How to manage and mitigate brand risks while protecting value during a pandemic

Last month WTR reported on a discussion over how to reduce the impact of the coronavirus pandemic on brand value. In this guest post, Gabriela Salinas, global managing director of the Brand Finance Institute, takes a deep dive into brand valuation and strength data to provide critical insight into how companies can minimise the impact of covid-19 on their brands.

Guest analysis

There has been a lot of discussion about how the health crisis and lockdown has affected brands and how brands are reacting to this situation. But no one has yet quantified this impact. Brand Finance analysts estimate that the world's 500 most valuable brands can lose up to $1 trillion in value. This is what we call, in financial terms, value at risk. But this risk is not uniform for all sectors and all brands.

Generally, there are two types of risk that affect brands during a crisis:

• sectorial (the severity of the impact depends on the type of product or service, or category in which the brand operates); and
• own (the severity of the impact also depends on the company's own culture, risk aversion, orientation towards innovation and flexibility).

Sectorial risk

Some sectors have been more affected than others. Brand Finance has classified each sector into three categories based on the severity of business value loss observed in the period between 1 January 2020 and 18 March 2020:

• Limited impact – this category includes sectors whose demand has not diminished due to the lockdown (eg, utilities, food and drink, household products and telecoms).
• Moderate impact (up to 10% brand value loss) – this category includes technology, media and logistics, among others.
• High impact (up to 20% brand value loss) – this category includes sectors such as restaurants, travel, airlines, holidays and other categories where delayed consumption is not possible. International lockdown as made consumption barely possible and once restrictions are lifted, consumption will not be made up for.

Own risk

But even within categories and sectors, not all brands are affected in the same way. This depends on their own risk. Analysing individual impact, we have identified three ways brands across categories have been affected (see Figure 1):

Figure 1. Three ways brands across categories have been affected (own risk)

Source: Brand Finance Institute

Thriving

Some companies are now thriving as they are well placed to cater to our changed lifestyles, but how they act now can shape future trajectory. Zoom, Vodafone and Amazon are good examples of brands that fit into this category – although they are all facing their own challenges, including the following:

• A number of companies and governments have banned Zoom for official use due to privacy concerns (the enterprise value of Zoom increased 110% between 1 January and 18 March 2020 but decreased 30% after privacy issues were made public (see Figure 2)).
• Vodafone, being a telecommunications company, is well prepared to take advantage of the increase in traffic and online entertainment consumption, but it is under fire for the timing of a UK price hike.
• Amazon reacted quickly to changing consumer habits and adapted its offerings, delivery times and algorithms to better cater for consumer needs. However, it has also faced trade union problems and problems with staff in logistic centres in the United States, Spain and Italy. These reputational issues must be tackled for Amazon to emerge out of the crisis as a stronger brand – one able to fully optimise its long-term profitability.

The surge will not last forever, and these examples illustrate that managing brand reputation through scrutiny is key to maximising long-term profitability. For this, brands need to undertake a multi-stakeholder approach.

Figure 2. Zoom's market value affected by privacy concerns

Source: Brand Finance Institute

Striving

A second group of brands are striving, adapting and reacting rapidly by:

• adapting business plans, products and services to maximise changing opportunities and stay current (eg, LVMH decided in mid-March that it would dedicate three of its perfume manufacturing premises to produce hand sanitizer. Although LVMH has been hit by the outbreak in terms of revenues, this initiative is having a positive effect on brand strength, which in turn, will have a positive effect on long-term profitability. LVMH is sacrificing short-term profitability to build long-term stakeholder engagement and returns);
• adapting production to cater to urgent social needs (eg, Dyson quickly reconfigured its production line to produce ventilators); or
• contributing through funding where able to (eg, MasterCard has joined forces with The Gates Foundation and the Wellcome Trust, through the COVID-19 Therapeutics Accelerator, and donated funds to speed up the response to the covid-19 pandemic by identifying, assessing and developing treatments).

Surviving

A third group of companies is merely surviving, as they are unable to transition online or have come to a standstill. Apparel and airline brands could lose up to 20% of their brand value and are good examples of companies in this third cluster.

Country of origin

We have reviewed two types of risk that affect brands during a crisis: sectorial and own risks. But, in a crisis of the nature we are living through, we should consider a third type of risk: association with the country of origin.

This crisis is also a matter of public diplomacy. Headlines in newspapers have referred to the use of “mask diplomacy” by several countries as a tool to build soft power. The fact is that national brands will be affected both by how their governments handle the crisis and by diplomatic relations going forward.

The stronger the association with the country of origin, the harder the impact will be. In fact, at Brand Finance we have conducted extensive analysis of our Soft Power Index Database and concluded that increasing a nation’s Soft Power Index by one perceptual point has a positive impact of $3.6 billion in its net foreign direct investment inflow (soft power being defined as as “nation’s ability to influence the preferences and behaviours of various actors in the international arena (states, corporations, communities, publics etc) through attraction or persuasion rather than coercion)”.

How to manage and mitigate brand risks in a crisis

We have reviewed the risks affecting brands during the pandemic. But the question is: what should brand leaders do now to mitigate those risks and leverage brand value in the long run?

