Death by Margins: Companies' Desire to Please Wall Street May Be Hurting Brands

Retailers, Banks, Packaged Goods All Making Drastic Moves to Keep Profits Coming In

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When Netflix announced it was hiking the price for unlimited streaming and DVD rentals last month, customer reaction was angry and swift as complaints rolled in across the internet. But as movie viewers howled, Wall Street cheered, sending the stock price up more than 2% from when the plan was made public to when the market closed the following day.

Brands are feeling the squeeze.
Brands are feeling the squeeze. Credit: Alex Ostroy

In a rush to revamp its business in search of more profit, did Netflix cause long-term damage to its brand? And in its quest for investor satisfaction, is it risking long-term brand health for short-term gain?

The question applies not just to Netflix: As corporate America makes drastic moves to keep profits coming in industries where growth has slowed, the margin vs. brand dilemma is facing marketing executives across a broad swath of industries.

Behemoth Bank of America is among the banks raising fees to contend with tough business trends and new regulations. Procter & Gamble is facing new pressure from some analysts and investors to restructure in search of efficiencies, a move that threatens to slice into the marketing ranks of the nation's-largest advertiser. Walmart Stores, which a few years ago tried to offset slowing store growth by narrowing price gaps with rivals to raise gross margins, is now dealing with the consequences: most of its shoppers no longer believe it has the lowest prices.

In other boardrooms, the decisions to deal with lagging-growth businesses are even more dramatic. Kraft Foods is planning to split the company in two in part to please activist investors who have

called for the marketer to separate its fast-growing global snacks unit from its sluggish U.S. grocery business. Other companies are spinning off units, such as HP, which is making a less-than-graceful exit from the PC business.

"As you begin to spin off portions of the portfolio, you really get into some complications about the brands and what the brands stand for," said Tim Calkins, marketing professor at Northwestern University's Kellogg School of Management. For HP, "is it still associated with PCs? Or is it going to be associated with printing, or is it going to just be associated with the B-to-B company?" he said. "We really don't know how that brand is going to evolve."

In fact, a Wall Street Journal story last week said Fluor Corp. is rethinking both its decision to buy high-end computers from HP and a pilot project involving its tablets. Chief Information Officer Ray Barnard told the Journal, "I've put all that on hold," noting, "it appears that they're lost right now." And rivals are pouncing: Dell is touting on its website that it "remains very committed to PC solutions," while plugging an "HP migration program."

Marketers "used to talk about "You spend your way through the decline, you invest in the downturn so that you can come out strong,'" said Andy Flynn, a partner with Prophet, a brand and marketing consultancy. "What we are seeing now is the kissing cousin to that , which is people are beginning to make the hard decisions during a time of natural uncertainty in the hopes that ... as things begin to get better and their business model becomes a bit more sustainable and effective, that they can grow their way out of it."

But the fact is , things just aren't getting any better. And while companies have managed to post decent profits this year, there's a growing realization that bolder moves are needed to keep the momentum going.

The verdict is still out on Netflix's move to boost the price for dual-service subscribers of unlimited streaming and DVD rentals to $15.98 a month from $9.99 a month. The company explained the increase as a way to cater to DVD-only subscribers (who can now pay as little as $7.99 a month) while updating the old structure that did not "make financial sense."

The brand has already suffered: Netflix, which earlier this year met 99% of consumer expectations, has seen that score drop to 93%, according to the latest update from Brand Keys, which surveys consumers on brand loyalty. Still, Netflix has room for error -- it held the top-rated customer loyalty engagement score among 530 brands surveyed in Brand Keys' report published in February. And a separate study by market researcher TGD predicted only 12% to 15% will cancel service in the next six months. "Once they see what alternatives exist in the marketplace, Netflix won't look so bad," the report noted.

Meantime, banks risk consumer and branding backlash for raising fees in response to lower lending volume and new regulations taking effect next month that reduce so-called debit card interchange fees paid by merchants to banks. Bank of America, for instance, in May raised its monthly fee on its basic checking account from $8.95 to $12. (Customers don't pay fees if they have direct monthly deposits of at least $250 or keep an average daily balance of at least $1,500.)

While banks might have few options to make up the lost revenue, "people don't like to be nickel-and-dimed to death," said former Wachovia Chief Marketing Officer Jim Garrity. For marketers, "it's a pretty tough row to hoe right now because the fees are transparent; it's not a hidden fee, it's in your face," he added.

One bank marketing executive familiar with the issues facing large banks acknowledged that new fees on things such as online bill paying or simply maintaining accounts add to the risk that some consumers will leave individual banks, or even the traditional banking system altogether. Alternatives include PayPal, MoneyPak, Walmart's reloadable money card or prepaid credit cards. But the bank executive said those alternatives are relatively small players at this point (PayPal owns only about a 2% share of online bill payment, for example), and that the banks have no choice but to find new fee revenue if they're going to remain in business.

Kraft 's split, scheduled for late next year, is emblematic of a new phase for consumer packaged-goods companies, which are focused more on profits and less on volume and market share, said Rick Shea, a consultant and former Kraft marketer. "Where they are really getting increased long-term profitability is by positioning like businesses together -- that 's where you get the synergies and that 's where you get the efficiencies," he said. And while the split is likely to be invisible to consumers, Kraft must now change its corporate message from touting size and scale to "convincing stakeholders both internally and externally ... of why size and scale aren't the top priorities," said Morningstar analyst Erin Lash.

The tough economic environment, including rising commodity costs, has taken a toll on P&G as well, leaving some analysts to suggest it restructure aggressively to lower costs. Sanford C. Bernstein is urging P&G to "take a hard look at its cost base." The company's "recent results, the limited amount of acquisitions available and the difficult economic environment have left it no other good option [than to restructure] to stay on pace with/ahead of peers and deliver the results its shareholders expect," Bernstein stated in a recent report.

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