Branding lessons from private equity

Private Equity (PE) firms are getting plenty of bad press at the moment, being slagged off for being short term, ruthless, asset-strippers intent on sacking everyone who moves. Brings to mind memories of Gordon "greed is good" Gekko from the classic movie Wall Street.

However, this is far from the full picture, as pointed out to me last week on vacation by a partner from one of the biggest PE companies, Texas Pacific (they're bidding at the moment for Al Italia and Iberia). Sure, there's a need for cutting out costs, but this alone would not create any where near enough value for the PE firm to sell the business on at a profit. After all, how could they sell on at a premium an asset-stripped business with poor growth prospects?

No, dig deeper, and you find that these PE companies are actually very growth oriented, and that there are a lot of branding lessons to learn from them, as a recent article in Marketing/Brand Republic pointed out. Indeed, an FT article shows that the the biggest 30 PE deals done in 2003/04 created an extra 36 000 jobs, a 25% increase.

You may want to take some of the PE companies' medicine yourself before you have it forced down your throat by them after they've bought you:

Lesson 1: the power of FOCUS
Focus of money and people is a huge growth driver. The PE firms are expert at finding companies that are languishing unloved inside big groups. For example, Texas Pacific bought Burger King from Diageo, a drinks company for whom the burger business was an unwanted step-child they acquired then they married Grand Met. With renewed vigour and attention, the business was turned around as Euromonitor commented:

"Following troubled years under ownership of Diageo Plc, Burger King was restructured. In the past two years, it turned around declining sales. Same-store sale have grown for fifteen consecutive months in the US. The chain has blazed a trail to open outlets in new international markets, develop new products, and design new restaurant layouts."

Notice how the new management didn't use rocket science to grow, but rather excellent execution of the basics: new stores, closing under-performing outlets, developing new products and fixing the in-store environment.

Lesson 2: Speed
Linked to lesson 1 is the agility of the management put in place by the PE firms. Rather than having to cut through the jungle of bureaucracy in many big companies, marketing teams answer to a handful of owners. And they get quick feedback and decisions.

Interestingly, M&C Saatchi have been smart enough to set up a special agency to deal with PE firms called "Accelerator". This enabled them to create a new campaign for MFI in weeks rather than month's for the brand's new owners, Merchant Equity.

Lesson 3: "follow the money"
Most of the problems in a business come from not following this mantra. Dwarf line extensions, pointless meetings, ego-tripping ad campaigns... they can all be traced back to a lack of business-savvy, bottom-line focus.

PE firms don't make this mistake as they care about one thing: growth. They won't buy that old chestnut: "this won't grow the business, but its good for the brand". And rightly so. The idea of separating brand building and business building is, pardon my Franglais, beaucoup de bollocks. The best way to build a brand is to innovate in a way that grows the business...this creates more users, more occasions and more word-of-mouth. I expect to see more, not less, innovation from frozen food brand Bird's Eye under its new PE owners.

Lesson 4: what gets measured, gets done
Boy do the PE firms get this right. They are ruthless in getting rid of management that doesn't deliver. But reward those talented and dedicated enough to grow the business. To quote an ex-PE manager from the Marketing article:

"Marketing directors have little or nothing to fear from PR firms where they can create value; in fact, quite the reverse is true because they should be even better compensated for creating the value".

Opinions? Are PE Gordon Gekko types, or are they good for brands? Other lessons from them?

Comments

[Fergus]

I just can't see a PE owned Apple developing the iPod. That said, perhaps there are very few publicly owned companies that would have felt able to invest so much so far from their core. But, at a more mundane level, would
a PE owned Wrigley's have spent years developing sugar free chewing gum way back in the 70's or would it have stuck to improving the standard sugar product. I tend to think that developing and nurturing a product idea like sugar free gum comes out of a view that while this year/next year profits are important we need to spend some time and money developing the future otherwise we're going to be in trouble 5 or 10 years down the line.

[David Taylor(from Where'sTheSausage)]

Fergus raises a good point about long vs. short-terms innovation...though the CEO of Sarah Lee used to say "the long terms is only a series of short-terms"!

Do think that a good dose of short-term, business building innovation would do a lot of companies good...but to Fergus' challenge, are there any examples of PE-run companies that have done the transformational type of innovation?

Guess the point is "could Apple have done the iPod/iPhone/iTunes if it was owned by a PE firm?

[Fergus]

The points are well made regarding PE's focus on money, growth and cutting out activities which help deliver neither.

Where I think criticism is rightly levelled against PE is around short-termism and it's potential impact on innovation. Where a business is so focused on a 2 to 3 year time
horizon (in order for the PE fund to sell the business on at the required profit) then the only innovations that will be done will be those that can be developed, launched and can show a profit on investment before the
business is to be sold. That pretty much limits innovation to simple flavour or format style extensions on existing brands. Where are the transformational innovations or the new brands that will drive category
growth and profits in the longer term going to come from?