IS BRANSON FALLING?

Much of the media is afraid even to speculate.

Edward Heathcoat Amory explains why

and looks at the tycoon's prospects

RICHARD Branson's corporate reputa- tion is built on a foundation of litigation and public relations; his first lawsuit coin- cided with his first business venture. In 1969, he sued the Beatles to force them to provide a promised record to be sold with his magazine, The Student. Since then, legal action has figured as prominently as mar- keting ability in the rapid growth of the Virgin empire. Branson's High Court victo- ry last month over Guy Snowden, founder of GTech, the technical experts who helped to secure the National Lottery contract for Camelot, would appear to mark the latest triumphant milestone in the career of Britain's most visible entrepreneur.

Any passenger taking one of Mr Bran- son's trains can now blame Virgin for every sad sandwich, every wrong kind of leaf on the line, every piece of chewing gum under the table, every delay and every disappoint- ment. A sharply critical Panorama pro- gramme, broadcast this week, reflected the rising tide of public disillusionment. In addition to risking Virgin's good name, the railway venture is also a huge financial gamble; Mr Branson has contracted to pay a dividend of £1.24 billion to the Treasury, and invest £1 billion on track and trains, while the state subsidy declines to zero. To meet this target, he must bring his innova- tive new trains into service very soon, and persuade passengers to use them.

Nor are Mr Branson's railway worries confined to the West Coast line. His membership of the London & Continen- tal (LCR) consortium was crucial in help- ing that group to win the contract to build the Channel Tunnel rail link and manage Eurostar. LCR recently admitted to the government that they have been unable to raise financing for the link; Mr Branson, however, hopes to remain involved in run- ning Eurostar. The Deputy Prime Minis- ter, John Prescott, is understood to have recently remarked to the Virgin venturer, in a reference to the smart new logo on his trains, 'You've done wonders for the British paint industry, but what are you doing for the railways?'

In another part of Branson's corporate tangle, Virgin Cola, advertised as a soft drink to rival Coca-Cola and Pepsi, has also gone wrong. After sales fell flat, Bran- son had to buy out Cott, the Canadian partner which makes the syrup used in his fizzy failure. At the same time, Virgin vodka, launched, like its effervescent coun- terpart in November 1994, has been with- drawn from retailers after winning less than 2 per cent of the market. Finally, consumer programmes are beginning to take an unhealthy interest in Virgin's cinema chain. It charges filmgoers around £1 more than comparable rivals, and they receive little for their extra money than the privilege of buying into the Virgin brand.

Of course, these are only relatively small parts of the Virgin group. Many of Bran- son's other companies are successful — the group made an operating profit of £114 million in 1996, £84 million from Virgin Atlantic alone — and he has survived numerous previous flops. This time, however, the problems are more noticeable and, in the case of the railway, cannot be resolved simply by closing it down. For richer or poorer, Mr Branson and his reputa- tion are securely strapped to the front of his trains, and are therefore particularly exposed should they hit the publicity buffers. Moreover, some of the potentially successful parts of the Virgin group are still at sensitive stages of their devel- opment. His financial prod- ucts division is unlikely to have made a profit so far, and will soon face increasing com- petition, as more and more high street retailers pile into this lucrative market.

The structure of the Branson empire makes it vulnerable to bad publicity. Almost uniquely for such a diverse organi- sation, operating in so many fields including financial services, radio, cosmet- ics, clothes, an airline, retailing, a record company and a wedding dress firm — it has only one principal brand. Damage to the Virgin name in one area could have a knock-on impact on all Branson's business- es, creating the potential for a domino effect as one part of the empire, in falling, knocks down the next.

This weakness derives from the business approach that has made Virgin so success- ful. As one management consultant explained it to me, 'He has three or four people in a central strategy department, and punters come along with ideas. If Branson likes their idea, then they can use the Virgin name free, in return for a cut of the profits. The partner runs the business day-to-day, and in the centre is a publicity machine and not much else.' Only a hand- ful of his businesses, such as Virgin Atlantic, are exceptions to this rule, and the idea for the airline came from Ran- dolph Fields, a businessman forced out of the venture by Branson a few months after its first aircraft took to the skies.

