the enterprise has previously been a piecemeal activity. Disaster Recovery Planning ensures the recovery of IT systems and telecommunications capability. Business Continuity planning is designed to ensure the continued viability and operation of an organisation in the event of a disaster resulting in the major loss of product or denial of access to mission-critical facilities. Crisis Management Planning goes one stage further, and covers contingencies like product recall, kidnap and hostage or branch hold-up - it. includes issues like adverse publicity. Other related issues include Health and Safety, Environmental Protection, Security and Insurance. Often there are is no coherent escalation process from customer complaint or operational incident or quality defect through to invocation of disaster recovery, business continuity or crisis management procedures and to the declaration of an emergency or a disaster. We are just beginning to see the emergence of convergence of these piecemeal elements into a coherent whole under a single umbrella, which we call Total Asset Protection. Without a Total Asset Protection Plan, the organisation is in peril. There is an 80% mortality rate for organisations that are without contingency plans and that experience a disaster.

An Information Technology Disaster Recovery Plan alone is not a substitute for Total Asset Protection, since the computers although fully functional, will be useless if the production system they control has just disappeared in flames. A Total Asset Protection Plan will therefore cover all key facilities, such as office buildings, computers, communications, production capability and warehouses.

But, according to a joint DTI/APR report, the proportion of companies’ intangible assets (essentially goodwill) to tangible assets have grown over the last 15 years to represent, on average, 70% of their balance sheets during mergers and acquisitions. – A Total Asset Protection Plan therefore needs to cover all other situations from which an organisation can lose its goodwill, image and reputation.

43% of companies suffering a disaster never re-open and a further 30% go the wall later as a result. Businesses can be destroyed by the loss of a critical resource for more than 10 days. Nearly three-quarters of businesses hit by serious fire end up closing.

An example of a business disaster will illustrate the point. Ronson, the lighters and pens group, has international brand recognition. A fire destroyed their Newcastle warehouse. Their insurance claim was £10 million. In May 1997, only 60% was being settled. The company faced additional costs from reorganisation following the blaze. The result of the fire meant an over-all pre tax loss for the year of £1 million, a dramatic fall in Ronson’s share price and severe long-term costs in re-establishing its business.

The second concept, Marketing protection, delivers the justification for Total Asset Protection. To justify the extent of funding for any of the elements of Total Asset Protection (TAP) for any organisation, Business Impact Analysis is undertaken to identify the impact on an enterprise, in cash and non-cash terms, of a disaster. Typically it examines loss of market share, loss of product, cost of restoration (including extra cost of working), cost of fines or other penalties. In addition it will weight "non-cash" losses like loss of image, regulatory non-compliance or political impact. Using this standard approach, it is frequently difficult to justify spend on consultancy, services and products for business continuity, crisis management or other activities within the Total Asset Protection Programme. This is because:

The traditional Business Impact Analysis tends to look at short-term costs and too frequently fails to quantify longer term costs (e.g. lifetime value of customers; cost to regain market share and image). The concept of Marketing Protection takes the argument into a different dimension. It looks at the whole value of the business at stake from a marketing perspective and looks to the techniques of the worlds of advertising and brand management to demonstrate loss potential and justification for spend on BCP.

Seven out of the top ten brands in the UK in the 1930s remain in the top ten brands in 1998. Brands and companies have outlived nations. Smirnoff, the Grand Metropolitan vodka brand, has survived the reigns of the Tsars, Marx, Lenin, Stalin, Gorbachov, and Yeltsin. The USA beer Budweiser is some 130 years old.

The brand has value outside of any single product: Persil, originally a soap powder, was re-launched as a detergent, followed by an automatic version, followed by a low temperature product, followed by Persil liquid and by washing-up liquid.

Keith Holloway of Grand Metropolitan says "we know from recent experience, particularly the Nestlé episode, that the richest companies are prepared to buy other companies for brands that they own for a multiple of 20 or 30 times their annual earnings (perhaps 40 to 50 times their annual marketing costs). The episode Holloway refers to was Nestlé’s purchase of Rowntree in 1988 for £2.55 billion. Tangibles on the balance sheet were worth only £409 million. Even if you added up 10 times Rowntrees’ profits the total only comes to about half what Nestlé paid. Since Nestlé was capable of manufacturing anything that Rowntrees could, it meant that they paid £1.25 billion for the brands and the strategic value that went with them.

