How is the Internet affecting established brand value?

Source: Exec Digital USA

Date :1/15/2008 4:09:49 AM

With the value of brands being increasingly questioned, Exec investigates whether the ‘the power of brands’ is transferable to the Internet or are ‘virtual brands’ anything more than hi-profile fads?

By Ruari McCallion

What is it about the power of brands that will make sensible business people open their chequebooks and shell out zillions? Just about 20 years ago, The Economist magazine dubbed 1988 ‘the year of the brand’. In that year, four brands were sold for a staggering $50 billion.

During twelve days in November that year an astonishing takeover battle for RJR Nabisco saw the price rise from an eyebrow-raising $17 billion ($75 a share) leveraged offer to a mind-boggling $24.88 billion, over $109 per share – more than $18 higher than the stock price high on November 29, the day before the final bid was accepted.

The attraction was the brands – the RJ Reynolds tobacco lines; the Nabisco food products with their ‘red triangle of quality’, and a portfolio of well-known names, from Shredded Wheat breakfast cereal to Camel and Winston cigarettes. The long-held belief is that brand names themselves inspire loyalty, that people come back to buy repeatedly because of the name.

“Brands give comfort in an alien environment,” said Tony Roestenberg, now chief executive officer of SimplySmart Group. Say you want a lunchtime snack in Moscow while you’re on a flying business trip, and you have the choice between a café down a shadowy backstreet run by someone who looks like they may be nursing Cold War grudges, or a Big Mac at the shiny McDonald’s on the well-lit main street. Most people would elect for McDonald’s because it’s a comforting, known quantity.

But the value of brands is being increasingly questioned, as consumer tastes seem to become more fickle and long-established names, like MG Rover in the UK, bite the dust.

Reputation and reference

“The classical route for brands is to get established and gain a reputation. They also act as a ‘ball park’ for consumers – you could spend months and months going round and trying out different products. Going to a brand you can trust is a short-cut to the market,” said Sue Burden, of TNS, the global specialists in market information and business insight. There was a time when US car buyers were wedded for life to Ford, GM or Chrysler but that doesn’t happen now. Poorly designed and shoddily built products in the 1960s and 70s made things much easier for the Japanese, offering value and vastly better quality.

In November 2004 James Surowiecki wrote in Wired magazine that ‘we’ve always overestimated the power of branding while underestimating consumers’ ability to recognize quality’. He also argued that brand power can have a negative impact, their very success making businesses less innovative and rigorous. If innovation has led the company to success, it’s innovation that will keep it there – as long as the company meets customer expectations…

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