Private Equity & Brand Equity

“…a predatory system created and perpetuated by Wall Street solely to pump its own profits.” This was how Josh Kosman of Rolling Stone Magazine described private equity firms back in 2012. James Surowiecki was even less subtle in describing them in The New Yorker as “job-destroying vultures, who scavenge the meat from American companies and leave their carcasses by the side of the road.”

While many might agree, we think this paints the industry with too broad, and too harsh, a brush. PE firms control an ungodly amount of companies of all sizes across all categories, both in the U.S. and around the world. Many of these businesses were either struggling or had plateaued and were in need of restructuring, reengineering or rethinking. Herein, theoretically at least, resided the opportunity in acquiring them. Of course, there was financial rejiggering, but with an injection of new management and rigorous operational oversight there was a belief that the business could regain momentum, grow profitably and provide a healthy return for their shareholders within a given horizon. Unfortunately, like it or not, this timeline is farther out now than it used to be. What was about buying and flipping is now about buying and building. Perhaps out of necessity, PE firms have to invest in innovation and growth initiatives, which includes increasing the asset value of brands.

Now, you’d probably expect brand consultants to promote greater investment in brand equity and we won’t disappoint you. However, lately there seems to be an alarming increase in the demise, or impending demise, of several well-known brands and companies owned by PEs. This is particularly true in the retail sector. Is this a result of forced starvation causing a myopic focus on short-term financial results, a lack of cash caused by self-inflicted debt servicing, or simply a seismic customer shift from the mall to the web? Probably there are a lot of factors that come into play. However, one thing is hard to argue: when the flow of nutrition is cut off from a brand, the demise of the enterprise follows close behind.

Brands need to be understood, respected, nourished and cared for. Brands have meaning that creates value and is worth paying more for. Brands inspire loyalty with employees and customers, withstand changes in consumer behavior and provide competitive cover. Brands are often more valuable than products, more durable than factories, and more resilient than the companies that own them.

There is no greater example of what not to do than the debacle of Sears. Eight decades before Jeff Bezos was born, Sears catalogs brought products to people who could not get them any other way. As it grew into one of America’s largest retailers, it became a haloed house of brand names like Craftsman, Kenmore and DieHard that dominated their categories. Tragically, after falling into the clutches of a guy – technically a hedge fund – that doesn’t respect brands, cares less about customers, and doesn’t have the good sense to let people who do run things, Sears stores will soon be liquidation centers. Ironically, desperate to try to raise cash, they recently announced they were selling some of their greatest assets – their brands.
Thankfully, there are many more examples of private equity firms that recognize that whether you are selling aircraft parts or air fresheners, investing in brand equity can make it easier to achieve sustainable profitable growth.

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