A religion that’s hard to swallow

SBHD: The cola mega-brands may be spending billions on star endorsement to win market share, but are consumers – and marketers – disillusioned with soaking up the costs of image ads and becoming converts to a philosophy of quality without brand tax?

Thanks to Pepsi we now know that Cindy Crawford’s marriage to Richard Gere is over. Crawford was in London last week to launch Pepsi’s latest global marketing and advertising push and her revelations about her love life promptly swamped any news about Pepsi.

This was a pity because Pepsi was making a big announcement. After all these years, only now are the much-hyped cola wars truly going global. In 1993, less than six per cent of PepsiCo’s operating profits came from international sales, compared with 79 per cent of Coca-Cola’s. Now, after a $2bn investment in an international bottling plant and distribution, Pepsi is really gunning for global growth.

The ad launch was intriguing for another reason. While Pepsi executives are aggressively attacking Coke, for the first time in years they are also having to watch their backs. Wayne Mailloux, President of Pepsi’s European drinks division, gave a huge compliment to minuscule rival Virgin by starting his presentation with jokes at its expense. And he went out of his way to boast that, despite competition from Cott-supplied own-label colas, last year Pepsi-Cola’s UK sales fizzed up by 13 per cent.

What he didn’t say was why. One suggested reason is that he’s been cutting his prices. Normally, two-litre bottles of Coke and Pepsi retail at around £1.05. But in the run up to Christmas, Coke was down to 65p in Asda and 79p in Sainsbury, while Pepsi was selling at 75p just about everywhere. Prices like this, comments Virgin Trading’s James Kidd, are “mind blowing”. They show how “horrific the degree of slush under the margin is”. But now, thanks to the likes of Virgin, he adds: “Consumers are having to pay less of a brand tax on consum- ing cola.”

Now, brand tax is a fascinating concept. It was first coined by Cott chief executive Gerald Pencer, when he warned that consumers were no longer prepared to pay the brand tax, “the extra costs of hiring rock stars and the like to promote and sustain a brand’s image”. Slowly it has taken on a broader meaning – the idea that by charging consumers excessive prices (whatever “excessive” means) firms are effectively using brands to unfairly redistribute wealth from consumers to shareholders.

Marketers hate him for saying it, but Pencer had a point, as Unilever chairman Sir Michael Perry acknowledged in his Advertising Association President’s address last year. Then he attacked “consumer sceptics” and City “spin doctors” alike for swallowing the view that “brands are just about high prices and consumer exploitation”. (Consumer sceptics think it is outrageous, while the City and Wall Street think it’s an excellent idea.)

The question is, how many of his audience of marketing executives secretly agreed this is precisely what brands are for? If they did, they were part of the great brand tax heresy.

Like all the most powerful heresies, this one has a very large element of truth. Brands do command premiums and they do return higher margins. But instead of seeing brand premiums as the net result of organisations’ successful attempts to meet consumer needs and wield more power within the supply chain, the heretics start with the brand premium and work backwards by asking “how can I get consumers to pay more for this product?” The brand premium is seen as the mark-up created by clever marketing.

Take lager. UK lager marketers have responded to chronic over-capacity and rising excise duties with clever ads that say absolutely nothing about the product. They use ersatz innovation that puts “me-too” liquids into tiny, over-designed bottles with artificial authenticity and breathtaking prices. They price their main distribution outlet, the pub, out of existence and by positioning ordinary lager as “premium”, consumers they make pay three times the Continental margin.

This is an example of brand tax heresy at work. It is dangerous. It fuels inflated expectations in the City. It earns the hostility (or the boredom) of consumers. And it destroy markets.

Luckily, more sophisticated companies are realising the error of their ways. They are going to consumers on a popular tax-cutting platform, not by discounting where there is a straight trade off between price and quality but, as one chief executive recently described it to me, by “returning value to the category”. This means passing on the benefits of organisational cost savings and investing heavily in new technologies, new materials, new processes and new channels – without upping prices.

True believers know that, in the long run, returning value to the category develops markets and generates far more profit than trying to milk it for all it’s worth.

The Japanese never went in for brand tax marketing. They were always true believers. They transformed the consumer electronics and car industries. P&G is doing it with it everyday low pricing. Murdoch is doing it with national newspapers. Walkers is doing it with crisps (Walkers Crisp prices have been frozen for two years but investment in quality has been driving ahead). Sainsbury and Virgin are doing it with colas.

Of course, the dividing line between brand tax cutting and brand taxing strategies are not always clear. It is easy to slip from one to the other as conditions change – just look at colas. Which is why Pencer should be thanked rather than resented for his remarks. Perhaps only an outsider could see how close heresy had come to taking over marketing’s true faith.