Tuesday, October 02, 2012

What's For Breakfast? A Brand's Reputation!

I was reading about Mitt Romney and the Bain company, and came across this:

Companies like Bain Capital call themselves private equity firms, but as I explained in my book “The Buyout of America” they really provide no equity. They make money by putting businesses at risk. They say they turn struggling businesses around. But Sealy was not a turnaround — it was the market leader in its sector.
Romney first tried to boost Sealy’s profits, so it could pay its debt, by acquiring one of Sealy’s biggest retail customers, Mattress Discounters. But MD expanded too quickly and went bankrupt.
Bain then pushed Sealy to design the no-flip, or one-sided, bed. To cut costs they eliminated the bottom cover, making the bottom simply a foundation. With two-sided beds, consumers can flip their mattress, like they rotate a tire, for longer wear, so getting rid of the bottom would shorten the life of the mattress.
But Bain was more interested in cutting costs and boost short-term profits than in providing value to consumers. For a while, it didn’t seem to matter. Bain and co-investors sold — “harvested,” if you like — Sealy in 2004 to fellow private equity firm KKR for $1.5 billion, pocketing $741 million for its $140 million investment.

That's not quite the same thing as those firms which acquire another firm with a good reputation for quality or durability and which then eat up that reputation by lowering the quality or durability of the product.  Doing that makes a nice short-term profit for the acquiring firm and its owners but of course it makes the consumers ultimately angry and destroys the brand.

All this is easiest with so-called experience goods:  Those things which you have to use for quite a while before learning how good they are.

Mattresses certainly qualify.  If a mattress used to last ten years and now only lasts five years, you wouldn't want to pay as much for it, right?  But it takes five years to learn that a previously ten-year mattress now only survives five years.  This gap lets the acquiring firm milk down that reputation bank account.

Closer at home, I use Arabia's Teema mugs as the divine-coffee containers.  They are expensive, yes (22 dollars for a mug though I get mine for less while in Finland)  but they are so smooth on the eye and what's most important, they used to last almost forever.  The glazing was very thick.  I have dropped these mugs on tiled floors several times (accidentally!)  and never could break one (except for once the handle breaking off).

All this means that my china choice was probably saving me money, despite the high initial purchase price.

But the two I bought this summer seemed different to me.  When I got back to Snakepit Inc.  I weighed them and compared the weights to the old mugs.  The new ones are much, much lighter.  And they have small chips (from the dishwasher) after less than two months' use.

Now, whether this is a conscious policy of milking down Arabia's reputation (for high design and high quality in the past) by the new owner, Iittala,  I don't know.  But  when a brand is mostly known for, say, high quality, choosing to lower that quality to cut costs may have the same effect as a conscious policy of reputation-eating.

OK.  After glancing this through I just wanted to complain about my mugs...