A strong, successful brand can add to the balance sheet by promoting customer loyalty and communicating values to stakeholders. Will branding benefit Europe’s utilities?
The last few months have seen the UK’s LE Group rebrand under its parent EDF brand and Vattenfall put out to tender a project to assess and value its brand. Such moves suggest that the European energy market is making its first moves towards the development of pan-European branding.
In its recent study, ‘The emergence of pan-European utility brands ” adding value to the balance sheet’, Datamonitor has reviewed the state of pan-European branding and also examined the principles and benefits of building a brand.
The question to first ask is what are the drivers and benefits for utilities to establish a pan-European brand? Now that utilities have learned to adopt business principles as their respective markets deregulate, the need is to deliver on increased margins and build shareholder value. Utilities and other industries are beginning to realise that branding is not solely the preserve of consumer products and that the brand can add to the bottom line and to the balance sheet as an intangible asset.
So how can a brand deliver on this, and can this be replicated across Europe under a single European brand? The ability to put forward such questions in a utility context is driven by the fact that the mobile telephone market has done just that. Orange is the leading example ” where consumer loyalty equals assured revenues and where the brand as an entity has increased the value of goodwill on the balance sheet, pushing up the value of the company both combining to deliver increasing shareholder value.
Figure 1. Most European utilities have adopted a single brand, driven by the desire for clarity in the investor community
A key role for any CEO is to increase shareholder value ” if this can be delivered through a brand, then this achievement can bring both personal and corporate benefits (higher book value/share price). Utilities are increasing investment in, and support of, their brands and are requesting investors to accept this cost and intangible brand value in their valuation of a company, on top of their fixed assets. To facilitate this acceptance, utilities need to deliver a more transparent strategy to investors and shareholders on how the brand can be directly attributable to this. The ability to communicate the consumer and corporate brand provides a clear statement of intent. The brand can improve the potential of consumer revenue through brand loyalty and simultaneously communicate this capability at a corporate level, where the brand holds residual value and this value can be accounted for on the balance sheet.
Investors currently analyse metrics on customer numbers, supply margins, revenues and product uptake, as well as inferring a qualitative assessment on factors such as strategy and management ability. Investors analyse these individually, however, each of these factors are directly affected by the brand. Utilities are beginning to develop better communication of the brand’s purpose to support the potential of adding to a company’s valuation via the sum of goodwill. The growth of brand valuation accounted for by goodwill will also fuel the desire of the leading European utilities and their senior management in supporting the emergence of a pan-European brand.
Datamonitor conducted a survey of the leading European utilities, by customer size, interviewing key branding and communication decision makers on the likelihood of the development of a pan-European utility brand. These respondents account for 100.1 million electricity customers across Europe’s electricity customer base.
Datamonitor’s research found that in one in three cases the CEO or the Board determines the company’s brand values. Many CEOs have an accounting or financial background, so are they actually best placed to formulate the strategy? This background and experience should leverage a greater influence among accountants and investors to accept a larger proportion of brand value attributed to goodwill (or intangible asset) so as to add to the company’s balance sheet and drive up a company’s market value.
While decisions are made at Board level, frequently responsibility for the brand is held in other departments, usually in corporate or supply. This situation increases the likelihood of reducing the impact of board-level decisions, and can easily result in failure to deliver on consumer acceptance, investor confidence and Board level expectations.
However, as Vattenfall’s June 2003 project tender to measure their brand equity indicates, utilities in Europe are fast accepting that barriers are internal as well as external. It highlighted this external and external assessment to inform the Vattenfall Group of:
How the public perceives Vattenfall’s ability to interact with all its major stakeholders: (i) customers (present and potential, private and corporate); (ii) employees (present and potential, different categories); (iii) society (public, authorities); (iv) capital providers (present, and potential)
Support the managing of brand equity and performance, in the sense of providing information on which stakeholder areas, and within these, which main and sub-processes, to prioritize to enhance the value of the brand equity and performance parameters.
Figure 2. Barriers when building a single brand across all markets
Building a brand
Respondents believed that changing the brand would harm the ability to retain customers in the short-term. They also pointed to the complexity of decentralizing brand management from the national to a regional level. Both these issues attained a higher than average level of importance in overcoming the barriers to building a single European brand. Nevertheless, the need to implement change and create innovation requires a more risk averse nature. Wolff Olins, the brand consultants, were given the freedom by Orange to create the brand that is now the benchmark of delivering value to consumers and investors.
