I joined Dave Donars, Chief Research Officer at Cardwell Beach, to discuss whether the legendary Volkswagen brand can recover from its self-inflicted injuries after a major emissions cheating scandal. The short answer: it doesn’t look good, but there may be some light ahead in the proverbial tunnel. Take a listen to learn more.

Podcast Transcription

Brian: Hello everybody and welcome to Air Quotes, the podcast about invisible marketing. My name is Brian Erickson, the chief marketing officer here in Cardwell Beach.

Dave: And I am Dave Donars, the chief of research at Cardwell Beach.

Brian: Today we want to reopen the can of worms that we never opened in the first place but the engineering team and likely the executive team at Volkswagen certainly did open.

Dave: And I think we did talk about it I think right when it happened I think in September when this happened last year umm I think we did initially talk about it and we, I think we initially looked kind of foolish because we said this would do severe, severe damage to VW because as marketers we’re focused on brand and what that brand says to people, what that means and all those unconscious things that factor in before they make a purchase and it’s not about every item, people are not totally logical in that manner but brand is an easy shorthand to express a lot of things about how a product is made, about what it stands for, about how it treat its workers, about how good that quality is going to be right?

Brian: Yes and I think there is an interesting story behind the numbers here that we want to dive into a little bit today umm with what’s happened to VW, on the surface it’s pretty clear that they have destroyed the tremendous amount of shared value and you know I think that’s obvious and nobody is just going to just beat that but I think there is a deeper level of damage that you know kind of interestingly from a objective perspective umm proves the power of brand you know and brand can be a positive power and when you treat it poorly and you neglect it or, intentionally damage it as Volkswagen has done, that can be strong negative power.

Dave: The first thing you address is what you spoke about before right the intro is that VW Volkswagen you know, the people’s car has done damage to the reputation umm now Volkswagen is in more precarious situation than almost any modern corporate entity because it was invented by Hitler and Nazis like I mean this is a brand that has worked as seriously hard to make sure that they could leave that original framing behind…their founder story is no good so, you know like with the bug and all that stuff I mean a lot of people consider the greatest ad of the twentieth century to be “Think small,” you know the Volkswagen ad where the car is very, very tiny on full scale print ad. They have worked very, very hard to come off as playful and corks and very not Nazi while also trying to play to the heritage of a German brand that has a lot of quality engineering and all those aspects of manufacturing, durability, that thing you think of when you think about German manufacturing. I think they have always had a very tough road, and in honesty I think I can undoubtedly say one of the reasons I am in advertising now are you may not remember these ads but there were bunch of VW ads that used like a lot of indie rock and hip-hop in the late nineties.

Brian: I do remember those ads actually.

Dave: They were just these very, very good ads umm…when you think of VW, you don’t think about like Hitler making a car company, but the scandal about these emissions, for these emissions were at times even in excess of forty times the amount that it was registering umm and 40-50 times above what the legal limit was, was a very, very formidable hit to the reputation.

Brian: I mean there is probably nothing more dramatic you could attempt to do to a reputation without you know outright damaging the environment or committing genocide [Laughs]

Dave: I mean, the thing is that, here is the real difference GM got in a lot of trouble in the last few years because they had malfunctioning cars that were literally killing people umm now there were few issues within the electrical systems some of them was brakes, some of it was just umm the ignition which itself, there were few issues happening within those cars umm the executives knew about it and they covered it up, on the scale though of what VW did with covering up the emissions, the reputation harm is so much worse for VW then it is for GM not just because…

Brian: I mean you are looking at this spectrum potentially of negligence to outright evil.

Dave: There is something about the GM thing, it just felt like because it was more desperate, because there was a few things going on maybe they themselves knew something was going on and they should all be punished for that umm both in jail time and monetarily but it just feels like it was very different than like going into the car…

Brian: Yes.

Dave: To manufacture something to cheat the emission system, to lie to the owners, to lie to the government—that’s another level.

September 18th VW recalls four hundred and eighty two thousand cars in the US after it’s caught deploying some sophisticated software and what they have eventually learned were also some pieces of hardware to cheat emissions test in the US.

