Member Article

Leisure sector feels effects of summer of tragedy

Commentary by Michael Hewson Chief Market Analyst at CMC Markets UK

Following the results of Merlin Entertainment and Thomas Cook’s financial results , Michael Hewson comments on the impact of a crisis on a brand’s reputation and performance in the market.

Within the report Michael Hewson discusses: • How public confidence can affect a brand’s reputation • How past companies have reacted to a brand crisis and the impact on market performance • The negative impact on Thomas Cook’s image • Merlin Entertainment’s reaction to events at Alton Towers

Public confidence in a brand is always a fairly intangible metric, particularly when something happens to damage that confidence and a company’s response to such an event can make the difference between the company reputation surviving, and it marking the beginning of the end, to a success story.

Everyone remembers the infamous comment by Gerald Ratner in which he described his company’s products as “total crap” - marking the beginning of the end for Ratners Group that had, up until then, been one of the UK’s biggest jewellery chains.

The aftermath of these comments prompted the value of the business to collapse as customers deserted the brand in droves, eventually prompting a corporate rebrand to Signet Group in September 1993, while Ratner himself was fired 10 months earlier.

This episode provided a salutary example of the importance of how a company presents itself in terms of its brand and its position in its market, and why a company should never take its pre-eminent position in its market for granted. While the downfall of Ratners was entirely self-inflicted sometimes events can overtake a company’s ability to respond with some recent notable examples showing that how a company responds to a damaging event is as important as the quality of its product.

BP learnt this lesson the hard way in 2010, in the aftermath of the Gulf of Mexico oil spill and its reaction to the tragic events on the Deepwater Horizon oil rig disaster. Its share price more than halved to a low of 312p from levels of 650p in the space of three months as the company’s insensitive reaction, as well as threats of massive litigation, prompted fears of asset seizures and a break-up of the company. While the threat of a company break-up was averted BP’s share price has never recovered from the events of 2010 as management embarked on a massive asset sell-off and the company was scaled back considerably in order to meet its obligations.

This week we will be getting the latest numbers from two companies that have had to deal with their own problems with respect to adverse publicity as a result of product failures, as they have responded to tragic events, whether beyond their immediate control or not.

Thomas Cook received a great deal of media opprobrium earlier this year due to its “insensitive” handling of the tragic case of the two children killed by carbon monoxide poisoning in Corfu in 2006. This is likely to have had a negative impact on the company’s brand as prospective customers went elsewhere in the weeks after the episode, with calls for a boycott of the company going viral on social media. Whether the brand damage is more long term is likely to be harder to quantify, but the whole episode was an exercise in how not to deal with a tragic event.

While CEO Peter Fankhauser subsequently came out and apologised, the damage had already been done and this week’s Q3 results won’t have been helped by the subsequent political turmoil in Greece and the terrorist attack in Tunisia, which have seen bookings slide sharply. Given that the summer is a peak trading period for travel companies, these events are the last thing the beleaguered travel industry needs, and the recent slide in the share price could well not reflect the full effects of recent events.

Merlin Entertainments appears to have learnt the right lessons in respect of responding after the horrific accident at Alton Towers on its “Smiler” ride which resulted in tragic life-changing injuries to a number of passengers. The company swiftly accepted full responsibility for the accident, regardless of the outcome of any future investigation with all the potential liabilities that might bring. In doing so, it demonstrated the human aspect of the company and that people and their safety is much more important than any damage to Merlin’s finances and reputation, the impact of which is likely to be reflected in this week’s trading update.

While Merlin’s brand has undoubtedly been damaged by events this summer its, so far, sensitive handling of recent tragic events are in stark contrast to Thomas Cook, and while the financial impact will no doubt be felt in both of this week’s updates, the extent of any lasting brand damage for the two companies remains to be seen.

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