Virgin phenomenon rides on a lot of hot air

`Since he sold his original, core music business to EMI four years ago, Mr Branson has struggled to find anything that comes close to filling the gap'
Is Virgin really the only internationally recognised global brand to have emerged from Britain over the past 20 years? In a recent article for The Economist, Richard Branson, Virgin's founder and guiding light, came close to making this claim. Mr Branson's ill-fated attempt to circumnavigate the globe in a balloon has reminded us all that in some respects at least, he is probably right. Furthermore, the inference he draws from it - that this is a quite damning indictment of the British economy - is right, too.

While it is true that there are still quite a lot of born-in-Britain brand names waltzing around the world - BP, Shell, Unilever, ICI, the BBC and even British Airways - these are not recent creations. There is nothing that has come out of Britain since the war to compare with BMW, Nike, McDonald's or Sony.

Except, perhaps, Virgin. The pity of the Virgin phenomenon, however, is that this is precisely what it is - more of a phenomenon than a brand and one, moreover, that feeds almost entirely off the publicity-seeking antics of one man. There is no definable product behind Virgin that sustains it as a brand. There is no ultimate driving machine, or Walkman, or fashion sportswear. Many and varied are the attempts to stamp established products with the Virgin name, but this is a rather different thing. And although the Virgin name is hugely well known, it is also the case that for the time being its fame is unmatched by its substance.

In that sense Virgin is a quintessentially British thing. A bit like the Beatles, everyone's heard of Virgin, but it is hard to know whether this fame generates any tangible benefit. In other words, is not the Virgin phenomenon just a lot of bluster and front, mostly (forgive the analogy) hot air?

I read somewhere that Mr Branson's balloon trip generated well over pounds 300m of free publicity for the Virgin "empire", or more than Pepsi Cola spent world-wide on its much-criticised relaunch. I find this rather hard to believe, especially since the exercise was a damp squib. But let's accept that even disappointing publicity is good publicity, especially when it is free. Free publicity for what, though?

Since he sold his original, core music business to EMI four years ago, Mr Branson has struggled to find anything that comes close to filling the gap. These days Virgin amounts to a small but highly successful and profitable airline, a small and moderately successful soft and alcoholic drinks business, a small and entirely unproven financial services operation, the Virgin megastores (reasonably profitable in the UK, unprofitable overseas), a relatively successful films and entertainment division, a couple of rail franchises, a stake in the high-speed Channel Tunnel rail link project, an even smaller stake in Eurostar, a stake in MGM cinemas in the UK, now rebranded Virgin, and... yes, that's about it.

With total annual sales of approaching pounds 1.5bn, this is obviously no small enterprise. Furthermore, at the moment it is reasonably profitable. Pre- tax profits this year should amount to about pounds 100m. The vast bulk of this, however, is Virgin Atlantic. The rest wouldn't even qualify Virgin for the FTSE 350. By international standards, it is tiny. What is more, Mr Branson's hotch-potch of entirely unrelated interests could hardly be a more unfashionable form of corporate organisation, in stock market terms at least - this on the not-unreasonable logic that people who are good at running airlines are unlikely to be good at financial services too.

Mr Branson believes received wisdom of this sort to be a canard, and in an entrepreneurial but small-scale way he is proving his point. His comparison of Virgin with the Japanese Keiretsu is an entirely bogus one, however. While it is true that Mitsubishi, one of the largest Keiretsu (family of companies) lends its name to a whole range of business interests from cars to textiles and financial services, the link between these companies is not nearly as strong as he would have us believe. Internationally it is not recognised at all. John Smith of Surbiton might wish to buy a Mitsubishi car but he is highly unlikely to bank with them too.

Virgin is a quite different sort of "family". Both in ownership and management terms, it is dominated by just one man. Mr Branson is the cement that holds Virgin together and drives it forward. Without him, it would very rapidly fall apart.

But let's not be churlish about this. Virgin is responsible for a string of entrepreneurial successes, some of which have also pushed out the barriers of product development. There is nothing particularly remarkable about this, though. Rather, Virgin's uniqueness is derived from the fact that such a disparate collection of quite small businesses could command such strong international recognition. This is undoubtedly a wonderful and heroic achievement. But Virgin as a panacea for Britain's economic woes, a new global brand for the next century? I'm going to take some convincing.

Any Chancellor who took 10p off the basic rate of income tax in present circumstances would be accused of recklessness to the point of criminality. That, however, is roughly what the free share handouts from demutualising building societies are going to deliver to the British masses over the next year - more if the stock market flotation of the Norwich Union and other likely life assurance demutualisations are taken into account. In total well over pounds 20bn of new money will be entering the economy. If only a half of that windfall is realised (with the rest left stashed away in the bottom drawer) we are still talking about a very substantial boost to consumer spending.

Is this really the windfall we all think? For those without qualifying building society accounts the effect will almost certainly be financially negative. Even for the 15 million members who benefit directly, the net effect may not be particularly advantageous. This is because pump-priming consumer spending on this scale, even when it is not being done by the Government, must inevitably result in higher interest rates. Quite how much higher interest rates will be by the end of the year as a result of all this is anyone's guess, but higher they certainly will be. Borrowing costs and mortgages will be that much more expensive than if the Halifax, Alliance & Leicester, the Woolwich and others had not floated.

Furthermore, it may well be that demutualisation will in itself lead to higher long- term borrowing costs and less competitive deposit rates. After flotation, the main priority of building societies will be to serve shareholders. That means hundreds of millions of pounds in dividend payments that would otherwise go towards keener interest rates. Pressure to improve short-term returns yet further by milking the customer will be intense. All of which goes to show that there is no such thing as a free lunch.