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The big brand sound

As I said last week, when it comes to distribution brands, our cross-section of senior decision-makers in distribution and manufacturing businesses are oddly schizophrenic. In theory, many believed that we are moving into an era of rapidly growing “retailer power”, in which large new consolidated retail businesses will rapidly emerge, many of them multi-tied.

But in practice, many simultaneously believed that most distribution businesses – from the biggest bank to the smallest IFA – do have a more or less “no change option” and are pretty likely to take it.

You might expect this schizophrenia to follow through into our respondents&#39 thoughts about manufacturing businesses. I would have half a mind to agree with you (ha ha) but in fact we would both be wrong.

Oddly enough, when it comes to the consequences of depolarisation for manufacturers&#39 brands, our respondents somehow put their schizophrenia aside and express clear opinions on the basis of two key assumptions, namely that:

•Distributors would indeed consolidate into a much smaller number of much more powerful organisations, and

•Most of these distributors, whether coming from an IFA or tied background, would choose to multi-tie.

It is important to emphasise that both of these points of view are so contentious that even the people who express them spent half their time disagreeing with them. Still, here is what they say about manufacturers&#39 brands on that basis.

First and foremost, there is widespread agreement that a rise in retailer power represents a big threat for manufacturers. Many respondents point out that, in other parts of the market economy, powerful retailers with big market shares put manufacturers under enormous pressure. Organisations such as Tesco, Dixons and the reborn M&S were cited as examples of businesses whose success depends primarily on ferocious buying departments who pressurise their suppliers ruthlessly.

Most respondents agree that multi-tied status provides the greatest opportunities for the wielding of this kind of retailer power. One says that “for the first time in a generation, it will be fun to be a buyer in a financial advice business”.

Against this background, it was believed that manufacturers sitting down at the negotiating table will need to do everything possible to strengthen their hands and one key card available to manufacturers will be the strength of their consumer brand franchise.

We tested an analogy with the grocery market, pointing out that the likes of Persil, Oxo and Weetabix build consumer brands principally as points of leverage in their negotiations with retailers. With some caveats, this analogy is seen to be much more relevant to financial services in the future than it has been in the past.

One critically important dimension of manufacturers&#39 consumer brands, both now and looking to the future, is the level of reputational risk they offer to distributors, and most of all to banks. This is a huge issue.

Whatever strengths a manufacturer may stand for – terms, service, product quality, brand, etc – if it is also seen to offer reputational risk, then the big distributors will run a mile.

The worst label you can get stuck on you these days as a manufacturer is the word “toxic” – a word that was extensively used in the research – and once you are branded toxic, your ability to secure distribution becomes very, very limited.

If there is any kind of uncertainty – questions over the possibility of a change of ownership, or overhanging problems from any regulatory difficulties, or unclear positioning within a corporate structure – the toxic label is attached and it is awfully hard to remove.

In this regard, it is interesting to consider the list of five investment houses chosen as multi-ties by HSBC and announced during the period that our research was in the field. If you wondered why it consisted of Fidelity, Gartmore, Invesco Perpetual, JP Morgan Fleming and Schroders, and not any of the other names that come to mind, reputational risk is a big part of the answer.

Not least because of the reputational risk issue, big is beautiful in the eyes of big distributors. In life and pensions, there is now a pretty clearly defined premier league of major players. These are definitely Norwich Union, Standard Life and Legal & General, probably Prudential, Skandia and Axa, and maybe Aegon if it would get its brand strategy sorted out. Scottish Widows sits in a category of its own, with ticks in lots of the boxes but one great big cross in the box marked “ownership”. On the basis of our research, it is very difficult to see how being owned by Lloyds TSB benefits Widows.

The situation is completely different in the investment industry, where, weirdly, there is still only one team in the premier league. This is, of course, Fidelity, which is still seen to be about 100 million miles ahead of every other fund manager. Our research respondents struggle with the idea of a premier league with only one team in it and felt that others must be trying to earn promotion but they found it very difficult to imagine any other fund manager narrowing the gap much below, say, 95 million miles.

You may wonder what alternatives our respondents held out to manufacturers who do not like the look of playing by this rather fearsome set of rules. Well, to be fair, some respondents do recognise that for one of two exceptionally well positioned organisations, there is a Plan B and even a Plan C.

For example, overall, our respondents display more or less zero enthusiasm for direct-to-consumer businesses run by manufacturers. They believed that manufacturers do not have the skill to run distribution businesses; that consumers will not buy most financial services direct, especially now; and that even if they would, they would be mad to, because they can buy them cheaper and get better service from distributors.

Even the manufacturers in our survey generally agree with this, with several of the fund managers saying off the record that they would be very happy to offload or outsource the direct customer bases they already have.

But even so, one or two players – well, to be exact, two and a half – were thought to have the skills, resources and commitment to play in this area. The two are Fidelity (again) and Legal & General, and the half is M&G, which respondents say had always been 100 per cent committed to its direct business but was showing recent signs of losing interest.

Equally, respondents showed fairly polar warmth levels towards the vertically integrated manufacturer/distributor model, where a single organisation makes the products and sells them through its own salesforce. The participants in our research could not really see the point of yoking manufacturing and distribution together in this way. If the manufacturing is any good, why would you not want to obtain distribution beyond your own salesforce? And if the salesforce is any good, why would you want to confine them to a single range of products? But, again, there are a couple of exceptions, businesses that respondents think could operate this formula successfully – notably St James&#39s Place, with its upmarket wealth management positioning, and, at the opposite end of the spectrum, a couple of the friendly societies which are seen to be the rather distant, but still surviving, relatives of the old industrial branch offices.

Still, these are the exceptions, not the rules. The rules, in the opinion of most of our respondents, will be simple and harsh. Big is beautiful, reputational risk is lethal, the only alternative to bigness is brilliance at something; and the strength of your consumer brand is one of your few points of leverage at the negotiating table.

It is a picture that is very familiar to any manufacturer trying to secure distribution through Tesco or Dixons. But in financial services, I suspect that, if it is an accurate picture, it is one that will come as a considerable shock to a fair few.


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