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Pricing BP's infamy

Mark Ritson

Published 6:29 AM, 16 Jul 2010 Last update 10:12 AM, 16 Jul 2010



Buy shares in BP. That was the bizarre advice from RBS analysts last week after the bank’s bright sparks worked out that even the worst possible costs of the Deepwater Horizon will total less than the actual drop in BP's market value. 
 
RBS have, of course, got it wrong again. Irrespective of the costs that BP must now endure – our financial friends are completely ignoring the fact that even after all the oil has been cleaned up, BP will live in infamy as one of the world’s most shamed brands. The official terminology for this kind of perilous state is negative brand equity. And as much as our banking colleagues might sneer at the term, it spells long-term disaster and probable death for the company that once was known for being 'Beyond Petroleum'.

Negative brand equity is a relatively rare, but serious complication of corporate brand failure. It occurs when a brand has a negative impact on the business – meaning that a company would be better off with no name at all. It happened in the 1970s when, believe it or not, Tesco’s brand was so poorly perceived that Imperial Tobacco decided not to acquire the retailer for fear of being associated with such a tarnished and unpopular organisation. It happened again in the 1990s when Skoda discovered to its horror that they could not get the British consumer to buy their cars despite making some of the best vehicles on the road and spending millions on advertising. Consumer research later confirmed that two thirds of their target market would literally not consider anything at any price that carried the Skoda badge.

"Closer to home, Sydney based rugby league club the Canterbury Bulldogs encountered a similar problem after being found guilty of breaching the salary cap in the NRL in 2002. According to CEO Todd Greenberg the club found it hard to bounce back from the scandal because of the negative brand equity associated with the Bulldogs. "We were starting from a position below zero," reflected Greenberg recently, "But we hit our lowest point and fought our way back". 
 
And now we have BP. Like every case of negative brand equity before it, the peculiarities of the situation mean that all the traditional advantages of branding are now inverted. BP would be better off literally whitewashing its forecourts and removing all evidence of its Helios brand identity. That said, the actual impact of the Deepwater disaster on BP’s petrol pump sales is likely to be both localised and temporary. We know from past history that petrol consumers are a fickle bunch. When the Exxon Valdez spilled its load into Prince William Sound in 1989 the enduring impact on Exxon’s gas sales, even in the state of Alaska, was virtually zero.
 
Unfortunately for BP, the more serious implications of negative brand equity transcend consumer sentiment. BP is discovering that negative brand equity can also have a detrimental impact on their relationships with suppliers. Earlier this month, for example, the company returned to its bankers to seek additional finance to help fund their cleanup operations in the Gulf. While BP did apparently raise money, the funds were only obtained after agreeing to pay significantly greater margins and fees. BP need to get used to this – it will become standard business practice from now on as suppliers who once prided themselves on dealing with BP now regard such interactions as a reputational and financial risk. Even Lord Coe, the head of the 2012 London Olympics, recently had to defend BP’s sponsorship of the games in light of the Deepwater affair. The tarnished oil giant can’t even give money away without a fight.  
 
Even more pernicious damage is being done to BP at the employee level. Internal memos at BP have recently advised staff not to wear the company logo and to take caution in revealing who they work for in public settings. Good advice, but also a measure of the kind of impact that negative brand equity has on HR strategies. One of the biggest drivers behind the rebranding of BP in 2000 as “Beyond Petroleum” was to avoid losing talent to better positioned, more ethical brands. BP now faces the prospect of navigating the century ahead with a damaged brand and an increasingly second rate management team.
 
And finally there are the financial implications. A well run global brand like Google trades at a massive premium from its net assets because it also owns a brand name that has both widespread brand awareness and positive brand associations. Millward Brown currently values Google’s brand equity at $114 billion, or roughly three quarters of the company’s total value. In contrast, BP’s current market capitalisation is less than its book value. If you broke up and sold off all its oil wells, offices and other assets you would recoup a sum bigger than BP is currently worth. To put it in layman’s terms: BP is worth more dead than alive.
  
And of course death is exactly what will eventually befall BP. It will probably be gobbled up by a competitor keen to get their hands on BP’s assets for less than they are actually worth. Even if BP can avoid that fate, its brand is so tarnished that it will eventually have to break itself up and rebrand the various off-shoots with new identities untainted by any association with its original corporate identity.
 
Whichever way it happens, the death of BP is an entirely appropriate fate for a brand that claimed it was green (and wasn’t) and a company whose core competence was pumping oil safely to land (and couldn’t). Good riddance I say.

Mark Ritson is associate professor of marketing at Melbourne Business School.


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8 Comments


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Barry Williams wrote:

I think all the in this piece are extremely valid. (See Pricing BP's infamy, July 16).

But, given the logical conclusions outlined in the second last paragraph, shouldn't BP still be considered a 'buy' at current value?

