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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