6 Factors Behind The Impact Of Brand Scandals

Mark Di SommaJuly 17, 20176 min

Everyone’s very quick to call almost any news a scandal these days. Nevertheless, brands do get into trouble, and they emerge from those challenges in different states. Some seem to brush off what has happened while others falter.

I’ve identified six factors that individually or collectively decide the effect that a scandal has on a brand.

1. Market Dynamics – supply and demand has a significant influence on a brand’s ability to rebound. If the demand for the service is high enough and there is little perceived choice, consumers will often feel they should try to forgive. They may complain about the brand on social media, but the impact on behaviors and therefore profits may be far smaller than expected. United Airlines for example took a massive hit reputationally over its recent forced removal of a passenger but nevertheless directly benefits from the fact that huge numbers of people continue to fly. According to Reputation Institute, passenger travel is expected to almost double from 3.7 billion passengers flying in 2015 to 7.2 billion flying by 2035. That, and the fact that there has been such a high degree of consolidation in the industry itself, means that attempting to avoid a significantly scaled brand like United is inconvenient at best. As The Guardian observed, “Thanks to deregulation and industry consolidation, the power relationship between airlines and customers is dramatically skewed in airlines’ favor. Carriers can basically do whatever they like and get away with it … Short of boycotting flying altogether there’s basically no way for customers to hold airlines to account. So we just hand them our money and grin and bear it. We expect airlines to be awful. And low expectations are lucrative; while airlines like to cry poor to justify incessant cost-cutting, last year global airlines made profits of $35bn.”

2. Reputation – the degree to which a scandal takes consumers by surprise will influence the degree to which a brand feels the heat. One of the key reasons that Volkswagen received such strong reactions to their emissions scandal was because they were such a highly regarded brand. There was a tangible sense of let-down that they had behaved the way they had. Nevertheless, the brand seems to have used the momentum of the scandal to good effect —restructuring its business, rethinking processes and cutting executive remuneration to get itself back on course. They have been able to offset the damage by drawing on their brand goodwill and by acting decisively and systemically to restore their standing.

3. Investor Reaction – while every significant scandal is likely to trigger some level of short term reaction, the key interest for the market lies in the long term effects on shareholder value and underlying stock price. The fallout from the Petrobras scandal in Brazil is an example of a scandal that has not only rocked a brand Brazilians were proud to call their own, but then had ongoing impacts for the sector and perhaps for investment in that part of the world. So how should investors assess the likely impacts of a scandal on a specific stock? Glenn Curtis suggests that rather than wait for the media and analysts to make a pronouncement, investors do their own homework. Among the factors he suggests that investors should consider: who was involved and to what degree (specifically, was the CEO or another decision maker implicated?); the cash that the company has to weather the storm; any insurance policies that the company may have to offset legal costs; and likely future financial impact. Faced with a scandal that could significantly impede investor confidence over the longer term, companies need to move quickly not just to address the public fallout but also to assuage investors that their money is safe and that they have the governance and risk measures in place to see things through.

4. Resilience – a brand’s ability to move on from a scandal is critical to it achieving renewed traction in the market. While the global recall of the Note 7 device is said to have cost the Samsung brand the better part of $6billion, the company rebounded quickly with the significant success of its Galaxy S8 and S8 Plus handsets, to the point where Forbes declared, “Coupled with a positive reception from the critics, the Galaxy S8 and S8 Plus are on course to return Samsung to the top of the Android tree for the first time in nearly a year, provide a strong challenge to Apple’s current and future iPhone line-up, and to define what it means to be a smartphone in 2017.” In a world where consumers soon want to know ‘what’s next?’, the brands that can bounce back from adversity and present new, exciting and popular follow-ups will quickly re-win the confidence and interest of consumers if their underlying brand is strong enough.

5. Duration – the length of time that a scandal remains in the news can have a detrimental effect on the brand’s ability to recover. When the documentary Blackfish brought SeaWorld Entertainment into the public eye in July 2013, the company failed to shake the adverse publicity quickly. In time of course they undertook some major changes across their business to try and reposition themselves, but by then they had already suffered significant revenue losses. And ironically, as they have moved away from their signature shows in an attempt to reinvigorate interest, attendance has continued to decline. These challenges were compounded in Florida, some suggest, by Universal upping its game in order to gain a greater share of the non-Disney vacation market. Like the passing of Ringling Bros. and Barnum & Bailey Circus, the SeaWorld brand got involved in a long-running battle that, combined with changing attitudes, has significantly affected its ability to deftly reposition and re-monetize its offering. It will be interesting to see if and how SeaWorld can re-find success or whether, like the greatest show on earth, it will find itself in a spiral that is just too fast and too far gone to escape.

6. Impact – while many scandals happen at arms-length, perhaps the most damaging are those that consumers perceive as potentially affecting them personally. The Chipotle brand for example was involved in a food safety scandal that saw hundreds of people get sick. Stories like this didn’t help. Faced with the prospect of contracting norovirus, consumers abandoned the former darling of the food sector for two simple reasons. One, they didn’t want to get sick themselves. Secondly, there were plenty of other choices available to replace the brand with. The combination of these factors saw Chipotle fall off the charts, and while the brand is finally showing some signs of recovery, one of the reasons this scandal had such a powerful effect on Chipotle’s brand was that consumers perceived real danger to themselves. Winning back trust in such situations requires patience and persistence.

Jonathan Copulsky observed in his book Brand Resilience: Managing Risk and Recovery in a High-Speed World that brands have never been stronger nor more fragile. As transparency and scrutiny intensify, the chances of a brand being involved in some level of scandal will only increase. The key decisions for those tasked with helping a brand recover are determining the nature of the scandal and the extent to which market factors will work for, or against, the brand. That’s not to suggest for one moment that brands should try and ignore or shortcut proven techniques for crisis management. It does suggest though that, where appropriate, brands should look beyond just the process to the predilection of consumers for cues as to how they might act, how quickly and how radically to resolve the crisis they find themselves in.

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