The chief executive of private equity-controlled Kraft Heinz, Miguel Patricio, delivered a message to investors on a recent earnings call that would keep any CEO up at night.
"There’s going to be continued risk of future impairments.”
The troubled and well-documented Kraft Heinz story now pins its hopes on brand building to deliver long-term value and growth for investors. The choice of their new CEO, a former chief marketing officer at Inbev’s Anheuser Busch, is telling – he was parachuted in for his brand-building skills to revive growth at the consumer goods giant. Some suggest it’s mission impossible.
Intangible assets, brand recognition and customer relationships account for 84 per cent of the market value of the S&P500, according to Ocean Tomo, the research and ratings firm. With Kraft Heinz’s value at an all-time low and continuing to tumble, the appointment of a proven brand-builder to address the company’s value seems fitting and a break from the efficiency-first agenda of many companies today.
Brand-building, in the words of advertising’s most famous protagonist for effectiveness, Peter Field, ‘'relies on the creation of emotional memory structures which take time to create and reinforce'’.
But time is a luxury most CEOs don’t feel they have: 78 per cent of CEOs believe they have a 90-day window to prove themselves in an organisation, according to strategic brand consultancy Brandpie in the UK. Investors are already anxiously watching Patricio for a turnaround, and he’s only been in the hot seat 40 days.
This short-termism, described as quarterly capitalism, is the single greatest threat facing the value of brands and their ability to deliver long-term value and growth.
It’s not just the plight of Kraft Heinz. Many businesses are moving significant investment from brand-building that drives product and brand consideration, preference and profitability to short-term performance marketing which delivers quick hits. The lure - return on investment is accountable within the quarterly reporting cycle.
It’s not that performance marketing doesn’t work – but it doesn’t work optimally for business results on its own. Ironically, there is a mountain of work which proves performance marketing doesn’t work as efficiently without investment in brand building.
Field puts the peril succinctly: ‘'Short-term promotional messages will usually be undone by the competitors' responses, leaving the brand with little residual benefit or momentum - just a rapidly fading memory of a brief moment of glory. It soon becomes the crack cocaine of marketing - the next hit of which is needed ever more urgently.’'
When it comes to brand-building we have sacrificed long-term goals, which inevitably undermines long-term business success.
There is much commentary on this sorrow. The latest from The Financial Times in collaboration with the UK’s Institute of Practitioners in Advertising adds to the litany. The Board-Brand Rift report details how business leaders have stopped building brand value, globally.
The Times' findings are consistent with every report on this theme before it. Startlingly, knowledge of brand-building is perceived as average to poor in over 50 per cent of boardrooms, resulting in the significant shortening of marketing reporting cycles. Short-termism is a false dawn but it’s today’s new black.
Despite the vociferous case for long-term brand building being waged by marketers and academics, business leaders seem to continue to ignore any of the objective evidence available. And there is much of it.
Marketing’s collective voice on building brand value appears to be reverberating in an echo chamber.
Warren Buffet, an investor in Kraft Heinz, added his voice to the cause in 2018. Together with Jamie Dimon, chairman and CEO of JPMorgan Chase, and nearly 200 CEOs from major US companies, they called for all public companies to consider moving away from providing quarterly earnings-per-share guidance, an attempt to tackle the unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.
Their pledge was built on the Commonsense Corporate Governance Principles developed in 2016. America’s largest corporations including AT&T, P&G, Coca-Cola, Verizon and GM signed up to self-regulatory principles to ensure a company should not feel obligated to provide quarterly earnings guidance if it does more harm than good.
With regulators and lawmakers now embracing the need for direct regulatory intervention on issues that touch the marketing ecosystem, perhaps regulation could be the fix.
In June, the European Securities and Markets Authority launched an industry consultation on pressures stemming from the financial sector that cause corporations to apply a short-term instead of a long-term view. The mandate is to explore whether companies are under-investing in long-term value drivers. Does the prevailing corporate culture focus on near-term performance at the expense of long-term objectives?
And last month the US Securities and Exchange Commission Division of Corporate Finance hosted its first roundtable to discuss the phenomenon of short-termism.
The erosion of brand value is certainly on the regulators' agenda.
Whilst opinions are varied about whether short-termism can and should be addressed through regulation, for marketers the hope is a wider groundswell of interest in the impact of short-termism on brand value.
The cavalry might be coming.
Original article featured on the Australian Financial Review here.