Since 1988, there has been continued debate about brand valuation and whether or not brand valuations should appear on companies’ balance sheets. Reckitt and Coleman and Grand Metropolitan have both put acquired brands as assets on the balance sheet since 1988. Rank Hovis McDougal declared, in the same year, that the development of Mr Kipling, Hovis and Mother’s Pride was worth £678 million.

It is no coincidence that, as soon as Grand Metropolitan proposed the merger with Guinness on 22nd May 1997 - a merger which would put the new £24 billion operation sixth among the world’s food and drink companies, just behind Nestlé and Unilever - they announced the proposed new name: GMG Brands (subsequently changed to Diageo). Grand Met’s price immediately rose 76.5p to 591.5p and Guiness’s climbed 86 to 602.5p - the first time they had been above 600p since 1992. GMG was expected to capitalise its brands, which include from Johnnie Walker and Gordon’s Gin: the brands’ stated value could rise from £5.7 billion to £12 billion.

The table below shows the world’s top ten brands and their value brand from a recent survey by Interbrand in association with Citibank.

The World’s Top Ten Brands

So brands and the goodwill associated with a company name have a real value - capable of being destroyed by a disaster and resulting adverse publicity. That value is created by many years of advertising and good experience by the consumers of the product or service.

There are formulae for spend on advertising, market share or sales volume and product profitability and highly sophisticated ways of analysing the effect of advertising after a campaign has finished. Fundamentally, the more that is spent on effective advertising, the more volume that is shipped and (assuming product pricing is correct) the more profit that makes. The more profit that is made and the bigger the turnover, the more the company is worth and the higher the share price. It follows, therefore, that any disaster which adversely affects the attractiveness of the brand or of the good will associated with a company’s name, regardless of its impact on production capability, will impact turnover, will impact profit and will impact the value of the company and hence its share price.

Weight tests have been introduced to test the impact of advertising. These are usually evaluated by comparing the cost of more or less advertising with the estimated change in sales volume times the marginal revenue per case. There is new evidence that successful weight tests can show more sales in the years after the test finished than during the test - that is advertising impact has its own momentum after advertising spend has stopped. In one case, sales volume was up against its neighbours 28% in the second year after the campaign and 8% in the third year. In a summary of 44 BehaviorScan tests, it was found an average increase of 22% in year one was followed by year two sales 14% above average and year 3 sales 7% up. And these effects may spin off onto other "sister" brands.

So, what sort of money is invested in creating brands? An examination of some of the best recent campaigns will illustrate the large sums of money involved.

The "halo" effect of the reputation of one brand can be passed onto another: Virgin, which started as a record company, opened music megastores; moved into airline, cola, insurance and pensions and banking. From March 1995 to October 1997, over £1 billion has been invested in Virgin Direct’s savings and pension products. Sainsburys and Tesco stores have both moved to banking. One of the most important factors in this is that "As popular trust in institutions declines and individuals feel they are faced with ever more choices and even less time to make them, consumers are seeking new partners to help them confront, share and manage the risks they face in their everyday life. In this situation, brands are ideally positioned to fill the vacuum." Researchers discovered that, over the last three years, confidence in Sainsbury grew from "a great deal" or "quite a lot" score of 59% to 74%; in Marks & Spencers from 73% to 83%, in Tesco from 52% to 71% and Boots from 78% to 83%. Other scores include Kellogs (83%) and Heinz (81%). Brands score higher than the police (62%), the judiciary (43%), a local council (24%) and, oddly, a multinational (13%).

