Today, most successful businesses are valued far more than the value of their tangible assets by the market. Globally, brands as assets are estimated to account for approximately one-third of all corporate wealth. In this context, it is important to interrogate how brands are being paid attention by the Indian cement industry.
One quick way to judge the importance of branding by an industry is to peer into its M&As and see how much have the brands been valued in those transactions. It is informative indeed to see what assets have been prioritised as sources of value in arriving at fair valuation in some of the recent M&As in the cement industry in India. Brands as assets have hardly featured in arriving at the enterprise value. Most mid- and small-size cement companies have had their enterprise value lower than even the current replacement cost of the tangible assets. An enterprise value even marginally higher than the replacement cost is considered admirable for a cement company - such is the pre-eminence of the tangible assets in valuing a business in this industry! Even those assets that have had their enterprise value higher than their replacement value were so valued because of their operational efficiencies and higher productivity. Brands didn't feature much for what value they brought to the business.
Every industry has its unique complexities that inform its valuation perspective. The cement industry has its own reasons to prioritise the quality and strategic fit of the tangible operating assets, but does it have to be at almost a complete exclusion of the value of brand as an asset?
Granted, it doesn't help that most cement brands are actually the corporate names, which, in an acquisition scenario, present their own unique use/ownership issues. However, the corporate history world over is replete with examples when a corporate brand name has been bought over for the consumer goodwill and equity of the brand, and the new owners have carefully transferred the said equity to another brand. Obviously the concerned brands presented significant equity to have commanded premium valuation despite the effort involved in transferring the equity to another brand. Closer home, L&T Cement name changeover to UltraTech is one such example.
It is beyond any debate that out of all that a corporation owns, the brand is the most important and the most sustainable asset. Even at operational levels, companies driven by strong brands have delivered significantly superior financial performance compared to their peers not driven by strong brands. In sum, strong brands mean better returns, period. And the Indian cement industry is certainly paying sub-optimum attention to brand management, despite two-thirds of its volume being in the consumer market.
Brand creation is not a priority
For FY 2015-16, the Indian cement industry collectively spent about Rs 220 crore on advertising across TV, print and radio - the above the line (ATL) media. Arguably, the industry does spend a significant part of its advertising budget on media like billboards and wall painting. Though it is hard to estimate these spends, we may not be too off the mark if we were to assume the total advertising spend at double the amount spent in ATL. At Rs 440 crore, the spend makes it a miniscule 0.28 per cent of revenue of this mammoth Rs 153,000 crore industry! Clearly the industry doesn't consider advertising an important business tool. And what is even more revealing is what this much-less-than-optimum budget gets spent on - very generic, mere salience building advertising. Most advertising discourse is focused on the core expectation from the category - strength/durability or even more general things like quality, trust etc. The quality of advertising betrays the fact that neither deep consumer insights nor rigorous competitive product analysis to drive differentiation is being deployed.
A large study owned by Young and Rubicam that tracks hundreds of brands across a large spectrum of categories, shows that 'differentiation' is a large prerequisite for a brand to start getting created, a meaningful differentiation of course. But the cement brands, as revealed from their advertising, are hardly making efforts to create differentiation.
And yet, advertising is not even the core of genuine brand building. It is at best one of the tools, only one of the ingredients in brand creation.
Not just about advertising
Before it gains ground, it is critical to perish the thought quickly and early on in this article, that brand is all about advertising. In fact the cement industry's skin-deep engagement with brand creation and management suggests it might be afflicted with this notion. Being brand driven is much deeper than being mere advertising driven. It is a strategic shift in the way an organisation conducts its business.
Closely related to advertising, but a very basic and fundamental brand prerequisite is to be consumer driven. Brand-driven organisations will be strongly consumer-knowledge and understanding driven. In the cement industry, even the most basic exercises like segmentation and differentiation, the building blocks of basic brand management and marketing construct, are missing - something that one would expect from an industry with such a large number of players as an approach to competitive engagement.
Branding is a commitment at the business strategy level. Who will the brand serve most, what will the brand promise, and how will it back that promise up in each and every act, where will it spend most of its R&D efforts, which aspects of its operations will it seek to excel in, what kind of internal business review matrices will it deploy, what kind of talents it will hire, etc., are the kind of alignment being branding driven demands.
Branding-driven organisations are constantly chasing deeper and deeper consumer understanding, seeking product and service innovations, and seeking points of meaningful differentiation and departure. They are essentially seeking sustainable competitive advantages that are harder to beat or compete with.
Isn't cement a commodity?
It might be the best news, from a branding point of view.
Cement being a commodity is an often-heard refrain in the industry. And, just like its belief that mere advertising equals branding, even this could count as a self-defeating belief. It is not that it is a commodity, but the fact is that this over-arching belief might be making us put fewer efforts in creating deeper brand assets. Is salt any less of a commodity? What about flour, cooking oil? And drinking water, coffee, tea, sugar, milk, hair oil? It is a secret that not many are in the know of; biggest brands have indeed been created and built in commodity categories! Only the last 20-odd years have been somewhat of an exception where technology products might have taken the centre-stage in brand creation and investment. Otherwise the biggest brand battles have been fought in the commodity space, and some of the biggest brand values too have been created in the commodity or near commodity space.
