James Thomson Editor

James Thomson is the editor of BRW. Previously he was editor and publisher of SmartCompany and a senior editor at Business Spectator. He writes regularly on Australia's wealthiest entrepreneurs and has deep expertise in small business and the mid market.

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Published 18 April 2013 00:45, Updated 24 April 2013 13:32

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Richard Branson: ‘We want people to go away feeling they’ve got great value for money.’

Sir Richard Branson is not an easy man to pin down.

It’s taken weeks to secure an interview with the billionaire, who finally speaks to BRW on a Sunday morning from Switzerland.

But once Branson starts talking, it’s clear he’s not a business person who fits neatly into a single box.

For all his cheeky pranks and eccentric attitude – a day after our interview, Branson appeared lifting a kilt to reveal underpants reading “stiff competition” to launch Virgin Atlantic’s flights to Edinburgh in Scotland – Branson is actually a canny asset trader, who this year has reaped $316 million from the sale of Virgin Media in the US and $40 million from the sale of Virgin Money in Australia.

Despite the hype about his sprawling empire, Branson’s reach is somewhat overstated – his personal stakes in many of the businesses are tiny and the bulk of his $4.8 billion fortune comes from his big assets in the travel sector.

And for all the years of carefully building his Virgin Group’s brand as underdog and populist, Branson has steadily moved it upmarket since the onset of the GFC, in an attempt to tap into what could broadly be called the middle-class luxury market.

From space travel and hotels through to Virgin Australia’s charge into the business segment, Branson is trading up, driven by the attraction of higher margins and the fact that consumers who have always loved Virgin are now older and richer.

Marketing expert Mark Ritson, an associate professor at Melbourne Business School and a BRW columnist, describes it as “premiumisation”.

“There is no question that Virgin’s original target demographic is ageing,” he says. “That’s not to say the brand does not also appeal to younger consumers but its original target consumer, the 20-year-old hipster that bought Tubular Bells [Mike Oldfield’s mega-selling ambient album on the Virgin label] 40 years ago is now retired, well off and looking for upmarket products too. It would only make sense for Virgin to premiumise its brand to reflect this richer client base.”

Aiming for the best

Branson, who will talk at an event at the University of Queensland’s business school on May 9 on the future of business, says the GFC hasn’t had a great effect on the approach Virgin takes to new business.

“Our approach to an industry is to look at whether we can shake it up,” he says, “whether we can make a difference, whether we can offer great value, whether we can have fun, whether we can improve the quality of the brand and whether we can pay the bills. We’ve continued to do that during downturns as well as upturns. And I think doing it in downturns is actually much better.”

Branson cites Virgin Hotels, a business that was launched with the aim of investing $500 million to build up a chain of high-end hotels. Branson’s timing was perfect, as depressed property prices have allowed the group to find sites at a “fraction of the price” the company would have paid before the GFC.

“It’s people like Virgin who continue to invest during downturns that help the economy get out of them,” he says.

The hotel chain is an example of Virgin Group’s move upmarket and the description of its target customer – “high income, well-educated metropolitan business and leisure traveller” – could sum up the target market for the entire group.

Within the hotels company is Virgin Limited Edition, which collects Branson’s private retreats, including exclusive ski lodges, game parks, private clubs and islands. One of these is Makepeace Island resort, in the Noosa River, which Branson owns in partnership with former Virgin Australia boss Brett Godfrey. Prices for the Balinese-inspired Makepeace start at $3250 a day for exclusive use of the island (this is the only way it can be hired), which can sleep up to 22.

It’s hardly going to be top choice for the everyman that Virgin has traditionally appealed to, but Branson doesn’t agree with the idea that Virgin is suddenly catering to an exclusive clientele.

“Anything we do we try to make it the best in the market,” he says. “With Makepeace we got the best designers to create a little Bali off Noosa. And if you create the best in your field there is a market of people that want the best.

“But the best doesn’t need to be the most expensive. We want to give people value for money and have them go away feeling they’ve got great value for money.”

He argues that philosophy even extends to Virgin Galactic, the space travel company slowly making its way towards taking tourists into space. Tickets start at a reported $200,000, and the 500 who have paid deposits include more celebrities than professionals. But Branson insists affordability is paramount.

“If you create a spaceship company the aim must be to make sure the experience is the absolute best,” he says. “But our aim is to make it affordable for your children and my children and everybody’s children.”

Staying true to form

Melbourne-based brand expert Michel Hogan says Virgin Galactic shows the way the Virgin brand is trading up while remaining connected to its roots.

“The price point is certainly upmarket, but the concept? There’s not much more populist than going into space,” she says.

Hogan argues that Virgin has always been about going into sectors that are large and complex – think air travel, banking, trains and yes, even space travel – and opening them up to ordinary consumers. This may be through lower prices, a simpler product offering, or both.

“One of the things Branson has always done quite well is connect with the everyman’s aspirations,” she says. “This whole idea of making stuff accessible is actually what Virgin does.”

The message of accessibility hasn’t necessarily changed, Hogan argues, but the audience has – the kids who grew up with Virgin Records and now have money to spend. And the competitive landscape has also shifted.

“How many copycats are out there trying to out-Virgin Virgin? So what’s new Virgin territory? Making luxury accessible.