Brian: You created software to do this, if there is not a conscious act…

Dave: Right, ven though people you know good innocent people who did not deserve to die were dying in GM cars because of engineering mistakes that they didn’t cover up, it wasn’t like they are like hey lets, so let’s just kill some people here and they didn’t cover up like there wasn’t any intent and that I think it’s the very, very root of what is so bad about this umm also let’s be honest people bought these diesels, these TDI’s, they bought the diesels, they bought umm a lot of VW because it did feel like it was more of environmentally conscious and good move to make.

Brian: Yes.

Dave: It wasn’t umm it wasn’t like you are buying like a big all GM pickup or something like that, it felt like you are making a conscious choice to help the environment.

Brian: Yes I can definitely see if that was like you know you are buying a suburban or something like that, and you find that about like oh my God oh well…

Dave: Right…we are going to go through a bit of the time line right now but what this eventually rolls out to be is not just in the US umm not just in the western markets, not just these four hundred and eight thousand cars, it rolls out to be eventually eleven million cars that they have been tied to at this point but there has been massive changes of leadership at VW that look the cover up may be a larger than this it may go to more than eleven million cars at some point.

The fact that you are saying right now is a known aspect of their reputation and that will last for decades that that’s not going to go away that you don’t know if they are really telling you the truth, and there is so many lines when you buy a car you know like in the United States you go to a dealer you have to basically talk to a dealer and that dealer is going to have a certain amount of information and then there is going to be you know some middle manager fleet sales people then the manufacturers themselves, then the engineering teams. There are so many layers of misinformation before they can get you that the person who is telling you about this and selling you the car, they are probably not even being given accurate information by the company who is giving them these goods to sell or selling them the goods to sell, but I mean that is a systemic and long term problem. We haven’t seen things like this before—big, big environmental disasters like Exxon Valdez, those two types of situations. Other than not choosing to go to a BP gas station, there is not a lot I can do as a consumer to ensure that the gasoline that I am buying is not from BP.

Brian: And I think there is also a difference there because everybody kind of feels like oil companies are evil anyway, so it’s not surprising.

Dave: But you don’t have a conscious choice to be able as a consumer to totally fully opt in or out, like saying I am buying Exxon or BP gas or I am not buying that gas, there is no conscious way to do it, it just has to do with the oil market and it was incredibly complicated umm and so even if you go to a BP station the amount of oil or gasoline that they are providing that would have actually been drilled from a BP facility is not always known and its definitely not a hundred percent. I mean its roughly like 30-40 percent because they go to these refineries than the refineries have bought it then they refined it into gasoline and then they are selling a new product and you don’t know where its coming from so it’s incredibly difficult for a consumer and individual person to make those choices but when you are talking about a car it’s got a name plate on it and you can chose which one to buy.

Their stock price in the morning after all this comes out has wiped out about nineteen billion dollars of stock, eighteen billion, nineteen billion somewhere in there within one morning and the German government is now concerned that the German car industry is now facing damage and we will get to some numbers in a second but that is actually very true, its hurt the entire German car industry.

Ok so by September 22nd, VW has come out and said that there are at least eleven million vehicles that have to be recalled for this emissions issue umm and where we go is that at this time Rasmussen umm Rasmussen reports which is umm an imminently respectable polling organization in the United States, they poll Americans to see if they still trust VW now at this time. VW comes out higher than any American automaker. People trust VM more than they do GM because it’s on the heels of GM literally killing people, umm higher then Ford, higher than Toyota, higher than Chrysler so, their reputation at this point doesn’t seem to be hurt.

At this point, some people are still buying Volkswagens knowing that they are going to get a better deal at that time and umm so you have maybe now the highest price point for the cars but you have people who are willing to say, I don’t really care about this situation, I am still going to go buy this VW car because it’s probably going to be comparatively cheaper than it was a month ago, the extremely price conscious people umm but as you move forward in time more and more countries are hit by this, there are more, more regulators involved. VW has set aside 7.82 billion dollars just to deal with the legal ramification of this, that doesn’t count the cost of the recall and that doesn’t count the cost of any of this PR nightmare umm I think that that’s situation starts to cascade for them.

