What's holding back British brands?

Britain's biggest brands are growing at a slower pace than their rivals from around the world. Where are we going wrong?

Britain's brands are losing ground to their overseas rivals. That, at least, is the message from this year's BrandZ brand valuation study from Millward Brown Optimor, published this week. Despite the success of companies including Marks & Spencer, the value of Britain's leading brands is growing at a slower pace than those in France and Germany - with implications for both Britain's marketers and the whole economy.

Napoleon might have dismissed Britain as a nation of shopkeepers, but it is our retailers, alongside our banks, that remain the country's leading lights. Of the eight British brands in the ranking of the world's 100 most powerful, three were banks (HSBC, Royal Bank of Scotland and Barclays) and three retailers (Tesco, Marks & Spencer and Asda), with Vodafone and BP making up the group. Asda's inclusion as an independent listing, despite the seemingly tautologous presence of its US parent Wal-Mart, is justified because of its 'strong heritage'.

For a relatively small country, this appears to be a good performance - only seven home brands appeared last year. In addition, two British brands ranked among the 10 fastest-rising global brands in terms of value - M&S came top, with growth of 192% over the year, while Shell came 10th with 38%.

Yet closer analysis reveals that overall, Britain's biggest brands are growing far more slowly than those of our main competitors. The six brands that ranked in both the 2006 and 2007 lists grew 6.7% in value. The French brands in both lists grew by 18.8%, and the comparable figure for German brands was 10.6%. Asian brands grew by 26.8% (admittedly from a lower base), US brands by 8.7% and Japanese by 8.5%. The global average is 10.7% - so why is Britain lagging behind?

One of the main reasons for the strong performance of France and Germany is their high number of luxury brands, from German upmarket car marques such as BMW, Porsche and Mercedes to French luxury goods and cosmetics brands such as Louis Vuitton, L'Oreal and Chanel. Luxury goods is one of the world's fastest-growing sectors, since high-value products are in great demand in emerging markets and margins are higher than for other types of products and services.

Overheads and infrastructure are also major factors. 'Retail and financial services are "average-growing" sectors, partly because of the need to establish infrastructure - shops and branches - in the territories into which they expand,' explains Peter Walshe, global brands director at Millward Brown. By contrast, luxury goods have lower overheads: in many cases, success boils down to a joint venture with a good distributor.

As a result, foreign brands may be in a better position to exploit emerging markets than British brands. 'If they are to make greater inroads into new territories, [British firms] need to innovate and better exploit the potential of their brands,' Walshe argues. 'As our manufacturing economy declines and business becomes more global, leveraging British brands overseas will be an important source of competitive advantage.'

If British companies are missing a trick, it is not because they can't create successful brands. One reason for the dearth of our brands in the top 100 is that we tend to sell successful companies to foreign competitors. For example, we are very good at creating mobile phone brands, for which there is huge demand in emerging markets. The survey ranked Vodafone as the most valuable UK brand, but Orange and O2 have dropped out of the UK list because they have been taken over by France Telecom and Spain's Telefonica respectively.

The two network operators joined a long list of British companies to have passed into foreign hands, including Rowntree, Jaguar, Mini, P&O, Pilkington, The Body Shop and Abbey. Aside from murmurings in the press and concern about job losses at a local level, such takeovers have passed largely unremarked. The consensus appears to be that acquisition by foreign owners is all part of a healthy and dynamic free market. 'If a brand in one country is undervalued and under-developed, it is right that the free enterprise system allows others to do more with it,' says David Haigh, chief executive of Brand Finance. 'It is healthy to allow foreign managers to keep Britain on its toes.'

For consumers, ownership is not an issue. Rita Clifton, chair of Interbrand, points out that consumers neither care - nor, in many cases, even realise - that a brand is under foreign ownership, provided their experience of the product or service does not suffer. 'The question is one of brand management,' she says, pointing to BMW's stewardship of the Mini brand. 'It has pursued disciplined brand management and taken time to really understand and use all the quirks that make Mini unique.'

The issue of management is important. Walshe argues that foreign interest is a testament to the strength of the brands the nation is producing. However, Tim Ambler, senior fellow in marketing at London Business School, believes British management generally does not understand brands, and it often needs foreign companies to manage them better.

'The typical board spends just 10% of its time working out where its money is going to come from - that is, marketing,' he says. 'With very honourable exceptions, the quality of British top management is poor. Where we are top class, we really are top class - companies such as Tesco and Diageo spring to mind. But we have a longer tail of second-rate performers than our competitors. Businesses in this second tier dismiss marketing as peripheral - they are smug and not interested in improving.'

