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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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Coca Cola: Things used to go better

C. HUYGENS - Monday, February 24, 2014
Although Coca-Cola and PepsiCo are tapping emerging markets for growth and sell a wide array of beverages, the two companies are struggling to stem the decline in their flagship soda business back at home. Americans have been cutting back on soda bit by bit for years. Today, Coke just isn't what it used to be (See Reputation Metrics, Dec 2011) and most of its stakeholders are cognizant, at least according to the most recent reputation metrics shown below.

When Coke announced last week that fourth-quarter profit fell, the market was shocked sending the company stock  down 3.7%. But investors would have been less shocked had they been tracking the reputation metrics where the reputational value profile of The Coca Cola Compamy, according to Consensiv and based on Steel City Re's reputational value metrics, is shown below. Among the 18 companies in its peer group, Beverages: Non-Alcoholic, the Reputation Premium was near the top of the heap but over the past six weeks has drifted to the 71st percentile. Concurrently, the Consensus Trend, CT, has been rising to the top quartile. The combined movement of these reputation metrics indicate lost value from evolving expectations and uncertainty.

Coke also announced that it will save $1billion in costs even as it boosts marketing to stimulate demand. One might argue this is a fool's mission authorized by desperate executives; but those in the know appreciate that Marketing (caps "M") includes product development. Coke as a source of buzz is losing ground to energy drinks and coffee because, well, all that sugary brown water that Steve Jobs derided is just that to the generation that grew up on Apples, Macs, and iPhones.

There may also be an opportunity for that other aspect of marketing -- promotion. Because this is the generation that looks at Coke's supply chains and cares about who is making their beverages, under what working conditions, and with what ingredients, there may be an additional opportunity to realize value. Huygens calls the "who, what and how" the basic questions that expose the drivers of reputational value. Granted, this generation is cynical and will not succumb to conventional marketing ploys, but if Coke could come up with a unique way to create transparency into its highly ethical, safe, and sustainable processes that could be appreciated and valued by its stakeholders, what then?

For more background on the Consensiv reputation controls, click here. To view the December 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here. Last, to read more about how reputational value is linked to stakeholder expectations and enterprise value, read, Reputation Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012) (click here).

Reputation Year In Review

C. HUYGENS - Saturday, December 31, 2011
Let's not get carried away. Huygens can not possibly do justice to a review on reputation in a year which almost $6.3tn (12.1%) was erased from global stock markets as the eurozone financial called into question the future of the world’s largest currency bloc, according to the Financial Times (Dec 30, Wigglesworth). Instead, Huygens offers a tale of two intellectual property strategies, and an example of reputational resilience.

TIVO and Rambus are two firms that have been fighting IP infringement battles for many years. At the end of 2011, TIVO finds itself experiencing one of the greatest reputational jumps over the trailing twelve months while Rambus story has a less than happy ending, so far.

Among the 28 companies in the Electronics/Appliances sector, Tivo's reputation metrics, according to the Steel City Re Corporate Reputation Index, rose from the 3rd to the 84th percentile. Its most recent EWMA reputational volatility was 74% after a very volatile year, and while its volatility continues to trend downwards, its trailing twelve week reputational velocity and vector are at 8 and 11 percent, respectively. All good signs consistent with the fact that it has outperformed the median of its peer group by 37%.

Among the 98 companies in the Semiconductor sector, Rambus dropped from the 89th percentile to the 4th percentile. After a volatile year, its exponentially weighted moving average volatility is down most recently to 30% while its vector and velocity continue to trend negative at -36 and -9% respectively. Not surprisingly, Rambus is underperforming the median of its peer group by 39%.

Last, the Coca Cola Company distinguished itself this year by exhibiting among the lowest levels of reputational metric volatility. Among its 14 peers in the Soft Drink Producers & Bottlers group, it showed no change on any metric. It outperformed the median of its peer group by 7.67%.

The first lesson among many this past year comes from the last case: in a highly volatile market, reputational stability has value. Things do go better with Coke.

Coke v Pepsi: Pepsi challenged

C. HUYGENS - Saturday, July 16, 2011
On this particular sunny weekend day, Huygens is busily putting the final touches on an article for IAM magazine’s issue 49 that examines the reputational issues raised by the News Corporation (NASD:NWSA) matter. Pausing to refresh, Huygens reaches for the carbonated cola drink.

