Risk Management

Don’t Let Branding Burn You

A strong product identity is wonderful--until something goes wrong. But there are ways to temper the volatility.
Russ BanhamFebruary 1, 2000

In the frenzied world of beverage marketing, a contamination scare can quickly turn today’s top drink into tomorrow’s sour aftertaste. So even as South Beach Beverage Co. works overtime to solidify its SoBe brand as a big-time name in health drinks, it faces a second challenge that is almost as important. It is investing heavily to make sure the new name isn’t ever besmirched by a tainted-product case.

“We’re a virtual company with one asset: our brand,” explains Norm Snyder, CFO of South Beach, based in Norwalk, Connecticut. “We don’t own bricks and mortar or machinery or hard assets. My mission, in effect, is to protect our brand promise of quality.” So his department spends heavily on quality control, for example, working with a flavor house and co-packers to analyze each batch of SoBe. “It’s expensive, but given the risk to our brand, well worth it,” he says.

SoBe, with $170 million in 1999 revenues and its sights set on topping $250 million this year, competes among healthful refreshment beverages, a product category that has seen more than its share of broken brand promises. In 1996, Odwalla Inc. was at the center of a case of E. coli contamination. More than 60 people became sick and 1 person died from drinking the Half Moon Bay, California, company’s unpasteurized apple juice. And who can forget the shock a decade ago to Perrier, after reports of trace amounts of benzene in bottles of its water turned that drink into a pariah almost overnight?

Certainly, there is much good derived when a company cultivates name-brand status for a product: that intangible quality whose value is realized when consumers loyally order a “Coke” or “Kleenex” or a “Dell.” But with that brand recognition comes an additional risk that is not experienced by the companies trafficking in nonbranded items. With the wrong kind of publicity, your brand becomes a target. And it is in finding ways to reduce this risk that many CFOs — already increasingly active in the brand arena — are leading the charge.

The downside of branding is often ignored in a hot new product’s rush to capture market share. Typically, says brand guru Duane E. Knapp, president of BrandStrategy Inc., in Seattle, and author of The Brand Mindset, brand equity managers are frequently sales and marketing executives who focus on short-term growth, and can miss long-term risks from misdirecting the brand asset. “Focused on quarterly revenues,” he says, “they may unknowingly sacrifice the integrity of the brand for quick financial gain.”

In Good Hands with Deerbrook
Who better, then, to oversee brand risks than the CFO, or a corporate risk manager reporting to the finance chief? “As a company’s financial adviser, the CFO should be focused on growth that delivers against the brand promise, and not growth for unit sake,” Knapp explains. Raymond Perrier, global director of brand value management at New York­based consulting firm Interbrand Inc., agrees, arguing that “the CFO must live the brand in every decision” — especially about how to reduce brand volatility.

Many brand-related problems that explode to hurt companies reflect plain old marketing mistakes, operational problems, or sheer bad luck. A plane crash tars the reputation of an airline, or a serial killer chooses bottles of branded pain reliever to poison and replace on store shelves. But there are steps that can be taken to insulate a company from some exposures associated with having a recognizable brand.

One such form of brand insulation involves multibranding or cobranding. Even with one of the most powerful names in the financial services industry, for example, Allstate Insurance Co. holds down risk by maintaining multiple brands. For example, the company sells nonstandard automobile insurance in the United States under the Deerbrook name, and in Canada uses the Pembridge name. Through Morgan Stanley Dean Witter, Allstate sells annuities under the Northbrook name, and through banks and broker-dealers it sells under the Glenbrook name.

Why not simply call it all Allstate? Mainly, “because a multibranding strategy enables the company to offer different value propositions in the marketplace,” explains Tom Wilson, former CFO of the Northbrook, Illinois-based insurer, and currently president of Allstate Life & Savings. “When people think of ‘Allstate,’ we want them to have a very specific impression of our agents, who are located in their communities to provide personal service,” Wilson says.

Still, there would be an added benefit if one brand encountered problems. Were Deerbrook, for example, to suffer a public-relations disaster or highly publicized losses, the core brand would be far less affected. In short, Allstate’s branding strategy has at least some risk-management elements.

Brand risks can be acute when a company extends branded products to other markets or to recently acquired companies. Colgate-Palmolive Co., for example, frequently follows cobranding strategies when buying companies overseas. Although the company insists its branding philosophy is driven by marketing and not corporate risk issues, its cobranding strategy provides both benefits.

The Chief Financial Lizard
Early on, CFOs looking to reduce brand volatility must understand the product as the consumer does — so they know what brand promises are being made and, hence, what the vulnerabilities are. In one case, Interbrand “worked with the CFO of a bank whose marketing department wanted to spend more money on advertising to build the brand. Our research, however, revealed that the bank’s customer service was shabby,” recalls Ray Perrier. “Instead of pouring money into advertising, we advised spending it on employee training. Had not this CFO understood and lived the brand, the wrong decision would have been made.” Knapp touts the benefit of consumer surveys for helping create an understanding of brand image.

