Every light has its shadow
Of all the assets under marketing control, brands are perhaps the most valued. A strong brand attracts new customers, retains existing customers and offers a platform for the introduction of new products. A strong brand can reduce risk by encouraging broader stock ownership, insulating a company from market downturns, granting protection from product failures and reducing variability and volatility in future cash flows. A landmark study by Madden and colleagues confirms that by cultivating strong brand assets, companies not only generate greater returns but also do so with less risk. At the same time, a company’s branding strategies can exacerbate its risk profile, thus endangering revenues, cash flows, brand equity and shareholder value. The history of the Martha Stewart Living Omni Media brand (Box 1) serves as an example highlighting the strategic role that brands play, not just in driving top-line revenue but also in implicating a company’s risk exposure. Given that investors seek to maximize returns while minimizing risk exposure, it is crucial that management proactively considers brand-related risks. The problem is that marketers have only recently entered the risk conversation. If managers are to understand brands as tools for risk management, they need to understand four types of brand risk (Figure 2).
Box 1: The rise and fall of Martha Stewart Living Omnimedia, Inc. (MSLO)
Martha Stewart first appeared on the cultural landscape in the late 1970s as a caterer. She steadily built her reputation as a homemaking guru and expanded with a line of housewares sold through mass-market retailer K-mart in 1987. In 1990, Time-Warner took notice and launched the monthly Martha Stewart Living magazine. A media empire quickly grew and a lifestyle maven was born.
Martha Stewart Living Omnimedia (MSLO) went public in 1999 at $36.88 a share. By 2001, Martha Stewart stood as a cultural icon and her eponymous lifestyle brand was one of the world’s strongest. One short year later, MSLO traded as low as $1.75 in the height of a scandal that eventually landed the founder in jail. MSLO never recovered. It was purchased in 2015 by brand management and licensing company Sequential Brands Group for $353 million, at $6.15/share. Although analysts highlight the benefits of authenticity and intimacy that came with Stewart’s human brand, they also point toward the risks inherent in using a living person as the core of a brand .
Four brand-relevant risks
Brand reputation risk ... is the possible damage to a brand’s overall standing that derives from negative signals regarding the brand. It destroys shareholder value by threatening earnings through negative publicity that exposes the companies to litigation, financial loss or a decline in its customer base. By selecting certain strategies, brands may become more exposed to reputation risk. Extensions into downscale markets endanger a brand’s standing and damage a brand’s quality associations or its perceived exclusivity. Connecting a large portfolio of products with one single brand name and logo can make brands vulnerable to this type of spillover risk. As the piece by Fournier and Eckhardt demonstrates, reputation risk is exacerbated through person-brand strategies, as for Calvin Klein and Martha Stewart. They highlight the importance of consistency and balance between the person and the brand. Misconduct within a company poses risk, also for non-person brands. Consider Uber, the highest valued pre-IPO firm in history. It suffered financial losses and was downgraded 16 % by mutual funds following a series of high-profile reputational crises involving CEO Kalanik and the Uber organizational culture. In a similar way, celebrity endorsements expose brands to spillover reputation risk. Research on the Tiger Woods scandal links celebrity endorsement not just to stock market effects but also to damage affecting the entire companies of the sponsors.
The contemporary marketing landscape with ongoing co-creation, social media interconnectedness and fake news increases reputation risk even more. The article by Berthon, Treen and Pitt illustrates how truthiness, fake news and a “post-fact” culture endanger brands and increase brand risk and proposes several solutions for risk management.
Brand dilution risk ... concerns the loss of meanings that differentiate a brand from its competition. Brand differentiation, more than any other brand quality, drives market share and penetration. Conversely, losses in brand differentiation comprise the first step in the erosion of brand equity. The loss of unique brand meanings negatively affects cash flows because customers might switch to other brands or become unwilling to pay price premiums. The frequency, depth, range and quality of brand extensions increase a company’s exposure to dilution risks. Consider Harley Davidson’s decision to enter the food category and introduce beef jerky: Line extensions serving the current category with new varieties or category extensions into markets not previously served distance the brand from what is unique about it in consumers’ minds and dilute the brand. Nabisco’s introduction of Watermelon Oreos is another example: Focal meanings of the Oreos brand become diluted as the new extension adds additional meanings relating to watermelon flavor that must somehow be accommodated in the brand’s meaning mix. Burger King’s launch of its so-called “healthy” Satisfries, complete with salt and grease, has the potential to obliterate the favorable and dominant brand associations that drive the strength and value of the Burger King brand.
Companies with multiple offerings in a category also risk dilution simply because such brands are more likely to overlap and lack distinctiveness in consumers’ minds. Mercedes’ C-class stands as a powerful case in point. As Chip Walker’s article shows, new brand and line extensions raise awareness but can add risk when such knowledge makes people think worse of the brand. As Monga and Hsu point out, culture and its associated style of thinking is a powerful predictor of how consumers react to brand extensions and companies need to consider culture carefully when leveraging and protecting brands.
Brand cannibalization risk ... leads to sales or revenue losses that accrue when customers buy a new product at the expense of other products offered by the same company. Cannibalization, or intra-brand substitution, is a type of spillover risk and managers strive to minimize competition within product lines. Multiple line extensions within the same category risk considerable overlap in their brands’ value propositions and poorly differentiated brands suffer greater cannibalization. Mason and Jayaram explain the dynamics of cannibalization risk and recommend investigating factors that drive cannibalization, measure the cannibalization effect on existing products and consider organizational implications.