There are five types of generic brand risk management strategy:

Avoid (the risk of being judged by avoiding communication)

This tactic rarely works. Avoiding marketing spend is not the solution, but rather carefully considering how to invest. Brand leaders should invest in ways that improve the life of their clients or the situation for society in general. This takes me to the next brand risk management strategy: “improving”.

Improve (with concrete actions and generating a positive impact for the company and its stakeholders)

The “how” is more important than “how much” you invest during times of crisis. At the beginning of the pandemic, several brands separated the elements of their logos to further support and spread the message of social distancing. This movement was described as ‘social distancing branding’ and was met with criticism as these initiatives were perceived as tone-deaf, non-empathetic and opportunistic.

While some brands have just opted for rather “empty” words with such communications, others have used advertising to amplify the specific actions undertaken to benefit clients in these tough times (eg, Ford’s “Built for right now” campaign). Other brands, understanding brand investment in a much broader way that encompasses all stakeholders besides comercial audiences, have focused on social action more than words. Armani, Inditex, Dyson, LVMH and Seat either reconverted their plants to produce personal protective equipment or ventilators or donated funds to support social action at this juncture, which has paid off in terms of value creation.

In other words, brands are faced with the option of doing or saying, and unless what they have to say supports or amplifies what they are doing for society, clients and employees, they are better off by staying silent. Precisely, one of the main risk management strategies for brands now is to answer the question of how to generate a positive impact. And the answer is to put facts over words. In Figure 3, we illustrate some brands that have opted for actions, words or a combination of both to try to stay relevant during the pandemic.

Figure 3. Action versus words (illustrative)

Source: Brand Finance Institute

Adjust (implementing changes to reduce impact and increase post-event profits)

But also brand leaders should consider that there is so much more than just “promotion” among the marketing mix tools they could lever.
A large number of brand directors and leaders equate brand investment with advertising investment, and this reduces their options to make a significant impact on brand value and society in general. There are good examples of brands that are innovating and implementing changes to reduce the impact of the crisis and increase post-crisis profits, adjusting elements of the marketing mix other than promotion, and adjusting their offering, prices or distribution in creative and innovative ways. For example, an Australian supermarket set the price of one roll of toilet paper to $3.50 and two rolls of toilet paper to $99, together with the message “Don´t be greedy. Think of the other people.” It therefore used pricing as a communication tool. CVS, in the United States, eliminated shipping costs for medicines. In Poland, responding to the government mandate for people to cover their mouths and noses in public spaces, the Polish Vending Association coordinated the launch of Mask-O-Mat machines, which sell masks, gloves and antibacterial.

Retain (brand strength and long-term profitability)

Brands can also absorb the loss now, with the view of compensating for it later. Recent studies confirm that the public in general now expects brands, above all, to protect their employees. In short, stakeholders expect brands to put people over profits. This will surely destroy short-term profitability, but will strengthen their brand and reputation, and this, in turn, will have a positive long-term effect on profitability, which will more than compensate for the short-term loss.

Share (the burden of the crisis)

There is a fifth strategy that is now more important than ever and is exemplified by private-public collaboration: sharing or redistributing the burden of the pandemic.
Why is this relevant? Because the expectations on the role of protection extend beyond employees to encompass broader society. In the last few months, we have witnessed how public-private collaboration is key to mitigating the effects of the health, social and economic crisis that we are living through. All initiatives that put collective over individual interests will contribute, once the crisis is over, to generating a reputation for those brands that have acted in a quick, honest and compelling fashion. This is, for those brands whose decisions have contributed to protect clients, employees and the public in general, increasing their influence in the world and their community.

How brands should communicate to protect brand value

Although there are no universal recipes, some ingredients should always be present in our “crisis mix”:

• Continue engaging, but avoid empty communications unless you find the right content and tone – it is not about how much you invest, but rather how you invest.
• Invest considering how your brand actions will improve the lives of your stakeholders – think of brand investment in a broad sense, not only ad investment. Build reputation, not campaigns.
• Adjust all the elements of your marketing mix and not only your promotion – innovate with all the tools of your marketing mix, thinking beyond promotion to consider possible pricing, distribution and product adaptations and innovations. Ask yourself what you can do to improve your clients’ lives.
• Consider if and how retaining short-term losses can lead to building long-term profitability – as expectations of brands change, absorbing losses now, in particular, when it comes to employee protection, could hurt short-term financial results but build long-term profitability.
• Consider how you can collaborate with other stakeholders and share your resources to ease the impact of the pandemic on your community – as the concept of brand leadership evolves, and expectations from stakeholders require that brands provide protection and security, brand leaders need to think about how they can apply their company’s resources to solve pressing social issues, placing collective interest over short-term profits.

To manage the aforementioned risks, you should measure and track metrics linked to brand value creation. This measurement should be aligned with a renewed concept of brand leadership and emerging expectations from stakeholders. Brand leadership today goes well beyond the ability to generate profits, and is rather related with the ability to have a positive impact on the world.