How to Kill a Brand
One of the most important aspects of value investing that one can learn is the value of a brand. Developing the unassailable franchise requires a lot of work. Tending and grooming the public image to keep a brand relevant and authentic is the most critical task that consumer product managements have before them.
Advertising is not an extravagance. Advertising can set off deep emotional triggers that motivate the consumer to buy from certain companies and not buy others. How does the company stand out amongst a sea of competitors. The best way is to have a memorable presence in the head of the consumer! Shareholders benefit from the results, a growing stream of revenues, improved pricing, stability in downturns, higher profitability, and lower cost of capital.
Advertising is viewed by most shareholders as an expense. In my view, it is a capital expenditure, not terribly different than building a factory or buying equipment to build revenues, but with a very special bonus attribute...a 100% write-off in year one! Rather than a prolonged schedule of depreciation, Uncle Sam participates in the deduction, all in that first year.
Here's a look at someone who is killing a brand, Adidas.
Reebok under Paul Fireman did a lot of squirrelly things, at times leaving its premier brands completely unsupported. Many times through the 90's, as a pain in the butt activist shareholder, I reminded Paul of his obligations to shareholders, not to mention numerous unkept promises. Even Paul, who took some time to catch on, learned his lesson.
Reebok became masterful in capturing the authenticity that Paul had proclaimed, but previously failed to support in its product design, its professional endorsements, and its advertising.
Here's a look at Reebok's advertising spend over the years:
2004 $137 million
2003 $150 million
2002 $131 million
2001 $144 million
2000 $108 million
1999 $106 million
Here is the marketing support that Adidas has brought to the brand in the first half of this year:
2006 $7 million
Reebok orders have plunged 14%. Profit margins are narrower than expected. Retailers are likely fuming. In a never ending battle for shelf space, cutting back on advertising spending destines brands to oblivion.
Adidas is stepping up spending for next year with an incremental $63 million in spending. Looks like Adidas is learning the lesson that Paul Fireman finally did in the late 90's.
Disclaimer: I, my family, and clients do not have a current position in Adidas.