Tuesday, October 2, 2012

The perils of borrowing on brand equity

This story about the trials and tribulations of Fender in the New York Times illustrates the delicate balance between brand equity and real equity.

Hot brands create a feeding frenzy. Facebook, Groupon, and many others have suffered from a business that's worth less than the money its brand is capable of attracting.

Fender has hit upon hard times. Not because the brand isn't respected. Not because their products are inferior. Not because the competition is eating its proverbial lunch.

Fender is in trouble because in a tough economy they can't grow fast enough to satisfy the needs of those who have invested in it.

Growing margin is a challenge given the economy, competition and volatility of the high-end guitar market. 

Growing share is tough since about 65% of all guitars sold around the world are priced at $350 or less and Fender already competes in this space with guitars produced in Asia and Mexico. 

Growing the category is difficult because a new generation of musicians seem to prefer programming music instead of playing it.

Fender has worked hard to maintain an almost mystical brand image by promoting their relationships with rock's pioneers, legends and current stars. Go into any club on a Friday or Saturday night that features live music and the odds are better than 50/50 the guitar player will be wielding a Fender. From a brand standpoint they've done just about everything right since freeing themselves from CBS.

But now with the musical instrument market down 13% from its 2005 high, the venture capital company that bought nearly 50% of the company in 2001 and accrued additional debt to acquire other brands in an attempt to stimulate top-line growth, wants out and nobody thinks the company is worth the $396 million asking price.

Fender is in a box.

Worst case scenario: the company gets broken up and its pieces are sold to maximize their value. The other option is to develop growth platforms that take the company's focus off its core business in guitars, amps and other musical accessories.

Either way Fender will become something significantly different from what it has always been.

As a Fender player, owner and fan, it's frustrating to see a brand I love destroyed by its debt.

3 comments:

  1. Destroyed by debt. State of the world it seems. I am ever hopeful that we all can reinvent growth platforms.

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  2. "Maximize shareholder value." It's an all too common statement that will quietly kill a business while leaving all the brand value alive and well. Brand value isn't tangible alone; it's a multiplier of value.

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    1. Exactly Stephen. Too many people forget that.

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