Fighting brands such as Kodak’s FunTime film, designed for “less important” photographic occasions, attempt to defend a company against price-based competitors but can exacerbate cannibalization risk when they substitute other brand offerings. Vertical line extensions into value-based markets, such as Porsche’s introduction of the Cayenne model, incur the same risk. They become counter-productive from a margin standpoint when customers who would otherwise purchase the costlier version trade down to the cheaper alternative. Tesla’s introduction of the Model 3 provides a case in point with investors foreshadowing the erosion of the Tesla brand at the hand of profit declines. Also, luxury fashion houses launching low-price/low-quality fighting brands are entering a slippery slope. Experts generally agree that there can be negative spillover risks to the main brand, although new clients can be cultivated. Outlet channels present a similar dilemma: Louis Vuitton is not available at the outlets, but Burberry and Armani are. The trade-off between reaching more customers and keeping brand values is difficult to balance. Access to upscale markets through supra-branding, as Volkswagen attempted with the Phaeton, is also high risk as this strategy often pushes the brand beyond its natural boundaries.
Brand stretch risk ... reduces a company’s ability to take advantage of new market opportunities, new technologies or changing consumer tastes through the introduction of new, tailored offerings. A main motivation for building a brand is to leverage it, but certain brand meaning characteristics can increase a company’s exposure to brand stretch risk. A brand with concrete meanings has less room to grow and hence greater stretch risk. Coach recently rebranded itself as Tapestry to allow for growth beyond the leather handbags and accessories that have borne the Coach brand name.
Dominant meanings tied to a specific category – such as with Kleenex and tissues or Levi’s and jeans – further limit opportunities and increase stretch risk. A brand can also face growth restrictions through dominant meanings that strain the credibility of new offerings. American restaurant chain Hooters’ decision to launch an airline was ill fated because its dominant association with frivolity clashed with the need for safety in air travel.
Marketers have only recently entered the risk conversation.
New realities enforce the need to manage brand risk
Risk management is not a natural act for brand managers trained in astute execution of the 4 Ps to drive revenues, and contemporary market factors make this more challenging still.
Brands and politics: a risky couple
Anyone familiar with risk management within the world of economics and finance understands political risk as a macroeconomic factor affecting certain markets as a whole: The geopolitical instability in the Middle East, censorship of information in China, or the turmoil in the EU caused by Brexit all pose systematic risks to global brands. What is less obvious is that political risk is increasingly a source of risk to companies and their brands. The politically-charged environment created in the United States around Trump’s presidency has made every news story an opportunity for brand meaning making. Whether unintended or intended, political affiliation has looming consequences for dilution and reputation risks. Movements such as “Grab Your Wallet,” founded in response to Trump’s treatment of women, encouraged a boycott of Trump-branded products and companies associated with Trump. Even distant personal connections to Trump have increased brand risk and destroyed brand value in associated companies. A boycott against L.L.Bean was initiated after Linda Bean, one of the 50 family members associated with the company, donated money to the Trump campaign. The Carrier and Ford brands were caught in the crosshairs of a debate to build a wall between Mexico and the U.S. and shift manufacturing stateside. The pull of brands into the political arena extends beyond reactions to the current U.S. presidential office to a more hyper-charged cultural world. Nike, Adidas, Under Armour and others found themselves in political territory after President Trump decided to take a public stance against NFL players who failed to stand for the U.S. national anthem. Weinstein Productions, The New York Times, National Public Radio’s Prairie Home Companion and Charlie Rose, NBC’s Today Show; a short list of media brands embroiled in nationwide political debates in the wake of high-profile sexual harassment scandals.
What is interesting is that some brands are willingly injecting themselves into this contested environment. They ignore the well-worn advice that brands won’t do well when they involve themselves in ideologies. Politics polarize and most likely alienate a portion of a brand’s customer base. Starbucks felt compelled to react to Trump’s immigration ban by announcing that it would hire 10,000 refugees in its stores worldwide. Lyft stood firmly against the ban on immigrants and made a $1 million donation to the American Civil Liberties Union, while rival Uber took a hit for its seemingly opportunistic response. Managers need to be cognizant of how exposed their brands are to political risk and how social media might intensify the risks before stepping into the political realm. With an increasingly polarized society, it may be impossible for brands to remain untouched by ideologies. Our interviewee Patrick Marrinan stresses that being right for half of the people means being wrong for the other half and suggests strategies for managing increasing social-political risk.
Less control over advertising context
With the growth in digital advertising, brand managers increasingly have less control over advertising placement and context. In the traditional brand-building world, managers controlled media exposure by targeting particular demographics and refining content to optimize brand messaging. BMW carefully placed its Z3 in James Bond movies to emphasize synergistic associations and target audience characteristics between the BMW and James Bond brands. Today’s digital world is different, and placements result from programmatic algorithms driven by consumer histories rather than managerial decisions. Such consumer-initiated ad targeting introduces vulnerabilities. For example, P&G found its brands on extremist websites on YouTube, prompting a $140 million reduction in digital advertising spending.
Brand managers face a choice: They can follow the digital traffic and accept attendant consequences of higher risks and potentially higher rewards, or they can attempt to manage the seemingly uncontrollable by imposing increased vigilance. Abdicating responsibility to machine learning requires ad placement monitoring solutions that minimize brand reputational risk. Managers can also manage risk exposure through a balanced advertising portfolio that combines company-initiated traditional advertising with better control over placement with digital advertising offering better consumer targeting, albeit with less context control.
With an increasingly polarized society, it may be impossible for brands to remain untouched by ideologies.