Experts are undecided as to how consumer confidence will fare in 2007. But investment in your brand may be the key to mitigating the risks ahead. Words by: Claire Oldfield.
It takes a bold man or woman to call the economy. But David Haigh, chief executive of Brand Finance, predicts Britain is about to enter a recession. Speaking at the latest August Equity Deal Club event, he said: "There will be a recession in the UK within two years and valuations will be reflected in this. Strong brands will help companies survive - or do better. That is why companies should concentrate on the brand." The risk, the concludes, is in paying a high price for a consumer focused business ahead of an economic downturn.
His pessimistic outlook is not shared by everyone, however. "People say we are going to fall off a cliff, but we have not seen it yet," says Marc Gillespie, a partner at Clearwater Corporate Finance. He cites good employment levels, a housing crash that consistently fails to materialise and the availability of personal credit as contributory factors.
"Stable but not brilliant" is how August Equity investment manager David Ramsey describes the market. "Consumer spending is forecast to grow in the region of 2 to 2.5 per cent in 2007, some way off the '97 and '04 peaks of near 4 per cent." Tom Howard of PricewaterhouseCoopers in Leeds agrees: "Consumer confidence is holding up well - but it is fragile."
For Richard Krajewski, a corporate finance partner at KPMG, the test will come over the next four weeks. "Before you think about next year you must first think about Christmas. There is a general expectation that it won't be a cure-all for retailers."
A belief in the power of brands to withstand economic shocks underlies so much of the effort that goes into generating them. This goes way beyond Christmas. The best brands are, according to Gillespie, able to really distinguish themselves in a crowded market and create an aura surrounding what they stand for. And while it may require constant nurturing to turn a business into a brand, it is a process that adds significant value.
Brands flourish during good times and have a reservoir of goodwill to fall back on in tougher times, ensuring any fall is softened. "Strong brands give a degree of confidence," says Howard. "And if consumer confidence is falling, that acts as a buffer for the brand owner."
But what constitutes a strong brand? Some, such as Gucci, have been rejuvenated through recent product developments. Others, such as Tesco, have evolved to become market leaders in domestic and overseas markets. Stella Artois continues to demand a premium by being "reassuringly expensive". Then there are the new brands - smoothie company Innocent, for example, has tapped into a perceived demand for healthy living. Its success is dependent upon being utterly clear about its market position and assiduously developing its brand credentials.
Consumer brands are becoming increasingly popular sources of investments for the private equity community. Companies such as Fat Face, GHD, Farrow & Ball, Inter-flora and Molton Brown have all changed hands recently. Each has a clearly defined set of values in the eyes of the consumer and has an ability to command a premium against competing products. Their potential is built on these foundations.
Brand developers spend a lot of their time considering effective ways of stretching and developing their brands.Look at Simple: it began life as a bar of soap and is now a whole range of personal care items. Then there's KitKat chocolate. Once a simple two- or four-finger snack, it has extended the range and flavours and even launched ice-cream versions. Gucci is another example of how diversification of products can pay dividends. Originally a designer clothes manufacturer, the company now sells perfume and sunglasses.
Strong brands are also those that the consumer connects with on some emotional level. You know you have got a strong brand when you try and get your friends to do it or try it," says Gillespie. For Ramsey this is the key to a strong brand. "Brands have to communicate a clear message to the consumer they are targeting. They relate with customers on an emotional level, frequently allowing them to charge a premium over the innate value of the product or service benefits," he says. "It is through the relationship a brand builds with its consumers that opportunities to grow the business are born."
Ramsey believes the next wave of investment in brands will be about identifying those that are focused on niché customer bases with strong growth dynamics or those with an opportunity to stretch beyond existing product ranges or geographies. This can be applied to orphan brands buried inside the locker of a multinational or heritage brands in need of a revival.
So what are the opportunities for investment in 2007? Ramsey says that a good investment decision fundamentally comes down to three things: "It is about understanding the market potential, a brand's ability to financially exploit that opportunity and your ability as an investor to buy into the opportunity at a realistic, but sensible, level."
Ramsey points out that there are a number of specific groups that also need to be targeted - for example, the grey pound and new mothers, both of which are more affluent than in the past and have a degree of homogeniety in spending patterns. Finding brands that appeal to these new and evolving demographics is one of the keys to a successful investment decision. "You have to look at trends and focus on trends," says KPMG's Krajewski. "For instance, the grey pound, people who are spending on children, children's safety. It's about having the right product and designing it right."
More generally, Ramsey anticipates that there will be more sales of underperforming assets from within brand portfolios in the coming year. He also anticipates an increasing appetite for luxury, convenience, health and leisure brands. Gillespie agrees: "There is a lot of private equity interested in strong brands and there will be transactions in 2007." He predicts the hot investment areas of 2007 will be clothing, leisure and food.
Ramsey remains confident that a strategy of identifying the strongest brands is a smart one for developing sustainable businesses during good times and bad. "The real strength of good brands compared with non-branded products and services, is that they offer you stronger margins, better upside when the market is strong and in a downturn they are more defensible," he says.
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