We talked about this in early October and at that time we didn’t have a lot of evidence. I would say almost all consumer package goods, there are very few that I can think off that break this rule and let’s just get those out of the way right away. Something like an Xbox or when you go and buy an Apple product or a Playstation there is like the set price for that right? You go in to a store you can’t buy like the brand new iPhone for 15 dollars or something like that, it’s always going to be roughly around exactly the same price umm and maybe you will get like umm a 15 dollar gift card or something like that but the price that you pay is the price that you buy in almost all over goods expect when you go to the extreme low end like an Arizona ice tea which always is like 99 cents on the can right on the can itself. Most things are not always set in price, there is a variable price to it, there is some price you lost yesterday now what this breaks down to is something that’s called A&P, that its advertising and promotion. Advertising is what we all think about: the all the marketing, all the money, all the TV ads that we see, print ads, all of that, that’s about 20% of the budget. If you had a $5 bill and you are promoting a product you put about $1 into that and the other $4 goes into promotions which are elaborate.

In cars you are talking about financing deals you are talking about 0% financing, you are talking about cash back, you talking about like being able to give them a sticker price, they knock a few hundred dollars off and those two hundred dollars don’t necessarily come from the dealer, they are coming from the manufacturer of the car who is giving them some money back, dealers always have the incentive to sell the car at the highest price possible umm and they are given a lot of incentives to try to lower this, to try to lure as many people in. Now what happened with VW is that as people were going  forward and buying VW vehicles, those pricing were getting smaller and smaller, the margin were getting thinner and thinner on existing sales. That’s a very bad situation for a brand to be in because the whole essence of brand is that your brand is the not only just a sales volume play, it’s a margin play so you can sell basically the same item. You know item X and Y being the same thing, you can charge more for X because it has a higher quality brand and there is whole bunch of positive goodwill that go into what creates that brand.

So I imagine a company like VW spends about a billion dollars globally a year advertising they are a huge company I mean we have seen some number they make up one hundred and seven billion dollars total in a year not in terms of profit but just total generation of dollars umm if you look at that a billion doesn’t seem like a  lot but then you’ve got to add the other 4 billion to get to that A&P the advertising and the promotion budget to get to that 5 billion dollars total of what they are spending. Those incentives would have been shredded through very, very quickly in the last quarter of 2015 and as we are saying in the beginning of 2015 those incentives are simply no longer driving people in so here we get some numbers…

What we see is a 1.5% decrease in sales for VW last year now that’s the whole year in total the last was very very bad for them but that still not terrible. Where it becomes interesting is the beginning of this year. So long story short, if you look at the first quarter of 2016 versus the first quarter of 2015 which we just recently manipulate to get numbers from VW. Direct sales are down 12.5% this year umm it’s so bad in fact that VW is turning around with the idea that it’s quite possible that this situation is so bad that VW will pull out of the consumer side of United States entirely. Let’s just try this for a second: I think you are looking at a lot of people who bought VWs, who may be lifelong VW buyers, who felt the cachet to owning a VW, I think a big percentage of them are not going to be returning customers and as you go forward in time you can see that continue to see that decrease as people who are VW owners get an offer of a new car and they feel very, very damaged and feel that they have been lied to.

Brian: And I mean locally Volkswagen Group consists of many more brands than just Volkswagen you know the brand itself you are looking at Audi, Bentley, Bugatti, Lamborghini, Porsche, but nothing that’s serving the average consumer umm.

Dave: May be Audi.

Brian: Yeah I can’t still even think that compares to Volkswagen as little bit higher end.

Dave: Thank you for listening. This is been Air Quotes.

Brian: The podcast on invisible marketing. My name is Brain Erickson, Chief Marketing Officer at Cardwell Beach.

Dave: And I’m Dave Donars, Chief for Research at Cardwell Beach. As always our episodes are edited by Zubin and Mark Cardwell our guru of all thing technical.