Private Equity Question: Does Private Equity impact brand equity?
Expect the unexpected when deal-makers arrive in the marketing department By Todd Wasserman It’s fairly easy to get Howard Davidowitz riled up. Just mention the name Eddie Lampert: “He bought Kmart and Sears, and so far he’s closed off and sold hundreds, but he hasn’t built one new store,” said Davidowitz, his voice rising. “He slashed promos and advertising. He slashed customer service and customers have left.” Davidowitz, chairman of Davidowitz & Associates, a New York retail consulting and investment banking firm, admits that Lampert—who decided to personally supervise the companies’ marketing—is an ex-treme case of a private investor taking control of a brand.
The Changing Landscape
But as private equity deals gobble up more companies—Cerberus Capital Management’s pending 80% stake in Chrysler and Warburg Pincus’ takeover of Bausch & Lomb last week being the latest examples—it raises a question: Does the arrival of the Gordon Gekko crowd at your company spell chaos and cuts for the marketing department or a new dawn in which brand managers are freed from Wall Street’s short-term expectations?
Analysts say intervention from such investors is unpredictable, from benign to helpful to disastrous. Though Sears’ stock price has risen more than tenfold since 2003, Davidowitz would put Lampert in the latter category. After Lampert’s Greenwich, Conn., hedge fund, ESL Investments, took a major stake in Kmart in 2003, Kmart then merged with Sears. Lampert took over marketing, merchandising, design and online at Sears—at least for a while.
“He has been micromanaging this company from Day 1,” noted Gary Balter, a Credit Suisse First Boston analyst, in a research note. Sears rep Christian Brathwaite disputed Davidowitz’s claims and pointed out that Sears had 870 stores when the merger happened and now has 935. (Davidowitz said the difference is made up of converted Kmarts, which he doesn’t count as “new.”) “We’ve hired a number of senior marketing talent over the last two years,” Brathwaite said. “To say that Eddie is directing the marketing is incorrect.” Sears and Kmart’s combined ad spend fell about 19% since 2004, per TNS.
Nevertheless, the notion of a private investor buying a company outright should give many CMOs the willies. Jack Trout, president of Trout and Partners, a marketing strategy firm in Old Greenwich, Conn., painted a bleak picture of what often happens after a buyout: “A new cast of characters that arrives obviously looks very hard at the marketing department to see whether they should be kept around,” Trout said. “In general they feel the performance has not been good; that’s one of the reasons they bought the brand. They’ll look for new blood.
The new owners will want to work with their own people.” Like it or not, the infusion of private capital—and the often heavy-handed management that comes with it—is on the rise. U.S. private equity firms raised $215.4 billion among 322 funds in 2006, per the Dow Jones Private Equity Analyst newsletter. That was a 33% jump over the previous year. (The figure doesn’t include hedge funds like Lampert’s ESL. Jeffers said the difference between private equity funds and hedge funds is the former are usually designed to build up undervalued companies while hedge funds are just after ROI at any price.)
“Any time you get private money involved, there is a new level of responsibility that falls on marketing,” said Corbin Rusch, senior brand strategist at Stealing Share, a New York brand planning firm. “There is more of a feet-in-the-fire situation in that results are demanded.” But Rusch said that private ownership can also mean an allowance for some risks. For example, after Bain Capital (and others) bought Burger King in 2002, the brand’s marketing got more experimental.
Tim Calkins, clinical professor of marketing at Northwestern University’s Kellogg School of Management, said there are no typical examples. “Sometimes it’s good for the brands,” said Calkins. “[Suddenly,] they can move away from having to do numbers quarterly.” Some PE firms are looking to “buy and flip,” but others are focused on long-term brand-building, Calkins said. Bain and Domino’s Pizza, which it bought in 1999, seems to be a case of the latter.
Two months after buying Domino’s, Bain installed Valassis Communications veteran David Brandon as CEO. Brandon hired a new marketing chief, ex-Wendy’s marketer Ken Calwell, in 2001, and introduced some “limited-time only” products like Philly Cheese Steak Pizza and the American Classic Burger Cheeseburger pizza. “Dave came in and insisted we improve the quality of the items we sell,” said Domino’s rep Tim McIntyre. “Before that we were very price point-driven.” Another happy example is Geico, which has been fully owned by Warren Buffett’s Berkshire Hathaway (which is actually a public company) since 1996. Said Ted Ward, CMO of Geico: “We’ve had a wonderful run with [Buffett] as our owner. He’s given us insights, but he’s not there pulling the strings.” —with Steve Miller and Jim Edwards