There is a sense of deja vu about Guinness's game plan of 'enhancing brand value', says Robert Heller. But unless brand appreciation is central to management thinking, the same mistakes will occur again.
Managers seldom admit to correcting their own mistakes, as opposed to those of their predecessors. Perhaps the greatest oddity of the self-flagellation at Guinness is that the sitting tenants, in proclaiming their new game plan of 'enhancing brand value', are returning to the same strategy which worked wonders for them before.
Guinness shot to international stardom on the strength of well-priced whisky buys (Arthur Bell and Distillers), on which the new regime capitalised by reversing the notorious brand neglect of the old. Brands were carefully re-positioned, used as a central focus, pricing was upped to match the new positioning, and marketing money poured forth to consolidate the strategy.
Deja vu, indeed. According to the Financial Times, chairman Tony Greener is 'trying to maintain premium pricing, backed by a sharp increase in spending on advertising'. What had happened in-between? The increase in prices had been overdone, depressing brown spirits sales, especially in the US.
In attempting to counteract the decline, prices and advertising budgets had been slashed - which neatly undermined the grand strategy.
Before the decline, the success of Guinness had been stunning. From £20 million and declining when Ernest Saunders moved in from Nestle, profits multiplied twenty-fold within seven years - and rising. The only fly in that rich ointment was that spirits volumes were relatively static. Thus, the boom had a built-in cut-off: once prices levelled out, so would growth.
Management's response was not to seek areas of new organic growth, but to acquire new subsidiaries. Instead of bargains like Distillers, Guinness bought flat beer (Spain's Cruscampo - £3 million of first-half profit on a £600 million investment), Germany's Asbach brandy (£10 million on £150 million), and Venezuela's Pampero rum (costing £45 million, yielding little).
The numbers rubbish Greener's verdict: 'Sensible acquisitions strategically, but we paid quite a lot too much for them'. Acquisitions only make sense by enhancing economic value added: that is, the cash profit exceeds the cost of capital, including equity. But excessive prices destroy shareholder value. Deja vu again. Bad acquisitions were a Distillers speciality pre-Guinness.
Reversion to failed strategy is not uncommon. Peter Senge's The Fifth Discipline tells of the heavy plant-maker whose culture was dominated by keeping inventories low. When orders fell, production was cut, worsening a tendency to 'unreliable and slow delivery'. Market share fell so far that a troubled management was persuaded by computer modelling to change its ways and maintain steady output, even in recession: Guinness-style renaissance followed.
Deliveries improved, market share rose, profits expanded. By the next recession, though, managers had reverted to their bad old habits: they slashed output, with exactly the same harmful results as before. Strategy had temporarily changed from bad to good, but the company hadn't improved permanently. Managers were still fearful of building inventory: the equivalent imperative at branded goods companies like Guinness is to move inventory - and never mind the marketing stance.
Cutting prices and relieving the margin strain by slashing advertising is a conditioned reflex. That wouldn't happen if brand values were central to management thinking. But often these wondrous assets are unappreciated by their owners. Recently a senior General Motors manager bizarrely echoed Greener: 'Over the past 10 or 12 years, we haven't gotten full value out of the brands ... The game plan now is to recognise that the brands are of great value.' That value is harder to extract in mature markets which are beset by high competition and low growth. Guinness obviously has not cracked this conundrum: since the May 1992 peak, the shares have duly fallen by 29%, wiping billions off market capitalisation.
In the course of its failings, Guinness broke a fundamental marketing law. The PIMS database has established that the ability to charge premium prices is linked umbilically to market perception of value. Overshoot that perception, and volume falls in step. In Asia-Pacific, the value perception of premium Scotch remains high, which explains why today it's the group's only buoyant region for spirits.
In the sluggish conditions elsewhere, reversing the failed Guinness strategy must be more difficult than the first time round. The strategists had best lift their eyes from the uphill struggle and look for underlying causes. Probably, the usual suspects should be rounded up: over-centralised decision-making, short-term measures of performance, excessive interference with local management, lip-service rather than service to brand strengths, and lack of long-term commitment to lasting management values.
The Senge moral applies: permanently improve the whole company. Neglecting corporate potential often goes hand-in-hand with neglecting the potential of the brands, creating a vicious circle. Marketing companies are the sum of their brands. Once again, Guinness is worth less than these vital parts: the difference is made by management.