The concept brand may be too far an emotive leap for consumers to make, although the same was said about mobile telephones ten years ago. Datamonitor also asked leading European utilities what level of investment would be required to establish a pan-European brand and what level of spend would be required to support this? The average of the responses suggested that it would require between g201-300 million of investment to establish a pan-European brand. The level of spend needed to support this brand would be in the region of g51-100 million per annum.
It is interesting to note that respondents cited “brand building costs too high” as a relatively low barrier to building a pan-European single brand. This may relate to the respondents’ knowledge that the potential to draw on funds to support the brand could be made available, since the utilities that responded were among the largest in Europe.
The respondents, or peers, believe E.ON is closest in delivering such a concept brand. This may be less surprising as Wolff Olins, who created the Orange brand, also created the E.ON brand. To date E.ON has yet to rebrand all its subsidiaries under a single brand or look to push the consumer innovation that Orange has become famous for. Until this can be realised E.ON will be unable to deliver on the increased corporate brand valuation that can be accounted for in goodwill, and thus help feed into its share price.
The investor angle
Another company that has started to move towards a pan-European brand is the state-owned French electricity giant, EDF. EDF’s rebranding of the London Electricity Group is part of a à‚£100 million ($160 million) reorganization of its UK interests. However, the need to rebrand may not necessarily be for its UK activities or for consumers. Indeed the rebranding has not seen any major television, radio or mass-market campaign. With EDF looking to make a public listing, and rumours are circulating that it may be as soon as 2004, the need to rebrand may focus on branding to aid investors rather than consumers.
When one plots these major players by their market capitalization (customer bases for the major utilities are closely related to their market cap in this case), most of the utilities have developed a single brand. This association has not solely been driven by the consumer angle, but also by the need of the investor community for clarity through a single brand. Greater clarity and clearer communication adds value to the company and helps drive the ‘capital provision’ that some of these companies seek. This has been understood by EDF and Vattenfall, the two remaining large European utilities yet to list.
Datamonitor surveyed respondents to evaluate the proportion that brand would contribute to goodwill by 2008. This figure is an indicative figure to be used as a reference and not as a definitive value of brand in relation to goodwill, due to the nature of company activity that feeds into financial reporting.
Figure 3. European brands find a f3bn price tag currently as part of goodwill ” that may grow to f6bn by 2008
Respondents believe that by 2008, this proportion of value would increase, with two-thirds expecting a 6-10 per cent share and one-third over 11 per cent. Datamonitor cross-referenced company accounts, using figures reported under goodwill or as intangible assets across the group, where the sum total of brand as a proportion of goodwill would equate to g6.0bn across 13 leading utilities. Nevertheless, M&A activity and promotion of the brand to support residential customer retention and acquisition strategies will deliver sizeable value to a balance sheet.
One should take note that Datamonitor’s survey may represent 48 per cent of Europe’s electricity customer base, however, it encompassed those very companies who will determine if a pan-European brand will emerge, with 83.3 per cent believing a pan-European brand would emerge. With regard to timing, almost two thirds expected a pan-European brand to emerge between 2005-2008.
Both E.ON and RWE are reviewing their brands and in particular the corporate brand and the potential of a pan-European brand. E.ON has initiated this through leading consultancy house, BCG, across all its country interests, which takes into account the Powergen and Sydkraft national brands. Currently RWE is trying to persuade the constituent parties of RWE Plus AG, RWE Net AG and RWE Gas to form an RWE Energy unit. While this has met some opposition from stakeholders, the company expects this to be resolved by autumn 2003.
RWE recently appointed Simon Esberger, the former npower and BT Cellnet marketer, to define the group’s global brand strategy. Esberger’s role is to define the position of RWE’s various component brands around the world. It was reported by RWE that Esberger’s brief assesses the state of the group’s brands and whether its corporate and consumer marketers would benefit from any changes.
Figure 4. Brand compass ” the emergence of premium brands
As indicated earlier, EDF’s ability to communicate a cohesive structure for its international interests (that span 24 countries) to potential investors may be the driver that leads to a pan-European brand presence. Fortum has already moved to create a pan-Nordic brand, removing the Swedish Birka brand, and Vattenfall has also followed suit in northern Europe.
It is clear that the large European utilities are manoeuvering to establish a brand footprint. The question stakeholders, consumers, employees and investors must ask is, “Does each party see a real benefit?” Will utilities deliver to consumers the brand values they claim? Will the level of investment in the brand see a return on the balance sheet for investors? Can employees find their working environment matched by an inspiring brand message? If the response to all of these questions is in the affirmative, then we can soon expect to see the delivery of a pan-European utility concept brand.