Mia Pandey discusses how established brands have managed their risk when moving to the on-line environment.

Mia Pandey discusses how established brands have managed their risk when moving to the on-line environment.

Over the past months, it has become increasingly obvious that the internet bubble has well and truly burst. Share prices of internet companies such as eToys, Priceline, or Buy.com have declined by more than 97%. As we sift through the rubble, it may be appropriate to try and learn some lessons to help managers create better brand strategies.

The costs of a failed internet strategy are clear. When the Toys'R'Us internet venture failed to deliver customer orders in time for Christmas 1999, the company had to compensate dissatisfied customers with $100 gift certificates, at a net cost to the business of as much as 5 cents per share. Worse yet, the incident led to a class action lawsuit and a multitude of negative profiles in the media. The damage to the value of brand was substantial and could easily have been prevented (or at least substantially mitigated) by a better strategy.

In their haste to be part of the internet "gold rush", even conservative companies such as the MY Times rushed to establish dot.com subsidiaries to take them public and benefit from the inflated share prices. Luckily for most, the crash came before these internet ventures were able to separate from the parent business, taking with them the control of the crown jewels that are the core brand.

The brand risks of going on the internet are large for two reasons. First, extending the brand in any shape or form influences the perception of the brand for better or for worse. Second, and more specific to branding on the internet, is that on the web, the experience is the brand. When a customer buys a product in a retail outlet, there are external diversions that may mask the brand: the merchandising, the salesperson, the shop environment, etc. On the internet, the brand is concentrated into a defined space. The brand is the experience and the experience is the brand.

There are a number of risks that established brands face in launching an internet presence. However, there are also some strategies that they can pursue to mitigate such risks.

Level of brand engagement
The first two questions that brand managers need to ask themselves are:

How much does their planned internet venture leverage the brand (rather than being a distinct, almost unrelated business)? and how much risk are they willing to expose the parent brand to, in the event that something goes wrong?

The answers to these questions help managers to identify a suitable level of "brand engagement" that will underpin their strategy. The table above shows the spectrum of options, each with their relative trade-offs. An established brand can lend instant credibility and quickly generate traffic but at what cost?

There is no definite answer as to which option works best. At one end of the spectrum are those that have approached the web with extreme caution and drawn no direct relationship to their major brands. Lloyds took this "softly softly" approach by testing a stand-alone internet bank in Spain called evolvebank.com, with the view to bringing it to the domestic market once it had a proven track record. Now the company has decided go down the joint venture path by linking up with Centrica's Goldfish brand, thus still protecting the Lloyds brand from any involvement.

Less extreme in their approach are those that have developed distinctly separate brands, but have made it very clear that the might of the core brand is behind the operation. Vivazzi, the joint venture between Vivendi and Vodafone to target the provision of internet services, mobile data and interactive television is one that has taken this approach.

Better known examples are the Co-Op with smile.co.uk and Prudential with egg. They have allowed their brands to benefit from some of the trust already built around the parent brands, an aspect that can count for quite a lot in financial services, where customers are reluctant to give their money to a completely unknown identity. Furthermore, the core brand may have negative brand associations such as "slow-moving", "traditional" and "staid" that would be liabilities in the internet arena. A new brand can abandon these negative connotations.

Conversely, the arms length sub-branding approach also benefits the parent by offering a layer of insulation if the venture does not perform to expectations. When Cahoot, Abbey National's internet operation had problems, less sophisticated customers would not have realised the connection to Abbey National, thereby protecting the core brand from some of the adverse publicity.

Another method has been to develop distinguishable internet operations and sub-brands within the folds of the core brand. The Financial Times has overseen the rise ofFT.com. Interestingly, FT.com has had a reverse halo effect on the Financial Times by promoting awareness of the newspaper to a broader geographic spread. It is believed to have contributed to at least some of the 11% increase in circulation. This directly contradicts the threat ofcannibalisation that most outside sources were predicting in the early stages of news on the web.

Still another way, and the one that has entailed the most risks to the core brand, is developing integrated operations as a differentiating aspect of the parent brand. One of the most difficult issues with this approach is managing the integration within the company.

Barnes & Noble launched its Barnesandnoble.com site under the umbrella of its core brand. Structurally and financially, however, the parent spun it off into a stand-alone company, with separate management and separate shareholders. Bertelsmann now owns a controlling stake. The spin-off did mean that the on-line company gained greater organisational flexibility in terms of speedier decision making, creating an entrepreneurial culture and attracting staff. Nevertheless, it has also meant that Barnes & Noble have unwittingly placed guardianship of their brand into "foreign" hands. Should the on-line and off-line management teams have incompatible strategic or marketing objectives, then the brand will certainly suffer.

An integrated branding approach may offer an easy entry strategy, but is accompanied by the issues of integrating online versus off-line fulfilment capabilities, managing the internal politics and balancing competing customer priorities.

Don't underestimate resources
Companies moving to the internet tend greatly to underestimate the resources required to set-up a viable operation. Implementing a reliable e-commerce site requires specialised resources and a substantial back-office.

Some companies have tried to outsource the process of developing their internet presence with horrific results. Many of the internet consulting companies have grown very rapidly and thus have very patchy teams. Consequently, projects tend to run very late and deliver far less functionality than promised. The consequences of a crashed site or, worse, a hacked one can cause significant damage to a brand. This means that, in addition to managing the overall internet strategy for the brand, management needs to be directly involved in the execution of the strategy. The cost of such management attention can be large and must be planned for.

Of course, the success or otherwise of all of these brand strategies depends on many other factors. Top of the list is the commitment of the senior management and board of directors to the chosen route. Branding on-line provides the opportunity to create a personal dialogue with your customers. Thus it is more than just transferring the print brand identity to the internet. Of course, the website must include the design image of the company, but ifbranding is about building relationships, then merely creating a web presence is doing little to enhance the value of the brand.

Moving to the internet requires a 24 hours/7 days a week commitment to customer service and a major investment in fulfilment. Many customers live outside traditional service areas, but still need to receive deliveries. System crashes, fraud, lost orders, duplicated orders and delivery errors have both direct costs and detrimental impact on the brand.

Another consideration is the nature of the brand's target customers. Will it really be advantageous to offer a full-service web capability? Here is where the great web promise offered to the automotive industry fell through. Their customers were not ready to make such a high risk purchases on-line, and used it instead to negotiate the best deal once they had visited distributors. The result was lower margins and declining brand values for all.

In 1999, sales generated on the internetwere $11 billion. Last year's figure is likely to be double this amount, with some sources predicting that spending on-line could account for up to 10% of total consumer expenditure by 2005. If we define brand value as the economic worth generated by the brand, e-tailing offers a great deal of potential.

On the other hand, a half-hearted or inconsistent internet approach that creates confusion in the minds of consumers could detract from brand value. This is a grave danger.

  • Mia Pandey is a senior consultant with Interbrand, specialising in brand valuation, e-mail: mia.pandey@interbrand.com .