It’s been an extraordinary few weeks for the great branded companies that are part of our daily lives: High street chemist, Boots — home of No 7, Soltan and your local pharmacy —receives a £10bn bid from the private equity firm KKR. Next day, the CVC-led private equity consortium resumes discussions with the Jamie Oliver-backed Sainsbury’s for a similar sum. Next day, Cadbury Schweppes announces the break-up of its iconic and eponymous confectionery business from its soft drinks arm to head off activist investor Nelson Peltz. Then, Burton’s Biscuits is sold by one private equity firm to the next.
This growing number of private equity deals is providing a steep learning curve for both vulnerable branded businesses and for the private equity houses on the acquisition trail. Indeed, for both brand managers and fund managers, this flurry of activity is changing the fundamental modus operandi for both parties In the initial major deal frenzy of the 1980s, when Nabisco first fell to KKR, the "barbarians at the gate" meant little to UK brand managers. In fact, we probably thought it was not so much a film about Wall St acquisitions but another invitation to hospitality at Twickenham.
But now, for the iconic, defining brands of generations of British marketers, there’s a fundamental reassessment of corporate risk and the brand lifecycle. As a young brand manager, I was taught the truths of long-term brand stewardship/ continuous advertising, product excellence, great value, retailer partnerships and so forth — all working fluidly together to build long-term brand equity. "You are the guardian of this great brand for a short and privileged period in its history. Your job is to leave the brand in stronger health than when you inherited it," and so on. There was always an annual budget to deliver — but it was a long-term game — measured by those infuriating long-term intangibles (brand equity, consumer loyalty) that mystified our finance colleagues because they weren’t transparent numbers on the balance sheet. Intangibles, not tangibles. "Built to Last" was best practice in brand management, as well as required reading. This long-term prudence may have driven too much wariness of bold innovation – but it rewarded the City with steady performance and reliable dividends, and in turn it rewarded the consumer with steady product improvement and reliable performance – and so it defined the job of the marketing director. Now, there’s a totally different attitude to debt and risk. Companies with 100 years of consumer heritage are sitting on assets just waiting to be leveraged. This recalculation of balance sheet risk punishes prudence and timidity. It’s not necessarily a bad thing – indeed some blue-chip dinosaurs will deservedly become extinct in a faster, more dynamic world. However, private equity demands the exploitation of this carefully nurtured consumer loyalty, the short-term monetisation of long-term brand equity to drive the three-year returns that feed the funds. So, like it or not, rightly or wrongly, this change of pace redefines the role of marketing director: from development of future brand equity to exploitation of historical brand equity. It’s a short-term game with profound long-term consequences.
And at the same time, the simple fact of the surge of activity changes the rules of the game for private equity investors in a way they have yet fully to understand (because, again, it’s those fluffy intangibles that are so difficult to measure). Brands build a long-term relationship with their consumers based on trust, on transparency, on a shared historical relationship. Consumers, not companies, own brands. Brands exist in the minds of real people, not on the fixed asset line of a spreadsheet. This relationship demands an openness and understanding from brand owners. In the past 20 years all the great multinationals have realised that consumers want a relationship with the brand: "Tell me where it’s made; tell me the origin of your ingredients; help me understand your trading practices; where can I write to you or call you; who owns you" — and if you don’t engage in those relationships, there’s a consumer boycott or an activist blog just waiting to happen. Yet, ironically, those much chastised multinationals now seem so approachable, so transparent.
The great thing for consumers about public companies is they’re public: anyone can see the published accounts, call the helpline, understand about the companies’ social or environment policies. They can also freely buy shares in that company and put resolutions to the AGM. But, with private equity – it’s, er, private. And as the private equity firms will realise in the coming years, you can’t own great chunks of British consumers’ daily lives without inviting them in to know more about you: Boots, Sainsbury’s, Cadbury’s, Burton’s – great family icons we know and love. The new generation of corporate owners will need to embrace some of the tradition and values of their acquisitions to be rewarded with the loyalty and affection of their consumers – unless, of course, they don’t plan to own them long enough to care.
Andrew Harrison is chief executive of RadioCentre.