If one were to ask what, between a coffee and a cement, might feature as carrying higher stakes to the customer, we might discover an even happier news that not only is cement just like many commodities that are best amenable to brand creation, it is one of the most important commodities in terms of the stakes it carries. Even a cursory interrogation of the category makes one wonder why some of the most obvious unique customer needs haven't been used to create market segmentation and brand positioning, e.g., cements best suited for structures in coastal areas or high rain areas or for areas of extreme temperatures, cements best suited for different parts of a structure like foundation and slabs, cements for those who seek quicker construction time, cements that need less water for regions that are water deficit, etc. Why are there no attempts at SKU (stock keeping unit) sizes? Yes, it does call for a significant disruption in the entire supply chain, but that exactly is the difference between an industry that is consumer driven and the one that is inside out.
Consumer-driven organisations will make all efforts to overcome the current constraints to fulfil customer expectations while the inside-out organisations will make compromises with their existing constraints and in the process miss out on creating customer delight by finding solutions they want. If fresh cement is a big deal, it may make sense to for a player to think of a logistics innovation that minimises time taken for the cement to travel from manufacturing to the site, something that allows the cement to arrive 'hot and fresh' on the construction site.v Admittedly, there have been attempts, but so feeble that they seem to have lacked conviction and served to only reiterate the existing self-limiting belief that cement is a commodity that is best treated as a commodity.
Hard to tell, but mostly it is about an industry's belief system that the industry defines itself with. What you consider as a belief to live with and perpetuate, and what you challenge makes all the difference.
Even the way an organisation structures itself gives higher or lower emphasis to various aspects of business. Branding in cement companies is largely relegated to some marcom teams, seen as fiddling around with logos and colours etc. The brand spends are mostly seen as those painful line item expenditures that, unfortunately, can't be avoided. For want of robust brand strength matrices and their proven co-relationship with business impact, the finance guys, and rightfully so, remain ambivalent about it. The industry, driven mostly by those who have come up at the leadership positions from the manufacturing side, possibly sees itself as a hard, masculine industry and, seeing branding only as cosmetic advertising, views it as a rather soft subject that some designers are left to deal with.
The stage at which branding kicks in is another key determinant of what stops an organisation from making the best use of branding. If it is at the fag end of an organisation's core work - 'product is ready, now let us create some advertising', the branding will be superficial, cosmetic and sub-impactful. For it to be effective, branding has to be the starting point of an organisation's business and competitive strategy. It is what should be driving what kind of product differentiation to work towards, what quality standards to chase, what kind of packaging, how many SKUs, what kind of logistics and time to delivery, what kind of distribution strategy, what kind of stock keeping both at the warehouses and at the retail counters etc., to have. The organization as a whole must align itself to deliver on the brand strategy and not just the brand or marketing head. After all, a brand represents the entire organization's commitment and efforts to get the all-important competitive advantage. It is a promise that the entire organization has to fulfil in all its functions.
If managed well, brands bring immense operational and strategic benefits. They prompt business re-thinks from what product one is selling to what benefits one delivers and stands for. This in turn, in the cement industry for example, could lead to questions like what other product category could one extend a brand to. It is shocking to realise that most of what goes into building a house is unbranded material from the unorganised sector. Cement represents only about 10-15 per cent. Why should a cement organisation not consider extending itself into some of the other materials needed for construction - like sand and bricks?
Good brand management cultures would also make organisations ask questions like licensing and franchising as possible low cost/low capital ways to business growth. Though hard work, brands bring disproportionate operational and strategic rewards. They not only have influence on the consumer, they even influence talent attraction and attrition. Beyond the organisation's immediate concerns, brands even have significant social influence and serve as buffers of goodwill in moments of rare organisational failures or crisis.
Brands certainly drive customer loyalty and advocacy and fetch higher market shares and price premium. They even drive significant operational efficiencies and eventually, stakeholder value. What the brand thinking delivers beyond the financial parameters is even more precious - like organisational alignment and clarity; it unleashes collective energy and blesses the practicing organisation with the most sustainable competitive advantage called a 'brand' and a most prized culture of being 'consumer driven'. So it not whether or when, but how should the cement industry start creating mega brands out of their huge businesses. Branding is a critical business enabler that key stakeholders of the cement industry should start demanding without any further loss of time, and that too in a fundamental, comprehensive and scientific approach. It will only surprise the industry by its impact and value creation. And we may soon see valuations in the sector that gladden the hearts of shareholders even more.
Yogi Vashishta is a brand strategy consultant. He is presently CEO, Minority Brand Creation and Management LLP. Yogi has worked in leadership roles across ad agencies, market research, manufacturing, and marketing organisations, India and abroad. He has experience across diverse categories and brands like VIP Skybags, Orient Fans, Levers, Cadbury's, McDonald's, Reliance Cement, Servo and Kinetic Honda.