Surely a competitor would be forced to pay a premium above current market rates or alternatively you will realise value in any split that occurs.

Good article however, I believe the result will be the same as RBS concluded. By BP.

16 Jul 2010 1:45 PM

Philip Morrice wrote:

Whilst BP certainly has a lot to answer for, this article is rather emotionally charged. (See Pricing BP's infamy, July 16).

I suspect BP will survive quite nicely and all this hoohah will have been forgotten in a few years. After all, BP was guilty of severely spoiling the Amazon region of Brazil in the early 1990s which led to it getting out of mining, but very few commentators recall that today. Just as Siemens and Krupp survived being an integral part of the NAZI war machine, so will BP be around for a long time to come.

The UK government will make sure of that.

16 Jul 2010 1:57 PM

Andy Saunders wrote:

Mark, you've missed a fundamental point. (See Pricing BP's infamy, July 16).

RBS may well be making a good call on buying BP even if the brand is worth less than zero (in fact if the well is capped/killed and clean up is straightforward then they arguably are making a great call): the value of BP may lie in it being broken up or acquired, in which case the current shareholders may realise an asset appreciation due to the killing-off of the brand.

Or BP may survive and the brand tarnishing may dissipate (there are some examples of this happening previously).

16 Jul 2010 2:06 PM

Anna Candler wrote:

Mark, last time I looked petrol was one of the most homogeneous products around.

(See Pricing BP's infamy, July 16)

Brand equity counts for something when there is a direct connection between the purchaser and the product. But when was the last time you 'bought' a BP product? Sure there may be long-term financial consequences and the company may not survive.

And you appear to argue against yourself, pointing out that Exxon suffered no consequences from its Valdez spill.

Sure there will be push-back from some suppliers. However, charging higher prices for funds is a predatory. The fact is banks still did business with BP and so do thousands of other companies.

Far better we all realise there is a down side to our enormous appetite for oil.

16 Jul 2010 3:43 PM

John Grehan wrote:

Mark, worryingly for someone who is presumably teaching others, you clearly have no clue what you are on about, let alone any understanding of the oil business.

(See Pricing BP's infamy, July 19)

BP sells a commodity, the price of which has nothing to do with the 'image' or 'brand' of the company that produced it. When was the last time you bought petrol from one company rather than another based on anything other than price at the pump?

The comparison with companies such as Google is clearly ridiculous – by definition resources companies are valued at the worth of their assets without any provision for 'goodwill' (do you think people ask for steel made from BHP iron ore rather than Rio Tinto because they prefer the BHP 'brand'?). If the current price of BP is below the value of its resources then it is indeed a 'buy' as the folks at RBS say (and as you also concede in your article). Finally, I doubt that any company operating in the highly complex deep-water drilling environment could say with 100 per cent certainty that a similar disaster could not have befallen them under any circumstances. It is a blessing in disguise that this wake-up call to the industry was given through a company such as BP, who were able to quickly bring vast resources to bear in dealing with this disaster.

17 Jul 2010 3:54 AM

Timothy Rosser wrote:

Surely BP having to "pay significantly greater margins and fees" on loans obtained during the crisis is simply the price of risk. (See Pricing BP's infamy, July 19.)

At that point the costs were open-ended and there was some small chance that BP would go broke.

I'll conceed the HR implications, but the idea of a bank worring about its reputation being tarnished by lending money is laughable.

18 Jul 2010 10:06 PM

Lloyd Taylor wrote:

In the past, oil has been referred to as the devil's excrement. In the present, Beyond Petroleum has been demonstrated the height of hypocrisy.

As Mark Ritson note in the article Pricing BP's infamy (July 16), it is more informed to draw one's own conclusion about the consequences of the 'happy' marriage of the two under the BP brand, the value of the 'strategic foresight' it demonstrates and the inevitable end game in terms of reputation, brand and value.

The alternative of relying on the opinion of the spreadsheet jockeys as to the future and value of BP would be the height of folly.

In the final analysis, the owners of BP will prove to be the litigants and their lawyers will tie the company in knots for the next decade (at least).

There will be nowhere for Beyond Petroleum to hide and its management will forever be fighting a rear-guard action, to the detriment of the future and value of the company!

19 Jul 2010 10:31 AM

Mark Ritson wrote:

In response to the several comments above about petrol being a commodity (See Pricing BP's infamy, July 19):

I mention this in paragraph five as something that will not be impacted by BP's current plight.

My point is that all the other implications of brand equity – better credit, cheaper supplies, government tenders, access to land, employee acquisition quality, retention and performance, financial brand equity etc – are all going to be hit too hard for BP to make it.

Disagree with me at your leisure – but please try to base your disagreements on the article.

19 Jul 2010 9:19 PM



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