“Brands are always about evolution, not about revolution, and any smart brand absorbs its environment and uses that to keep itself fresh,” Hogan says.

She gives the example of Branson’s airline, Virgin America, which last week topped the rankings of US airline service quality, and has been roundly praised by the travel media for its passenger experience.

“Virgin America has done a wonderful job of taking something mundane and making it feel special,”

Paurav Shukla, professor of luxury brand marketing at the Glasgow School for Business and Society, which is part of Glasgow Caledonian University in London, has been tracking Virgin’s steady upmarket push and says that as well as giving the group a point of difference, it is also being driven by the global economy, particularly in the UK where a triple-dip recession looms.

“General consumer spending on many peripheral consumption activities such as leisure and travel has been hit hard,” Shukla says. “However, on the other hand, consumer spending on the luxury services continues to grow. Thus, the company may want to push upmarket to exploit this opportunity.”

Shukla believes it’s too early to tell if the strategy has been a success, but points out that the fact it is being used across many segments of the group suggests it is starting to work.

Strap in for a bumpy flight

Pushing upmarket might be a good strategy, but the fact many of the biggest companies in the Virgin Group are connected to the tourism and transport sectors means it can be difficult to see the financial rewards.

Virgin America, for example, lost $US12.6 million in the September quarter of 2012 (the latest available figures) after losing $US3.3 million in the previous period.

Last month, Virgin Atlantic froze the pay of its staff after a leaked internal memo showed the airline had lost £135 million in the year to the end of February, versus a loss of £80 million in the year before. And Virgin Australia’s net profit fell from $51.8 million to $23 million in the six months to December 31, 2012.

Aviation analyst Neil Hansford of Strategic Aviation Solutions, who has consulted to airlines associated with Virgin in Europe and Asia, gives Virgin’s airline group “10 out of 10 for marketing but five out of 10 for operations”.

“They have always been at the forefront of marketing innovation, like premium economy class, which is becoming a must on international routes,” he says.

The sale of 49 per cent of Virgin Atlantic by Singapore Airlines to US giant Delta for $360 million in December 2012 will be important for the wider group, Hansford says, as Delta has also formed a non-equity code share with Virgin Australia.

Singapore and Virgin Atlantic did not have any commercial co-operation despite the former’s 49 per cent shareholding, a fact Hansford puts down to Virgin’s desire to retain its image of independence, and its inability to relate to Singapore Airlines in the way international airlines form code shares and pool route revenues.

But the difficult state of the airline market means carriers need to get bigger or get out, which is why Delta and Virgin Atlantic are now code sharing and have integrated their marketing – two things Singapore and Virgin Atlantic never did over decades of Singapore ownership.

“Branson can be a very difficult person to do business with, which any number of current and past partners will attest to,” Hansford says. “The Americans will belt him into line, because they are a very conservative, dogmatic lot. They won’t be as well mannered as the Singaporeans were. They know what they must get out of this very sizeable investment.”

Branson says the tourism sector is not too bad, although high fuel costs have hit his airlines hard, as has weakness in the global economy, with Australia “the exception to the rule”.

He is effusive in his praise for Virgin Australia boss John Borghetti, who has been reshaping the airline and pushing hard into the business market, which Qantas has dominated since the demise of Ansett way back in 2001.

“It’s just been remarkable what John Borghetti and the team has achieved. They are a great example of an underdog brand. I think Virgin Australia is now better than Qantas because it offers better value generally.”

Still, Virgin Australia’s share price hasn’t moved in the past year, weighed down by concerns about consumer spending, oil prices and the impact of the dollar on tourism. Branson’s stake in the company is $245 million.

Growth plans for Australia

The Virgin chairman has a soft spot for Australia, which shines through as he talks about Virgin Australia and his friendship with Makepeace Island co-founder Brett Godfrey, who also toiled long and hard to get the airline off the ground.

“The island is a nice connection for me. It’s something that we can enjoy together,” Branson says.

He also marvels at the strength of the economy, which makes Australia an expansion target for Virgin.

He says he will make a major announcement about a new venture in the coming months, but won’t be drawn on what it might involve.

“We’ve got lots of connections in Australia and with Australians,” he says. “There are quite a few areas where Virgin and the Virgin brand could expand.”

Branson is more forthcoming on the next big sectors on which he’s concentrating. The billionaire, who recently signed up to Warren Buffett and Bill Gates’s pledge to give away at least half of his fortune, is tipping all the profits from his transport businesses into clean energy, an area he believes will pay environmental and financial dividends.

Virgin Group operates two funds – Virgin Green Fund, a growth equity fund focused on North America and Europe, and the VGF Emerging Markets Growth Fund, aimed at central Europe – and has invested across companies in renewable energy, energy efficiency and resource management.

“We are spending a lot of time and energy on that, investing in something where you can make quite a difference in the world,” Branson says, adding that he would like to see more tax breaks to stimulate investment in clean energy around the world.

Time will tell if Virgin can become a force in the clean energy market, although it’s perhaps another example of the changing philosophy of the Branson brand – a market that needs to be disrupted and made accessible to the world’s cashed-up consumers.

Michel Hogan argues that if any entrepreneur can open a new market, it’s Branson.

“Virgin is not actually a conglomerate,” she says. “It’s an idea of making something out of reach seem reachable.”

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