Balancing profit and brand building: Where is the line?
Tuesday, 25 June 2013 10:17
The biggest challenge for a CEO of today is making profits in the short-term so that one can keep the share price intact, whilst for the long-term it is how one can add value to the brand and thereby build the equity of the company.
The latter is important if one is trying to divest the stake of a company whilst the former is important if a CEO wants to survive on the job. The question is, what is the right balance? Let me take a Sri Lankan case in point to discuss this challenging question.
Odel ‚Äď Sri Lanka‚Äôs pride
Sri Lanka‚Äôs most innovative fashion brand, Odel came to being 1990 in Sri Lanka. In 1995, the first branching out of the Odel department stores began and today it has become the pride of Sri Lanka and a household brand in the minds of Sri Lankans not only in Sri Lanka but also globally among Sri Lankans living abroad.
From its humble beginnings, Odel has now evolved to be an internationally-recognised fashion retailer consisting of one flagship store in Colombo spanning across 33,000 square feet and 18 store footprints around the country.
Odel ‚Äď Mind, Body & Soul
Odel did a re-launch of their store in 2004 which revealed its new brand identity based on the theme Mind, Body & Soul. It is a concept that has fashioned the evolution of the brand‚Äôs philosophy ‚Äď gearing Odel to the status of international superstore.
With the re-launch reformed the company mission to ‚Äúprovide a complete Mind, Body & Soul experience with an unparalleled selection of fashion right and lifestyle products in an environment that is enjoyable and welcoming.‚ÄĚ
Today, Odel has become a fashion brand more than of just another retail store offering designer and high street fashion, home-ware, jewellery and accessories, luggage, perfumes and cosmetics, books and music, confectionery and food.
Odel ‚Äď Going public
Odel, Sri Lanka‚Äôs premier lifestyle brand, became the first-ever fashion retailer in the country to go public. The company‚Äôs Initial Public Offering was held on 5 July 2010 and was oversubscribed by over 63 times within 24 hours after it opened.
The Odel share commenced trading on the Colombo Stock Exchange on 4 August 2010 and was trading at over Rs. 30 since the start from its issue price of Rs. 15. In July 2012, Odel announced a significant change of ownership, with Parkson Retail Asia Ltd. agreeing to purchase a 41.82% stake in the company for Rs. 1.424 billion as per data available in the public domain.
The transaction was followed by a mandatory offer to minority shareholders and a 1 for 1 Rights Issue that raised Rs. 2.899 billion in capital for expansion of the 22-year-old fashion retail brand. Following the acquisition the original owner retained a 27.88% stake in Odel PLC and continued to hold the pivotal position as CEO of the company.
Odel ‚Äď High level of brand awareness and imageOdel has achieved top-of-the-mind brand awareness, mostly for clothing among the urban consumer of Sri Lanka. I believe that customers perceive Odel as a place to buy stylish, exclusive and lifestyle apparel items. Also it is the top of the mind destination when it comes to having a ‚Äėshopping experience‚Äô.
The awareness of lifestyle products in the customer‚Äôs mind can be seen as being low compared to the clothing this could be due to the fact that Odel‚Äôs inception was with clothing and the perception remains, which is quite usual in brand marketing.
Consumers use brand associations can be summarised as per the chart which explains the strong marketing dynamics that have been at play over the years. This drives attitude formation and finally purchase decisions, which in turn derives loyalty. Brand attitude is defined as consumers‚Äô overall evaluation of a brand.
The founder is essentially associated with the brand Odel. I believe the frame of reference of Odel (i.e. style, beauty, etc.) are communicated through her personality as well. The connection between the founder and Odel is so strong that even when Parkson acquired a larger stake of Odel, the option of the founder being strongly held together with the brand was mandatory, which is a lesson for Sri Lanka.
Odel advertising and promotional campaigns are essentially associated with characteristics of new, trendy, exclusive designs. This is consistently showcased as the numerous fashion shows and store displays used by Odel. Odel is not about a product portfolio but a shopping destination which I believe is marketing in practice at its best.
The experience itself is the magnet that attracts customers to visit the place. There is always something exciting happening at Odel in terms of events, promotions, charity programs or fashion shows that keep on attracting customers. Also, the flagship store is arranged in such a way that it can keep customer interest for a significant time, which is also an interesting pick-up for Sri Lanka.
Quick take ‚Äď Financials
If we are to take a financial analysis, the details are very interesting. We can see that the enterprise value of Odel has increased by 305% from FY2011 to 2012. The change of equity of has been Sri Lankan Rupees 130,000,000. This is due to the rapid increase in long-term liabilities and borrowings by Odel during the year 2012. As the debt capital rose in 2012, the enterprise value is deemed to rise just like any other enterprise.
The gross profit margin in FY2011 is 37%, while 38% in FY2012. The rate of revenue/turnover increase from 2011 to 2012 is15% however the gross profit margin increment is 2%. In an ideal situation, the gross profit margin increment should be equal to the rate of revenue/turnover increase. This difference can be due to the depreciation of the rupee. Depreciation of the rupee triggers the exchange rate to increase, making the import expenses to rapidly rise.
One can also mention that net profit increase in FY2011 is 48% and it has dropped to 5% in FY2012. This could be due to the rapid expansions that were taking place at Odel. The store network expanded to 16 stores and two standalone stores, which requires major expenditure in terms of acquisition, operational and administration costs.
If one does a deep dive we see that the locations purchased are mortgaged and hence the term liabilities increased from Rs. 322 million to Rs. 576 million. Hence interest expense on long-term borrowing has increased. Also, opening up a chain of new stores requires fixed costs that would increase overall overheads, which is the reason for the increase of financial cost, admin cost and distribution cost by 26% by 64%, 31% and 26% respectively. This is also the main reason for the marketing and promotion expenditure to increase from 12% to 46%.
Turnover/revenue has increased by 58% over the three-year period, mainly due to the rapid expansion of the store network, which is very positive. Tying up with HSBC for promotional campaigns on credit cards and the increase of buying power of customers have helped spruce up revenue, which are interesting developments given the pressure on the purse of a Sri Lankan consumer.
The challenge is, where does one draw the line? In 2012 we see an advertising investment of Rs. 79 million on an increase of 46% from available data. The brand value increase is very strong from Rs. 674 million to over the Rs. 1 billion mark. However, the profits have declined from Rs. 209 to Rs. 202 million as a group and company data from 191 to 147 million, which is a drop of 23%.
Where does one draw the line on the short term impact to shareholders as against the overall value of the company significantly improving on brand value to cross the billion rupee mark? I commend Odel for taking the marketing route of building on brand value, but this is the line that can be challenged.
Hence we see that Odel, whilst being the pride of Sri Lanka, is also a classic case study for business management training. One cannot make a straight line judgement on the decisions taken, but for sure it‚Äôs an interesting insight to balancing profits and brand value.
(The thoughts are strictly the ideas of the author and have no implications to the offices he holds in Sri Lanka or internationally. It is one of his hobbies he pursues and acknowledges the research done by the MBA graduates of Colombo University.)