As part of its brand-protection strategy, South Beach Beverage identified the impressions it wanted to produce among buyers of its SoBe beverages, a line that mixes health-associated herbs, such as echinacea and ginseng, with various juices, soy milk, and teas. “Our brand promise is a beverage that is, first, refreshing, and, second, something good for you,” says Snyder. “We’re hooking into the zeitgeist, promoting a fun, healthy, hedonistic beverage. Kids collect our bottle caps and bottles, which feature our trademark lizard.” SoBe’s lizard is ubiquitous, appearing also on the equipment and clothing of skateboarders, freestyle skiers, and other extreme-sports fanatics. Indeed, at the company, Snyder is customarily referred to as the CFL — chief financial lizard.

“To build the brand’s armor, you need to invest money in personnel, equipment, relationships, insurance, and education,” according to Snyder. “We also have a disaster recovery plan if something goes wrong, from proper disclosures to the parties that must be identified to a committee in charge. All this costs us $2 million to $3 million a year, but as you grow, that goes up because you have a bigger asset to protect.” Insurance companies generally don’t make brand insurance available, although policies covering various brand-related problems are common. South Beach, for example, has product-recall insurance from Chubb Group, which covers the cost of advertising, bulletins, corporate communications, and the like, in case there are brand-related problems.

Ironically, SoBe’s cult status itself presents something of a brand risk for the company — especially in a time of skyrocketing sales. “The challenge is to go mainstream without making it look mainstream,” Snyder confides, noting that sales were a mere $13.2 million in 1997.

Odwalla’s Tale
Insulating the brand is vital, because winning back market acceptance is often nearly impossible. Certainly, the Perrier brand has never been the same. The company, since 1992 a unit of Switzerland’s Nestlé, only now is “slowly regaining the Perrier brand of bottled water, sales of which are growing 6 to 8 percent a year,” says Kim Jeffery, president of Greenwich, Connecticut-based Perrier Group of America Inc.

Still, the U.S. subsidiary has benefited significantly from having installed a multibrand strategy. Its brands include Poland Spring, Calistoga, Oasis Water (in Texas), Zephyr Hills (in Florida), and Arrowhead (in California). Before the benzene incident, Perrier water sales accounted for 15 percent of the U.S. subsidiary’s revenues. Today, they account for only 3 percent. “When the Perrier brand was tarnished, we suffered a significant setback,” says Jeffery. “But thanks to our other brands, sales for the U.S. subsidiary have grown from $600 million to $1.5 billion since 1990.”

“The actual physical cost of the recall and relaunch globally was in excess of $250 million,” he says, acknowledging that the Perrier brand’s revenue is now 40 percent smaller than it was in 1989. “But remember that it went to zero right after the product recall.”

The road back has also been bumpy for Odwalla since 1996, when the fruit-and-vegetable-juice marketer watched its once-skyrocketing sales plunge 90 percent. Only in the past year have sales exceeded the levels that existed before the recall.

Odwalla attacked its problems early by spending to rebuild the brand, electing during the crisis to “flash” pasteurize the company’s juices, a process that removes bacteria and other contaminants, but is less harmful to vitamins and minerals than traditional pasteurization. It was a costly step, however. “Although we were contending with litigation and the operational cost implications of the crisis, finance backed the decision to invest in the equipment to leverage our brand,” says Jim Steichen, senior vice president/finance and CFO.

The company, which had $68 million in fiscal 1999 revenues, has also initiated an expansion — adding 12 states to the 8-state region it sold in before the recall, and to some extent bypassing the new local competition that sprang up as a direct result of the recall. “I think the fact that we were completely up-front and genuine in our expression of sorrow helped us to draw on existing goodwill in our main markets,” says Steichen. He says he hasn’t “quantified the impact on the brand financially, because a lot of things happened that made such quantification difficult.”

While the flash-pasteurization process turned out to be a significant capital expense over the years, Steichen says it was well worth it. “We have regained consumers’ trust in our brand,” he says. “Isn’t that what it’s all about?”

Promises to Keep

Some steps companies can take to reduce brand volatility:

  • Learn what qualities make your brand distinctive to the market.
  • Study the possible exposures from a “broken brand promise.”
  • Invest in making sure that the manufacture of your product or the delivery of your service reflects your brand promises.
  • Prepare operations people and company spokespeople for contingencies, and review the purchase of recall insurance or related products.
  • Consider some level of multibranding for defensive purposes.

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