Brands Have Limits – Saga and AA

I have written before about the merits of strong brands. This is a paragraph from my new book soon to be published (entitled “Business Perspective Investing”): “Trade marks help customers to identify with the product, and make it easier for them to select the product on a new purchase. Brands are particularly effective when there is actually little difference between competitors’ products – for example, lager beer, gin or washing powder. Brands are exceedingly valuable if well maintained. Coca-Cola is a great example of a powerful brand, supported of course by a secret recipe”. But there are limits to how much a brand can be exploited in the face of aggressive price competition or where the company milks the customers too aggressively. Recent events at Saga (SAGA) and AA (AA.) demonstrate the problem.

Saga specialises in insurance and holidays for the over 50s. I certainly qualify in that regards and until a couple of years ago I actually had a car insurance policy through them. The policy was well structured and they dealt with the odd claim well. But I found they consistently increased the premiums on each renewal to the point where they became simply uncompetitive on price. That undermined my trust in the company. It seems other customers may have faced similar issues because their insured customers have been falling. The shares fell by 37% yesterday after a preliminary results announcement that showed reported profits had turned into a loss and the dividend is to be halved. This is what it said:

“Over recent years Saga has faced increasing challenges from the commoditisation of the markets in which we operate, especially in Insurance.  This has had an impact on both customer numbers and profitability.  Although Underlying Profit Before Tax for the 2018/19 financial year is in line with our expectations, the long-term challenges we face and the results demonstrate that Saga cannot grow without a clearly differentiated offering to its customers.

In response, today we are launching a fundamental change to the Group’s strategy to return the whole business to its heritage as an organisation that offers differentiated products and services.  This will give our customers and members a compelling reason to come to us and stay with us.”

I also had a Saga branded credit card until last month, a service run by Allied Irish Bank (AIB). But Saga abruptly cancelled the service with no explanation as to why, and no alternative offered. Those who only had one credit card, or significant outstanding balances owing would have had to scramble quickly for an alternative (Saga did not arrange any transfer to another provider). This is no way to treat loyal customers.

It would seem that Saga has been making very substantial profits in the last few years by exploiting its brand and loyal customers, but there is always a limit to how much that can be done. The over 50 age group is growing in size so the company should have been growing its customer base, not see it declining. I fear that it will take some time to rebuild brand loyalty. The over 50s are not stupid and uncompetitive pricing will be found out sooner or later, which is exactly what has happened.

Similar problems have been hitting car breakdown service and insurer, the AA. Here again we have a very strong brand but turnover has been flat for several years and there are cheaper breakdown services. They have been losing customers of late. They also seem to have had operational problems in extreme weather conditions last year which increased their costs and here again their insurance offering is now less profitable than it was.

Competitors have crept up on both Saga and the AA in recent years and there is no great differentiation from competitors any more. Car insurance has become commoditised in recent years because there is little to choose between suppliers. There is no advantage in being over 50 at Saga or a long-standing AA customer. They both need to rethink what their appeal is to their existing customer base, and prospective customers, so as to ensure better retention and to attract new customers.

Rather like Superdry (SDRY) which I commented on recently, the brands need reviving with new and differentiated products and services. But brands can only be of limited help when the pricing is uncompetitive and operational mistakes are being made.

I don’t rate any of these companies as good investment propositions however cheap they may appear to be until they show that they have solved these problems.

Roger Lawson (Twitter: htt ps://twitter.com/RogerWLawson )

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Departures – AA and Blur

Yesterday was the start of many people’s holidays. But two company chief executives are going to be taking longer holidays than they expected.

The Executive Chairman of the AA Plc (AA.) Bob Mackenzie has gone. The announcement from the company said he “has been removed by the board….for gross misconduct, with immediate effect”. According to press reports, this arose from a fracas in a bar, although there is also a suggestion that he may be suffering from a mental illness. Some newspapers just suggested it was a “Jeremy Clarkson moment”.

The share price of the AA dropped 14% on the day, which probably reflects the problems that can arise when you have an Executive Chairman dominating a business. It’s not recommended corporate governance practice and personally I tend to avoid companies who have them.

The AA is an interesting organisation which provides breakdown cover and other services for many motorists. Back in 1905, it was formed to warn drivers about speed traps. It later transmogrified into a commercial organisation when the members sold out. Now it is one of the largest operators of driver education programmes such as speed awareness courses. That has become a booming industry and more than a million drivers are now attending speed awareness courses each year. This has resulted in the funding not just of commercial organisations such as the AA but more than £40 million per year goes to the police and local authorities. For the first time in English law, it is now allegedly legal to pay the police to drop prosecutions – all you have to do is promise to attend such a course. There is no evidence that it has any benefit in road safety. More information on this dubious practice is present here: http://www.speed-awareness.org (a campaign run by the ABD against it).

The other departure yesterday was of founder and CEO of Blur Group (BLUR) Philip Letts. This was a company that listed on AIM more than 5 years ago and in 2014 traded at a price as high as 665p. It’s now 3p.

This was a company that was a typical “concept” stock. It was going to revolutionise the commissioning by SMEs of services which is still very much an informal market by introducing an internet market. Mr Letts must be a very persuasive person to keep the business alive this long by repeated fund raisings. But it’s a typical example of how unproven business models are very risky investments. Most companies would have changed the business focus and the CEO long ago, or simply wound up, but Mr Letts persisted.

Yesterday the temporary suspension on AIM was lifted as they finally published some accounts. The results were slightly improved in that losses were reduced, but it still looks an unviable business unless the new management can make substantial changes. Mr Letts was removed from the board effective on the same day.

Incidentally I do hold a few Blur shares – market value now £6 so I hope that has not prejudiced my comments. If you get enthused by the hype surrounding some early stage companies, and the persuasiveness of the management, there is one simple thing to do. That is to only invest a very small amount until the company proves its business model and actually shows that the business is likely to be profitable. Revenue alone is not enough, because anyone can generate revenue by spending lots of your money.

The other protection is when the company fails to achieve its stated business plan, to simply sell and move on. Ignore the tendency to “loss aversion” where you hold the dogs in case of recovery. Or if you fear missing out on a big recovery, simply reduce your holding to a nominal level as I did on Blur and saved myself even more money.

So I invested a very small amount initially and then reduced it later to a miniscule level.

Just one point to note is that the company actually spells its name “blur” rather than “Blur” as I have used above, thus ignoring the rules of English grammar. Such affectations in companies to be “different” are always a bad sign in my experience.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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