Virgin spokesmen like to compare their organisation — with its 200 separate busi- nesses operating under 20 umbrella compa- nies — to a Japanese leiretsu', like Mitsubishi, but there is little resemblance. The huge Japanese holding groups own many different firms, in many industries, but do not rely on a single brand, and man- age the companies themselves. Neither is Virgin a modern media group, like Rupert Murdoch's News Corporation, which focus- es overwhelmingly on one sector. Nor is it a diversified conglomerate in the Hanson mode; Mr Branson does not buy businesses and strip out costs. In practice, his variegat- ed vehicle is little more than a highly adept franchising operation.

The kernel of the business is its publicity machine, which works in two ways, one visi- ble, the other out of sight. The public tip of the PR iceberg concentrates on the lovable antics of Branson himself, winning the Blue Riband for crossing the Atlantic, losing his balloon in Marrakesh, dressing up and falling down. Beneath the surface, howev- er, is a tireless news management unit which relies on its chiefs reputation as a willing (and successful) litigant to suppress any criticism of Virgin and its boss.

While I was writing this article, few people who had had dealings with Branson were prepared to talk to me; several had been to court with him before and were determined not to repeat the experience. One senior BBC employee explained that all the pro- gramme editors here are terrified of him; he is allowed to get away with behaviour that no other business boss would even think of try- ing'. He is notorious for walking out if asked questions of which he disapproves. When this week's Panorama programme — an exception to the rule of BBC sycophancy presented him with uncomfortable facts con- cerning the West Coast train service, he refused to continue with the interview. Sur- prisingly, for a man known for his communi- cation skills, he becomes inarticulate and incoherent when under pressure.

My face dropped again when I saw the bill.' If things begin to go wrong, Branson may find he has few friends and a growing band of enemies. Among the ranks of the unbe- lievers is the new Labour government, on which many of his businesses are now reliant. Virgin Radio, of which he still owns 20 per cent, needs regulatory approval to expand. In the past, Branson has found it difficult to win radio licences, and has been persistently turned down in numerous attempts to win television franchises. Virgin Trains needs John Prescott's good- will, and any future role in the Eurostar train service will need government backing. Ful- filling his undoubted ambition to run the National Lottery, a source of massive public- ity if not of profits, will also depend on a lov- ing relationship with Labour. Last time around, Mr Branson's bid failed because, despite promising to take no profits, it would have raised significantly less money for good causes than several of the other applicants. Finally, winning new airline routes, the key to the success of Virgin Atlantic, depends as much on political clout as commercial savvy.

Sadly for Branson, however, his star is not in the ascendant over Downing Street. One senior Labour adviser told me, 'He's becoming brasher and cockier by the minute. Prior to the election, he refused to support Labour. But the very first interview from our victory party was a grinning Richard Branson, climbing on the Blair wagon. People thought, what a cheeky git, he never supported us before. He's naive politically; whatever he may think, it's not an extension of showbiz.'

There is one other reason why Mr Branson may be unpopular with the new puritans in government. He has always made full use of the British tax laws to keep his tax bill as low as possible. After a youthful indiscretion which resulted in Customs and Excise dropping a charge of purchase tax fraud after he paid £53,000 in back taxes, the Virgin chief has been careful to steer to the right side of the law. He has never hesitated, however, to use foreign trusts, and may therefore be a target when Gordon Brown begins his much-heralded loophole-closing exercise. Nor can Branson rely on support from his erstwhile friends in the Tory party; many senior figures there believe that he bene- fited from the Thatcher revolution, and then betrayed its architects. So has Branson finally stretched his brand too far? It would be a mistake to underesti- mate him; he has weathered storms in the past, but the bigger his empire becomes, the thinner he personally is spread across it. Mr Branson's businesses are quintessentially modern, in the sense that they are ideas- based, with the product itself being largely incidental. An idea, unlike a widget, can quickly corrode. Mr Branson, like Othello's lieutenant, knows that his reputation, and that of his company, is the immortal part of himself. Without it, what remains is bestial, an inanimate body corporate at the mercy of his many enemies.