The corollary of this is that, in the event of loss of image or reputation through a disaster, market share losses from "negative advertising" could be equally as dramatic and these sums of money would have to be spent in addition to the normal ongoing advertising which has to continue merely in order to preserve market share. These days, volume is often the key to viability: lose volume, and viability is lost. The loss of a brand could mean the extinction of a company. Moreover, the "halo" effect could work in reverse: like guilt by association. Using the argument of Marketing Protection, the justification for spend on BCP becomes immediately obvious and immensely strengthened. When the Mercedes A Class small car proved unstable in 1997, it cost some $900m and 2,000 cancelled orders to recover the position.

Advertising agencies always consider the up-side of the advertising message, rarely the down-side. If the company fails to deliver against the expectations set by that advertising message, the message will work just as powerfully against the company. For instance, advertising for banks which stresses warmth, compassion and humanity is largely counter-productive because it does not match with customers’ experiences and consequently they feel such advertising is an attempt at cynical manipulation: this merely reinforces their antipathy to the bank. "Let the train take the strain" back-fired as thousands of passengers waited for an uncertain, unreliable, dirty and crowded train service. Arguably Kinnock lost the election against Major because the soft focus promotion was simply not credible. All these are inadvertent examples of advertising backfiring.

How much worse the situation could be in a disaster. Commercial Union’s slogan "We don’t make a drama out of a crisis" was re-played to brilliant effect when their offices were devastated in April 1992 by the IRA bomb at St Mary Axe in the City of London. Their Business Continuity Plans worked - but what if they had not? What if they had made a drama out of a crisis? A software company has the slogan "The Integration Company". What if, in a disaster, they failed to deliver - and the message became "The Dis-Integration Company"? What if the Automobile Association, "The 4th Emergency Service" could not cope with its own emergency?

An example of such an impact can be seen from the Perrier water benzene contamination incident in 1990. In 1989, Perrier was the market leader in bottled mineral water, its name synonymous with purity and quality. Perrier water was on the tables of virtually every high class restaurant around the world. sales peaked at 1.2 billion bottles a year. The plant at Vergèzem, near Nîmes, was tooled up for 1.5 billion, with capital investment and personnel to match. After recalling 160 million contaminated bottles and mis-handling the publicity, Nestlé took advantage of the drop in share price, fought of Giovanni Agnelli’s Fiat based group and in 1992 paid £1.6 billion to buy Perrier, giving Nestlé 40% of the French mineral water market. In 1991, Perrier production plunged to 761 million bottles a year, heading downwards: the plant was uneconomic, making heavy losses. Perrier was effectively dead in the USA and in the UK; the French mineral water market, having grown by 10% a year up to 1990, stagnated for over three years. A lifetime investment in promoting the images of purity and quality was effectively written off: all had to be started from scratch.

Moreover, this sort of damage could be inflicted by a third party: Rolls-Royce has a name synonymous with engineering quality - an almost priceless reputation. However, this hundred-year image was threatened in May 1997 when Airbus A330 - 300s powered by Rolls-Royce Trent engines suffered from inadequate lubrication of gearboxes allegedly by defective parts supplied by a French sub-contractor. It cost one airline alone, Cathay Pacific, between US $15.5 million and $19.4 million from withdrawn flights.

When viewed against and advertising budget rather than against the budget of a single administrative department, the sums involved in Crisis Management Planning and BCP seem almost trivial. Product recall plans are readily justifiable to protect reputation and brands and are in place amongst all major companies. Why should any of the elements of Total Asset Protection be any different?

When considering advertising campaigns, how many agencies consider the down-side of the advertising slogan? How can the slogan be turned against the company by a ruthless journalist? Should not that be part of a risk analysis of the campaign? Before the disaster and during each advertising campaign, should not some creative thought go into how that campaign would be developed to mitigate the results of a disaster?

The Marketing Protection approach brings a new dimension, a new urgency and a new justification for a coherent programme of Total Asset Protection. Every Finance Director, every Marketing Manager, every Advertising Agency should be aware of the twin concepts of Marketing Protection and of Total Asset Protection. Every Security manager, Risk Manager, Disaster Recovery Planner, Business Continuity Planner and Crisis Manager should be aware of these concept and apply them to their own (or their client’s) organisation.

©Andrew Hiles FBCI