To his surprise, even amongst these age old competitors, reputational issues leave their financial mark. In any sector, only one company can be #1. The title goes to the company that both tries harder and succeeds. Currently, among the 17 members of the Non-Alcoholic Beverage sector, the Coca Cola company (NYSE:KO) company holds that title.

For most of the trailing twelve months, the Steel City Re Corporate Reputation Index, the same metric that underpins the RepuStars® composite equity indices, has ranked Coke solidly in the senior position. This level of performance enabled Coke to outperform the median return of its peer group by 12.22%. The lack of reputational volatility over the trailing twelve weeks is evident in the unremarkable exponentially weighted moving average, vector, and velocity indicators.

PepsiCo (NYSE:PEP), on the other hand, shows a reputational slide from the #1 ranked position at the beginning of this twelve month period to the 92nd percentile most recently. The volatility metrics, as modest as they are, capture this movement, and in the hypercompetitive world of Coke. v Pepsi, these differences matter greatly. Pepsi has underperformed the median of its peers over this period by 10.53%

Looking quickly at the market cap to book valuations, both companies are composed mostly of intangible assets at rates greater than the median of their peers. In Pepsi's case, its intangible value is in excess of the firm's market cap suggesting that certain physical liabilities may be weighing on stock price.

Beverage grandmasters

Nir Kossovsky - Wednesday, May 06, 2009
This note explores whether a proposed transaction by a $75B beverage company, Pepsi Inc. (NYSE:PEP), is motivated by costs savings, brand enhancement, or reputation protection. Seeing no perceptible movement in the reputation index of either the company or its arch rival, we conclude that notwithstanding which of the three was the initial trigger, the greatest value may be in reputation risk management.

On 20 April 2009, Pepsi proposed buying the outstanding shares it does not own in its two largest bottlers, Pepsi Bottling Group (PBG.N) and PepsiAmericas (PAS.N), in a $6 billion cash and stock deal. Many in the financial press suggested it was a cost-cutting initiative. Jon Baskin, a marketing iconoclast, a keynote speaker at the Society’s 2008 annual conference, and the author of the book, “Branding OnlyWorks on Cattle,” opined that the move represented brilliant, strategic branding. In Jon’s words:

Think about it. New packages and formulations, available at new and different locations, priced and supported in novel ways...all thanks to a holistic approach to the brand, vs. some archaic top-down application that sees it only as image and words. It's these actions, and real investments, that will build sustainable, long-term brand growth.

Cost savings and long-term brand growth are both good things, reflect well on management and enhance reputation. So, with two weeks having now elapsed during which the market has had an opportunity to digest the news, and while the deal is still in the negotiation phase (the bottlers rejected it on Monday), we called on the Steel City Re corporate reputation index to see what impact the news has had on the reputations of Pepsi and its arch rival, The Coca Cola Company (NYSE:KO).

As shown in the charts below, the short answer is “not much.” Pepsi tops the fifteen-member Soft drink sector; Coke is in the 92nd percentile. Volatility is nil. In fact, in the midst of the most tumultuous market since the great depression, these two iconic firms emerge with nearly identical profiles comprising exceedingly stable reputation metrics. With Pepsi and Coke’s market caps at $75B and $100B respectively, are they too big to budge?

Big, yes, but not too big to trip and fall. As we see it, both pay exquisite managerial attention to their reputations. Ethics, quality, safety, security and sustainability are all watchwords. Innovation is alive and well. So the competition between these two is analogous to that of two chess grandmasters. They see all, know all, and understand the implications of every move and its derivatives. The game, therefore, is waiting for one or the other to make a mistake. It is a game where risk management is the winning play. And given the relative values of the physical assets and intangible assets at the two companies, reputation loss arising from a business partner where visibility and control are weaker – supply chain headline risk, if you will – is one of the major risks we believe needs to be managed.

So let us put our own spin on Pepsi’s announced acquisition: from an intangible asset finance management perspective, it is a prudent move to manage reputation risk arising from a third party. While it may not increase Pepsi’s brand value or enhance its reputation, it may prevent the sort of reputation loss that destroyed nearly 14% of Coke’s value 10 years ago.

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