A Project of the American Enterprise Institute and the Federalist Society

A new brand of power

Washington Post

August 7, 2006

By Sebastian Mallaby

Motorola used to be a manufacturer of cellphones. Then it came up with its ultra-slim Razr handset and became a lifestyle company as well. Apple made the same transition years ago: It is not so much a computer maker as a style iCon. At certain select nightclubs, Coca-Cola is selling its black sugar in funky bottles etched with glow-in-the-dark graphics. This redesign helped to propel Coca-Cola onto a recent BusinessWeek cover.

So what, you might say: The cool quotient in products may boost profits and amuse consumers, but what's its significance for the nation's future? Quite a lot, actually. The rising power of brands has implications for public health, globalization and the environment. It may even be changing the political equation.

Not long ago, the value of a company consisted largely of its "book value": physical assets such as factories and equipment plus money in the bank. But today book value accounts for only about a third of the stock market capitalization of the top 150 U.S. companies, down from three-quarters two decades ago. In the new economy, corporate value lies in intangible assets: patents, databases, know-how -- and brands.

So brands are eclipsing factories in value, and big brands appear to be crowding out smaller ones and reaching all around the world. Ten years ago Unilever sold its foods and detergents under 1,600 brand names, according to Kevin Keller of the Tuck School of Business; now Unilever uses fewer than 400. The world's biggest companies (Citigroup, General Electric, IBM, Microsoft, Toyota, Wal-Mart) sell most or even all of their products under one or two brands.

As brands have grown bigger, they have also grown more vulnerable. Marketing gurus such as Tom Collinger of the Medill School describe an unnerving revolution: The owners of brands used to sustain them with huge advertising budgets, but now consumers form their views of products in Internet chat rooms. It almost doesn't matter how much America Online spends on advertising. A blogger recently recorded a company salesman refusing to cancel an account when asked repeatedly to do so. The Monty Pythonesque result

is all over the Internet, ruining whatever might be left of AOL's brand.

If brands are both valuable and vulnerable, political consequences follow. Mighty companies have so much riding on their corporate image that they quiver in the face of customer opinion. And if they are mass-market companies, customer opinion is the same as public opinion, so corporate bosses become as sensitive to political and social shifts as elected officials.

Consider public opinion about junk food. Parents don't want kids to eat it, and Ronald McDonald understands. McDonald's has added salad and fruit to its menu; the home of fries and burgers has transformed itself into the nation's biggest buyer of apples. Meanwhile, Wendy's has stopped frying its food in trans fats, which have also been banished from Oreo cookies and Frito-Lay snacks; General Mills makes its Cheerios and Wheaties out of whole grain. In all these cases, companies have responded to public sentiment before regulators compelled them to do so. As a mechanism of political accountability, we have elections -- and now brands.

Or consider public opinion about globalization. No regulation compels Nike to pay more than the prevailing wage in the poor countries it works in. But the value of Nike's brand dwarfs its costs of manufacturing, so it wisely chooses to do so. No regulation, or at least none that is enforced effectively, prevents furniture companies from despoiling Third World forests. But U.S. stores with brands worth protecting insist on certification from the Forest Stewardship Council. The fight about including labor and environmental standards in trade agreements rages inconclusively in Congress. But corporations do not suffer from that sort of gridlock, so they're ahead of the curve.

Or consider the environmental behavior of U.S. companies at home. This used to be the classic case of politics leading business: For most of the past generation, regulators have forced environmental rules on grumbling corporations. But in the current debate on climate change, this order has reversed itself. Impatient companies are capping their own carbon emissions: Wal-Mart has promised to double the efficiency of its vehicle fleet and achieve a 30 percent cut in its stores' energy usage. Its motive is not complicated. Internet-enabled critics have assaulted Wal-Mart, and the firm's polling has suggested that 8 percent of shoppers have quit visiting its outlets because of its stance on social issues. An environmental makeover was essential to the brand.

The next stage may be for companies not merely to outpace government but to pull government along. Howard Schultz, the chairman of Starbucks, broke the mold by offering comprehensive health benefits to part-time workers, but now he's even more ambitious: He's lobbying Congress to fix the health system. Meanwhile, companies such as BP and GE have enhanced their brands with enviro-friendly policies, and perhaps may now nudge governments to become greener as well.

But whether or not we get to that, something big is going on. At a time when Washington seems incapable of tackling serious policy challenges, brands are creating a sort of shadow government. They cannot replace the real one, not by a long shot. But they are better than nothing.

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