Stewart's tarnished image bad for business

Conviction has company searching for a recipe for survival, analysts say

March 07, 2004|By Jamie Smith Hopkins and Lorraine Mirabella | Jamie Smith Hopkins and Lorraine Mirabella,SUN STAFF

Almost everyone who has studied the predicament confronting the managers of Martha Stewart Living Omnimedia Inc. agrees that Martha Stewart should leave for her company to have its best chance to survive.

But the cure could kill the patient, and it's likely Stewart will resist any effort to separate her from an institution so dependent on her taste and style.

If ever there were a business crisis that illustrates the vital link between personality and corporate success and also shows the danger of basing a company on the image and vision of a person, this is it.

It's not - as Martha would say - a good thing.

"If you go to jail and you're the embodiment of the brand, I think that ends the strength of the brand," said Lynn M. Parker, a principal and founding member of Parker LePla, an integrated branding consultancy in Seattle. "Martha Stewart is so intertwined with her brand that you can't extract the Martha Stewartness and have anything left over that anyone can relate to."

The stock sale that netted Stewart less than $50,000 in savings, plus four felony convictions, could end up sending her to prison for 20 years - though she is expected to get no more than 36 months.

Promising on Friday to appeal, she wrote on her Web site

"I believe in the fairness of the judicial system and remain confident that I will ultimately prevail."

For Stewart, there's an urgent imperative to fulfill that prediction. She lost $95 million in stock value on Friday alone. If the company fails, she'll lose much more.

But analysts say the damage to her credibility, as a purveyor of lifestyle advice - of perfection, graciously shared with the masses - may be irreversible.

"Her strength is her personality cult where people have bought into this Martha Stewart image," said Lewis Small, a professor of marketing at York College in Pennsylvania. "Guilty on four counts definitely messes that up."

Falling stock

Martha Stewart Living Omnimedia stock dropped more than 20 percent Friday, the $10.86-a-share price a far cry from the heady first day on the market in 1999 when shares closed at $35.56.

Based in New York, the company is a publisher of how-to magazines, a producer of how-to television, a multimillion-dollar merchandiser and a direct seller of products such as deluxe organizing cabinets and Slovakian Easter eggs.

A day before she was convicted, Stewart was nominated for a "service show host" Daytime Emmy for the Martha Stewart Living show - an award she has won four times before.

From a studio in Westport, Conn., she talks people through flower arrangements, table settings and caramelizing.

But almost immediately after Friday's verdict, WCBS in New York reportedly announced that it would stop airing the show beginning tomorrow, and marketing experts questioned how she could continue taping episodes.

The company Martha made is preparing for the possibility of a Stewart-less future. It posted its first annual loss Thursday, pulled down by declines in advertising and circulation at Martha Stewart Living magazine.

"We assure you that we have done the appropriate contingency planning," Chief Executive Sharon L. Patrick told investors in a conference call Thursday. "We are well-positioned to weather the storm."

A company statement the next day stated that it has $169 million in cash and no debt.

Still, insiders appear to be hedging their bets. In the last six months, creative director Gael Towey and other senior officials have sold 93,000 shares of company stock, according to Securities and Exchange Commission filings.

McAlpine Associates LLC, a media research firm in Scarsdale, N.Y., expects the company's biggest profit sector - the magazines - will continue declining.

"If she indeed goes to jail and can't be an advisor to the magazine - let's face it, she did a good job of it. Without that input, I don't know how good it will be," said Dennis B. McAlpine, the firm's managing partner. "And if you change the name of the magazine, you will lose some subscribers who thought she was good."

He said Stewart had a reputation for taking a hard line with advertisers by not giving discounts or rate reductions for a minimum number of pages, and "the advertisers have not forgotten."

On the other hand, the Martha Stewart-branded products - bedding and cookware sold at Kmart, paints sold at Sherwin-Williams and her furniture line - have fared well.

"Presumably, that's because they're offering a good product at a good price regardless of what the name is," McAlpine said.

But the nation's biggest retailer has been making a grab at the same market. Tarnish on the well-polished Stewart name could leave her merchandise vulnerable to Wal-Mart Stores Inc.'s lines.

"Now they have a similar product in the look of Martha, and the prices are lower," said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm in New York. "They're moving in here."

Gloomy prediction

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