The one-two punch that puts brands into bankruptcy
In boxing a one-two punch typically describes two blows, one from each hand, in quick succession. But with brands, there is nothing quick about the combination of weak demand and high debt that so often leads to bankruptcy. The sad thing is, the warning signs are often apparent long before the brand's demise, but little is done to fix the real problem until it is too late.
Bankrupt brands exhibit weak consumer demand
A common feature of bankrupt brands is weak consumer demand. However, that weakness often shows up as a lack of pricing power, in part because volume sales can be supported by discounts and incentives. Of the 52 brands measured in Kantar BrandZ at least a year before they filed for bankruptcy, 46 exhibited clear weaknesses in consumer perceptions related to demand. 65% were less likely to be perceived as different given their size, 48% were weak on meaning – perceived functional and emotional relevance – and 35% were weak on salience.
Weaknesses can be offset by scale
The fact that many bankrupt brands lack perceived differentiation is notable, since without differentiation of some sort, the brand is essentially commoditized. These poorly differentiated brands prove to be the weakest, lacking both volume demand and pricing power. Bigger brands tend to be more likely to exhibit weak differentiation but are better able to offset that weakness with structural advantages. Take the example of Hertz, which declared bankruptcy, succumbing to the combination of weak demand and high debt on May 22nd, 2020. Pick any airport in the US and it will likely have a Hertz rental desk inside the terminal. Many people used Hertz (until the advent of COVID-19) simply because it was there, not because they desired to do so.
The COVID-19 pandemic knocked out many brands
Hertz is just one well-known brand to have filed for Chapter 11 during the COVID-19 pandemic. Others include JC Penney, Neiman Marcus and, more recently, Brooks Brothers. However, Brooks Brothers, founded in 1818 and identified with professional suits, is the odd one out because debt load played little part in the company's bankruptcy. However, it does illustrate how consumer demand can erode over time.
Out of step with culture
Brooks Brothers is a classic case of a brand that is out of step with current culture, held hostage to its past success. In a New York Times article, Alan Flusser, author and designer of men's clothing, is quoted as saying,
"for many years (Brooks Brothers) has been more a memory than a reality in terms of its ability to influence or inspire people."
Famous for having clothed all but four U.S. presidents Brooks, Brothers has been left behind by changes in style and shopping. Equated in many people's minds with suits, Brooks Brothers style might be epitomized by that of a New York banker. However, suits have been going out of style for decades, replaced first by business casual and now casual every day, and following the Financial Crisis the association with banking probably added an implicit negative for many. The shift to e-commerce left the company with retail stores and fewer physical shoppers, while younger shoppers tend to seek out a more individual style of their own offline or online.
Brooks Brothers problems have been a long time in the making. It is not that people suddenly stopped shopping at its stores, it is that those that did do so less often, and those that never did now see the brand as dated and have little interest in doing so. The company is now in the process of closing a fifth of its stores while it looks for a buyer. However, any potential buyer will have to assess the likelihood of revitalizing a brand which many might feel is irrelevant to their needs and lacking in appeal. If the brand had been rebooted twenty years ago then it might not be bankrupt today, but to revitalize the brand now will be a much bigger challenge.
Servicing debt chokes of growth drivers
Rather than fix the real problem of underlying weak demand, all too many management teams try to buy their way out of trouble by acquiring new sources of business. In doing so they saddle the company with ongoing debt payments that eventually choke off investment in innovation and marketing, the two things that might have fixed the source of weak demand. In the case of Hertz, the acquisition of Dollar Thrifty for $2.3 billion back in 2012 brought in new revenues but added to the company's debt, now standing at $17 billion. Money that could have gone into innovation, better customer care, and more marketing was siphoned off to service debt instead. From the brand viewpoint, it's like driving with the handbrake on. The brand must rev harder simply to achieve the same speed, but the gas supply is being shut off.
How to identify when scale hides weaknesses
The sad thing is that signs of weak consumer demand are often apparent in brand equity data years before brands are forced to file. The problem is that the weakness is often offset by, and disguised by, the scale of the business. The bigger its market share, the more distribution it has, the easier it is for people to buy it, and people who do buy a brand tend to say good things about it. To identify real strengths and weaknesses brand equity data needs to be looked at in the right way.