Ambler believes one reason British brands are suffering is the same preoccupation with finance that has built our world-leading financial companies. Young people are encouraged to go into a profession rather than the 'tawdry' world of business, so it isn't surprising that Britain reputedly has more accountants per capita than any other country and that they, not marketers, run most of its businesses. Britain is as good as any other country at making things - hence the interest from foreign predators - but is less impressive at managing and exploiting them on a global scale because, says Ambler, 'we suffer from financial myopia and are not prepared to back our judgment'.

Other observers believe that ownership is critically important from an economic perspective. Hugh Davidson, visiting professor at Cranfield School of Management, warns: 'Brands create most wealth for their owners, because the closer to the marketplace you operate, the higher the margins you make. Most of the profits in any industry come from research and development, branding and distribution.' So, although Britain is proud of its car manufacturing industry, for example, most of its profits go to Honda and Toyota in Japan. 'We no longer have a car manufacturing industry of our own,' says Davidson. 'If we continue to allow foreign predators to lay siege to our brands, within 50 years we will end up as a producer of white-label goods for other countries to brand.'

While he is in favour of free markets, Davidson believes the acquisitions playing-field is not level. 'Anyone can acquire in this country, but it is very difficult for [British companies] to acquire almost anywhere else in Europe,' he says. Other countries take a longer-term approach than the UK to nurturing and investing in their critical industries, and protect them from foreign predators - witness the furore in Germany over Vodafone's acquisition of Mannesmann in 2000, and French anger over the mooted purchase of Danone by PepsiCo in 2005.

Ambler and Davidson are sceptical about the value of the brand league tables that firms such as Millward Brown, Interbrand and Brand Finance produce. 'They are all, in different ways, subjective,' says Ambler; worse, Davidson believes they can be dangerously misleading. He cites Cadbury, Diageo and GlaxoSmithKline as examples of firms that do not feature in Millward Brown's table but disprove the myth that the British can't create great global brands. Such surveys are also limited in that they tend to focus on corporate brands, he says. 'For example, the Pampers brand is bigger than many major companies, and Unilever has done a masterly job of extending the product and geographical range of a local brand in Dove.'

The surveys also tend to focus on 'superbrands' rather than 'super-sectors', and Britain is arguably much better at the latter than the former. US brands dominate the rankings because it is a relatively easy matter to roll out brands globally that already cater for a huge domestic market. 'In that sense every European market is economically disadvantaged,' says Jonathan Hall, global client managing director at Added Value. 'But the UK is very good at particular sectors, including niche luxury brands. Scotch whisky is a great example of a luxury sector that plays very well around the world, including emerging markets.'

Indeed, Guy Salter, deputy chairman of The Walpole Group of luxury brands, believes that over the past 11 years British luxury brands and fashion items 'have started to give the French and Italians a run for their money'. And because we were 'late to the race,' as he puts it, 'we have found more interesting, creative ways of doing it'. He cites brands such as bag maker Anya Hindmarch and shoes and accessories business Jimmy Choo, which have gained a global following from a British base, as exemplars of a new market-driven approach to luxury goods.

As well as an abundance of fresh ideas, entrepreneurs, designers and new ways of looking at business, there is also a lot of new money, particularly private equity, 'begging for the opportunity to do some of this stuff', claims Salter. What's more, because luxury brands are not intrinsically bound up with the UK culture, we are able to take a less serious and ultimately, he hopes, more successful approach - in much the same way that Australia stole a march on the French wine-making industry.

Perhaps the greatest benefit of these kind of brand rankings is that, despite their various degrees of subjectivity, they draw attention to the value of brands and their contribution to business success. The irony is that Britain seems unable to apply its financial prowess to the measurement and exploitation of its brands, which are often businesses' most valuable assets.

The alternative to recognising and exploiting Britain's creative capabilities, including the strength of brands built here, is stark. Sir George Cox, chairman of the Design Council and author of the government's 2005 Cox Review of creativity and design in British business, which was intended to identify ways of exploiting more fully the nation's world-class creative capabilities, warned recently of the threat posed by countries such as China and India. These have been seen as destinations for high-volume, low-skilled jobs, but both are now building up indigenous creative skills. 

According to Cox, Britain and its brands must be in a position to engage with these markets, which will enjoy huge economic growth over the next 50 years - or risk being marginalised. 'We need to ensure we get our share of that,' argues Cox. 'If we don't, we will end up becoming a theme park.'

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