MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Tesco: Reputation is stable

C. HUYGENS - Tuesday, February 05, 2013
"They’ve found horse meat in Tesco burgers? It’s an unbridled disaster." Through internet-wide humor, at the very least, Tesco is being reminded that supply chains can be a major source of quality risk. As the FT reports:

Having inquired into the provenance of beefburgers that contained horsemeat, it has dumped Silvercrest, its supplier of frozen burgers, essentially for deviating from the list of Tesco-approved meat suppliers. “The breach of trust is simply too great,” said Tim Smith, the UK retailer’s technical director, in a statement. (The owner and founder of Silvercrest’s parent told the FT earlier this month it had been “let down” by its own suppliers.)


Humor aside, stakeholders do not appear to be materially shaken by this turn of events -- a supply chain quality control (operational) failure -- with respect to Tesco's reputational value.

The Steel City Re Reputational Value Metrics, explained in greater detail in the 2012 book, Reputation, Stock Price and You, show no difference in RVM volatility between historic and current periods. RVM is a non-financial measure of reputational value and is holding steady in the 70th percentile. The company's CRR, a measure of reputational ranking, is at the 26th percentile. Its economic returns are median, and its reputational forecast suggest slightly below median stability with directionality indicators being positive.

The data suggest that stakeholders, having already ranked the company at the lowest quartile, were less shocked by Tesco's discovery of horse meat than they were pleasantly surprised by the company's swift response. First, severe action against a supplier to punish it for its failure and second, a commitment to  test the DNA of meat going forward to mitigate future potential problems. These comprise textbook reputational value crisis management practices. [A textbook response, it should be noted, is not PR; but rather substantive operational fixes. Pass the hint to Boeing.]

For supply-chain watchers, note the references to "trust" and "being let down." Supply chains can not operate effectively absent trust nor can they operate only on the basis of trust. Tools that help companies verify that which is the basis for trust will become increasingly important. Stay tuned.



Unilever: Seeking success through sustainability

C. HUYGENS - Wednesday, November 17, 2010
On Monday, 15 November, Unilever (NYSE:UL) unveiled a business model overhaul that was 12 months in the planning. The core strategy is sustainability.

Here is how the Guardian describes it:

The initiative will cover not just Unilever's greenhouse gas emissions, waste and water use – but the impact caused by its suppliers and consumers, from agricultural growers to the packaging and waste water produced by consumers of Unilever brands. The Anglo-Dutch group also intends to improve the nutritional quality of its food products – with cuts in salt, saturated fats, sugar and calories – and link more than 500,000 smallholder farmers and small scale distributors in developing countries to its supply chain.

Looking at the reputation metrics, there is no indication that the market has been anticipating a major announcement of a strategic shift designed to increase enterprise value along with corporate reputation. Over the trailing twelve months, the Steel City Re Corporate Reputation Index rank has slipped progressively from the 58th percentile to the 34th percentile relative to the 25 peers in the Food: Major/Diversified sector. (The top ranked firms are currently HJ Heinz (NYSE:HNZ); Kellog Co. (NYSE:K) and TreeHouse Foods (NYSE:THS)). During this period, the company's return on equity has underperformed the median of its peer group by 2.75%. As of 11 November, the exponentially weighted moving average volatility of its Index ranking has dropped to 7.6%, but the Index velocity and vector are overall negative at -3% and -6% respectively.

The sector as a whole as shown a decrease in its median reputation ranking as well as a progressive decrease in the variance within the group. Last, the entire sector is heavily leveraged with the median intangible asset value fraction in excess of 100%. Unilver's intangible asset fraction of 118% is marginally greater than the median of 114%.

We'll be following Unilever to see how its sustainability strategy pans out.

Costco: Food for thought

Nir Kossovsky - Tuesday, January 05, 2010
While the CEO contributes materially to a company's reputation, the products and services also speak for themselves. This is true even when the CEO is a founder and a lightning rod for controversy. Consider John Mackey, CEO, Whole Foods Markets (NASDAQ:WFMI).

In late summer, we shared that he had courted controversy with the left-leaning segment of his customer base through a strongly worded op ed in the Wall Street Journal. We speculated about the reputation effects. On October 3, he reappeared in the Wall Street Journal in an interview that markedly softened the tone of the August writings. Last, at the end of last month, he finally agreed to relinquish the role of Chairman under pressure from a pension fund-based investment group.

