P&G admits Cott’s right on brand tax

For some time the Cott Corporation has been berating the premiums charged for brands over own-label products, scorning manufacturers’ defences to criticism of their so-called ‘vehicles of value’. Now, an unexpected ally has come to its aid – i

There’s something very odd about the Procter & Gamble memo published in Marketing Week last week. In it there’s a sentence pregnant with implications. It reads: “We’re at the point where marketing support spending is the biggest area of cost disadvantage vs. private label.”

What’s odd about it is that somebody else – somebody very different to the great P&G – has been saying something uncannily similar for a very long time. It has also added its own crusading spin. “The difference between what a retailer pays for a national brand versus the price of a comparable retailer controlled brand” is, it declares, “a brand tax”, a manufacturer tax on consumers.

The self-styled leader of “the brand tax revolution” is, of course, the Cott Corporation. Shortly before P&G decided to warn its troops that it has “some major problems in our current approach to marketing support investment”, Cott president Dave Nichol was putting it in his own delicate way.

Brand manufacturers have “massive, bloated marketing and advertising budgets designed to disguise the fact that they are nothing more than commodities masquerading as unique products,” he declared. “These huge advertising and marketing costs put the masqueraders at a severe competitive disadvantage”.

Now, with its memo, P&G has admitted – privately, if not publicly – that after all, the despised Cott Corporation has a point.

Of course, marketers are used to criticism and challenge. Ever since Vance Packard appeared on the scene, they have faced incessant flak from pressure groups who think marketing is all about manipulating consumers into buying things they don’t really want or need, or which are positively bad for them.

Arguably, however, this challenge is far more important. After all, it goes right for the jugular: the economics of it all. If brands add more cost than benefit, what right have they got to exist? Who are brands really there to serve? Is marketing – the building of the brand equity which P&G’s memo directs all its marketers to pursue – a benefit to consumers? Or a con?

Marketers have some off-pat answers. The brand premium funds R&D, they say. Value is returned to consumers through superior quality and constant innovation. That’s what marketing is all about: New! Improved! The more sophisticated among them also argue that the marketing spend helps generate a guaranteed level of demand without which chief executives wouldn’t dare invest either in innovation or up-to-date manufacturing facilities. By delivering high sales and robust margins, marketing is the foundation stone of economies of scale and ever more efficient manufacturing processes. Far from pushing prices up, it’s actually the key to driving them down. As Unilever’s chairman Sir Mike Perry argues, brands are “a vehicle of value”.

That thesis is now being challenged on many fronts. First, retailers and their own-label suppliers are going all out to close the quality and innovation gaps. Second, there are signs that key links in the traditional brand value chain are cracking. If advertising ceases to work cost effectively, then the marketing budget can’t generate those crucial guaranteed levels of demand. And if new manufacturing technologies no longer require vast economies of scale, then perhaps the marketing budget is beginning to lose its raison d’être anyway.

Besides, if a more efficient business model starts delivering the same benefits without the cost, is the brand still a vehicle of value? Nowadays, Marks & Spencer, Sainsbury’s and Tesco are almost virtual manufacturers who, like Nike, outsource their manufacturing to concentrate on marketing and selling. And, as Nichol points out, their marketing economies of scale give them a huge advantage. If they spend 30m advertising, the cost is amortised over thousands of lines. It’s chicken feed compared with the 25 per cent of net sales that P&G is talking about.

Now a new line of attack is opening up. The vehicle of value argument is just a smokescreen for something much more cynical, it says. Brand equity is usually defined in the textbooks along the following lines: “The additional cash flows generated for a product because of its brand identity”. But, according to Cott, if you look down the right end of the telescope what you see is – the brand tax.

Marketers talk quality and innovation, but in fact the brand premium has an entirely different function. Just as a certain breed of socialist sees taxation as a means of redistributing wealth from rich to poor, so a certain breed of marketer sees the brand as a means of redistributing wealth from consumers to shareholders.

The brand is the source of extra “cash flow”. Cash, that is, that flows from consumers’ pockets into shareholders’ wallets. It serves shareholders at the cost of consumers. And marketers “champion” the consumer inside their organisations, not because they want to serve the consumer’s needs better but because the better they can understand their target market, the better they can hit them.

This line of attack against marketing was recently raised powerfully in the Financial Times by “stakeholder” theorist Professor John Kay. The idea that companies – and therefore marketers – are there simply to maximise shareholder value “is fundamentally instrumental,” he wrote.

“Meeting customer needs is a means not an end… we do not need to have read Kant’s moral philosophy to appreciate the difference between the person who proffers his friendship because he likes you, and the person who proffers it because he hopes to sell you double glazing. Both may buy you a drink but one is admirable, the other repulsive.”

Are some brands a tax on consumers, and marketers a set of repulsive tax gatherers? Judging by the way many marketers have behaved recently, they are. Now, P&G, one of the world’s most formidable marketers, has implicitly accepted the brand tax gauntlet thrown down by Cott. The battle for the future of marketing has truly begun.

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