BackHow will inflation hit brand value?
How will inflation hit brand value?
PremiumAl Ries (Founder, Ries & Ries Inc)
Take the Japanese stock market. On the first day of 1990, the Japanese stock market, as represented by the Nikkei 225, stood at 38,916. (On Tuesday morning, the Nikkei 225 was at 13,122, a decline of 66.3%.) On the first day of 1990, the US stock market, as represented by the Dow Jones Industrial Average, stood at 2,753. ...The Dow Jones was at 11,231.96 (at Monday’s close), a gain of 308%. What happened to Japan? As prices and wages went up, Japanese products became less competitive in the world market.
You saw the same thing happening in Korea. As the Korean economy improved, Korean wages and prices went up and Korean products became less competitive in the world market.
Will India and China follow the same pattern? It all depends. They will, if they continue their current policies of marketing products on the basis of low prices. You can’t win this battle on price alone. As the economy improves, the products become less competitive and global business moves to cheaper countries such as Vietnam.
What’s the answer? Building brands. Germany is perhaps the most expensive country in the world to make anything, yet German brands such as Mercedes-Benz, BMW and Porsche do extremely well in the world market. The same holds true for Switzerland and products such as Rolex.
How do you build brands? You have to narrow your focus so your brand stands for something in the mind. The Japanese tried to market a wide range of products under a single brand name (Sony, Toshiba, Fujitsu, etc.) This never works. You wind up selling on price rather than on the value of the brand.
A few Japanese companies have focused brands: Toyota Motor Corp., Honda Motor Co. Ltd, Nissan Motor Co. and especially Nintendo Co. These companies do well in the world market as opposed to the vast majority of Japanese companies that are line-extended to death.
Compare a focused company such as Nintendo with a line-extended company like Sony Corp. In the last 10 years, Sony has had sales of $623.3 billion and net profits of just $10.1 billion, or a net profit margin of just 1.6%. No wonder Sony is run by an Englishman, Sir Howard Stringer.
On the other hand, in the last 10 years, Nintendo had sales of $48.5 billion and net profit after taxes of $7.5 billion, or a net profit margin of 15.5%. Even though Sony is more than 12 times the size of Nintendo, the company is actually worth less on the stock market. Sony is worth $50.8 billion and Nintendo, $89.1 billion.
If India wants to become an economic superpower, it has to start building worldwide brands instead of just cheaper products and services to sell in the world market. Long-term, that’s a losing strategy.
In an environment of high energy prices and a bad economy, what should it do? My advice would be to admit the difficult times but use this to show how the truck can increase the productivity of a contractor.
Avoid all mention of luxury features in your product. Productivity is a very important and practical message to a contractor facing difficult times. The bottom line is to position your product as having real value even in difficult times.
In times of inflationary pressure, it is essential to be able to pass on these cost increases to consumers if profitability is to be maintained. Strong brands will be better placed to pass on cost hikes owing to higher customer loyalty and their ability to command a price premium. Even if the market does not support full pass-through of costs, it is the strongest brands that have more chance of surviving as margins are squeezed.
As the inflation rate shoots up, there will be certain consumers who start substituting traditional brands for lower-priced options or own label brands. During these times, it is possible to retain market share through heavy brand promotion via giveaways and discounts to ensure they retain existing consumers.
Historically, during periods of hyperinflation, strong brands have become the new exchange mechanism. For example, during World War II, inflation was so high that soldiers would use Marlboro cigarettes as a medium of exchange for food and shoes rather than currency.
Another example is Zimbabwe, where the political turmoil led to inflation hitting the 9,500,000% mark in June, resulting in Zimbabweans exchanging goods foressentials.
Advertising is not going to do much to help the poor. What is needed is very active government participation, although there may be some role for the advertising business. For instance, there could be state-sponsored campaigns to improve agricultural methods.
On the positive side, the current gross domestic product growth is still impressive. But we must remember that this has an effect only on a very small proportion of the population. And these people may become alarmed by the negative signs in the economy and hold back their spending. I think that there is a good role for business journals, and also for leading advertisers and advertising agencies, to communicate a message that the situation is not out of control and that people should not lose their nerve.
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