Every day, we hear about companies with famous brands being finagled by financial engineering.
Kraft Heinz with its stable of cherished brands (think Heinz ketchup, Kraft macaroni and cheese, Oscar Meyer hot dogs); Whole Foods; British Airways (the CEO of BA’s holding company, Willie Walsh, known as “Slasher Walsh”); McDonald’s, with a debt load larger than the GDP of many small nations; Darden Restaurants (Olive Garden, Long Horn Steakhouse), and many more, have faced extreme cost-cutting, debt accumulation, large numbers of employee firings, and money siphoned into the pockets of investors rather than into their brands.
Financial engineering that is actual financial finagling has only one goal: satisfy shareholders at the expense of customer satisfaction.
Financial engineering at the expense of customer focus is a financial finagling formula for failure. Focusing on short-term profits is important. Of course, there needs to be a short-term focus: if there is no short-term there will be no long-term. The challenge is to focus on both the sort-term as well as the long-term health of the business. But, thinking that a short-term focus is all that matters, puts the business and its brand(s) in danger.
One thing is clear; you cannot cost manage you way to high quality revenue growth. Financial engineering that extracts value from brands is a form of brand extortion. Innovation and renovation of products and services dwindle as dividends and share buybacks are increased.
The goal of effective management is high quality revenue growth. The bottom line of any superior “Plan to Win” is to attract more customers who purchase more frequently who are more loyal generating more revenues and increasing profitability. Quality revenue growth of the top line is the road to enduring profitable growth of the bottom line. Organizations must focus on both customer value and shareholder value at the same time. Focusing on shareholder value at the expense of customer value is death-wish management.
Look at McDonald’s: Over the last four years it has experienced a steady decline in customer transactions. So to keep shareholders happy, it has relied on financial engineering to prop up its shares, increasing debt to buy back shares, and continuing to increase the dividend payout. In the interim, McDonald’s has lived with a steady, four-year leaky bucket of a shrinking its customer base. The result is a loss of over 500 million customer transactions while finagling its way to propping up the share price.
Research has shown that it costs significantly more to attract new customers than it does to keep customers loyal. Love the customers you have more than the customers you do not have. McDonald’s marketing costs will now have to increase to win 500 million customers in order to restore the customer base to where it was four years ago.
Enriching loyal shareholders through financial finagling combined with short-term marketing tactics does not address declines in customer satisfaction and transactions. Growing comparable sales while comparable transactions decline; growing corporate revenues while franchisee profitability declines; growing shareholder returns through financial engineering while failing to grow customer share through effective marketing; all lead to a weakened business that extracts value from the brand rather than invests value into the brand. The financial engineers insist that their behaviors “unlock value.” They do not unlock value; they exploit value for short-term benefit. But, in the end, the brands (as well as, customers and employees) pay the price for these pecuniary shenanigans.
Larry Light, a global brand revitalization expert, is co-author with Joan Kiddon of Six Rules for Brand Revitalization. He also is the Chief Executive Officer of Arcature (www.arcature.com), a marketing consulting company that has advised a variety of marketers in packaged goods, technology, retail, hospitality, automotive, corporate and business-to-business, as well as not-for-profit organizations.