Bankrupt brands exhibit weak consumer demand
A common feature of bankrupt brands is weak consumer demand. However, that weakness often shows up as a lack of pricing power, in part because volume sales can be supported by discounts and incentives. Of the 52 brands measured in Kantar BrandZ at least a year before they filed for bankruptcy, 46 exhibited clear weaknesses in consumer perceptions related to demand. 65% were less likely to be perceived as different given their size, 48% were weak on meaning – perceived functional and emotional relevance – and 35% were weak on salience.
Weaknesses can be offset by scale
The fact that many bankrupt brands lack perceived differentiation is notable, since without differentiation of some sort, the brand is essentially commoditized. These poorly differentiated brands prove to be the weakest, lacking both volume demand and pricing power. Bigger brands tend to be more likely to exhibit weak differentiation but are better able to offset that weakness with structural advantages. Take the example of Hertz, which declared bankruptcy, succumbing to the combination of weak demand and high debt on May 22nd, 2020. Pick any airport in the US and it will likely have a Hertz rental desk inside the terminal. Many people used Hertz (until the advent of COVID-19) simply because it was there, not because they desired to do so.
The COVID-19 pandemic knocked out many brands
Hertz is just one well-known brand to have filed for Chapter 11 during the COVID-19 pandemic. Others include JC Penney, Neiman Marcus and, more recently, Brooks Brothers. However, Brooks Brothers, founded in 1818 and identified with professional suits, is the odd one out because debt load played little part in the company's bankruptcy. However, it does illustrate how consumer demand can erode over time.
Out of step with culture
Brooks Brothers is a classic case of a brand that is out of step with current culture, held hostage to its past success. In a New York Times article, Alan Flusser, author and designer of men's clothing, is quoted as saying,
"for many years (Brooks Brothers) has been more a memory than a reality in terms of its ability to influence or inspire people."
Famous for having clothed all but four U.S. presidents Brooks, Brothers has been left behind by changes in style and shopping. Equated in many people's minds with suits, Brooks Brothers style might be epitomized by that of a New York banker. However, suits have been going out of style for decades, replaced first by business casual and now casual every day, and following the Financial Crisis the association with banking probably added an implicit negative for many. The shift to e-commerce left the company with retail stores and fewer physical shoppers, while younger shoppers tend to seek out a more individual style of their own offline or online.
Brooks Brothers problems have been a long time in the making. It is not that people suddenly stopped shopping at its stores, it is that those that did do so less often, and those that never did now see the brand as dated and have little interest in doing so. The company is now in the process of closing a fifth of its stores while it looks for a buyer. However, any potential buyer will have to assess the likelihood of revitalizing a brand which many might feel is irrelevant to their needs and lacking in appeal. If the brand had been rebooted twenty years ago then it might not be bankrupt today, but to revitalize the brand now will be a much bigger challenge.
Servicing debt chokes of growth drivers
Rather than fix the real problem of underlying weak demand, all too many management teams try to buy their way out of trouble by acquiring new sources of business. In doing so they saddle the company with ongoing debt payments that eventually choke off investment in innovation and marketing, the two things that might have fixed the source of weak demand. In the case of Hertz, the acquisition of Dollar Thrifty for $2.3 billion back in 2012 brought in new revenues but added to the company's debt, now standing at $17 billion. Money that could have gone into innovation, better customer care, and more marketing was siphoned off to service debt instead. From the brand viewpoint, it's like driving with the handbrake on. The brand must rev harder simply to achieve the same speed, but the gas supply is being shut off.
How to identify when scale hides weaknesses
The sad thing is that signs of weak consumer demand are often apparent in brand equity data years before brands are forced to file. The problem is that the weakness is often offset by, and disguised by, the scale of the business. The bigger its market share, the more distribution it has, the easier it is for people to buy it, and people who do buy a brand tend to say good things about it. To identify real strengths and weaknesses brand equity data needs to be looked at in the right way.
- In the competitive context – how does the brand compare to its closest competitors?
- Over time – what is the underlying, longer-term trend?
- Versus expectations – is it good enough given the brand's existing size?
But what do you think? Please share your thoughts.
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