Let's look at the numbers courtesy of Steel City Re , Big Charts.com and the FT's Newssift.com. Over the past twelve months, Whole Foods has had a volatile ride on the Corporate Reputation (IA) Index. It entered the year below the 40 percentile, and exited at about the same level having touched the 90th percentile in late October and diving below the 20th percentile in February. Meanwhile, its equity has returned to stakeholders about 140% for the year while the mean of the 24-member peer group matched the S&P500 returns of around 20%. Note the August 2009 dip on both the reputation index and the market cap.

Compare and contrast this extraordinary return for a company with a controversial CEO and a volatile corporate reputation with the returns of one of the highest reputation-ranked Food and Staples Retailing firms this past year, Costco Wholesale Corp (NASDAQ:COST). Its CEO, James D. Sinegal, is a quiet man, relatively speaking. The Steel City Re Corporate Reputation (IA) Index shows values in the 90th percentile or greater, excluding an early September 2009 dip. Yet the 12-month returns, while positive, are underperforming the S&P 500 by 13%.

With respect to sentiment, over the past 12 months, Newssift reports that of the 238 articles on Whole Foods and its high profile CEO, 32% were positive and 21% were negative for a ratio of 1.5. Of the 99 articles on Costco and its lower profile CEO, 35% were positive and 16% were negative for a ratio of 2. Yet Whole Foods outperformed Costco by a factor of 20. What gives?




There is a simple explanation -- reputation resilience. The financial benefits of Costco's high reputational standing are best seen over a two year window in the stock price chart below. While the markets suffered greatly in 2008 through March 2009, Whole Foods suffered massively with a 75% loss in market cap at its low point. Costco, however, outperformed the market over this two year window with a 24 month loss of about 7% compared to the S&Ps loss of about 22% and Whole Foods' loss of around 25%.

The dark lining to the silver cloud of reputation resilience is that there is less ground lost, and therefore less ground that can be made up. The polish on the silver cloud, however, is in cost of credit. Firms with superior reputations exhibit resilience and lower volatility. Firms with superior reputations have lower betas, lower costs of credit, and credit protection (credit default swaps). Whole Foods' beta is 1.19; Costco's is 0.79.

Whole feuds

Nir Kossovsky - Tuesday, August 25, 2009
John Mackay, CEO of Whole Foods Market, Inc. (NASDAQ:WFMI), is no stranger to controversy.  Two years ago, Wall Street Journal journalists David Kesmodel and John R. Wilke discovered that John Mackey had been posting comments on the Yahoo Finance website using the pseudonym Rahobed, an anagram of his wife’s name Deborah, for eight years, boosting his own company and berating his nearest competitor Wild Oats. At that time, Harvey Pitt, a former Securities and Exchange Commission chairman, told the Wall Street Journal “It’s clear that he is trying to influence people’s views and the stock price, and if anything is inaccurate or selectively disclosed he would indeed be violating the law." He added that "at a minimum, it’s bizarre and ill-advised, even if it isn’t illegal."

The current fracas began 11 August when Mackay wrote an op-ed piece in the Wall Street Journal. Mr Mackey began his article with a quote from Margaret Thatcher and went on to add that Americans do not have an intrinsic right to healthcare - an idea strongly at odds with the views of a large proportion of Whole Foods' customer base. The response from the customer base has been swift and negative. Massachusetts-based playwright Mark Rosenthal's "Boycott Whole Foods" Facebook page has so far attracted 28,000 fans, including supporters in the UK and Canada.

As part of their damage limitation strategy, Whole Foods' in-house public relations division has created a forum on its website for customers to discuss the issue. There are more than 18,000 posts, compared with 63 posts on the dairy-free forum. On Newssift, the beta news filtering engine of the Financial Times, the sentiment ranking of 11 articles written in the 15 days  since 11 Aug covering Whole Foods and Reputation included three rated "negative" while the 11 articles covering the same topic written in the 15 days prior to 11 Aug were all positive or neutral.



With equity up 60% over the past year, while the S&P is still down 20%, Mackay may believe he has the reputation equivalent of "mad money." On the other hand, Whole Foods'overall reputation metrics and ROE relative to their peers in the Food and Staples Retailing sector were volatile and generally below average for most of the past year, and Whole Foods' share price is currently $28, more than 60% below its all-time high at the end of 2005.



The Intangible Asset Finance Society has consistently opined that the CEO, while an important element of a company's reputation, is only as good as the people and systems that drive quality, safety, security, ethics, sustainability, innovation, and ethics. Whole Foods appears to excel at all, so it remains to be seen what the reputation impact will be from a CEO whose personal values appear to be at odds with those of his customers.

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