ReputationInstitute

RI Case Studies: Martha Stewart

Overview

On July 16, 2004, Martha Stewart—founder, CEO, and majority shareholder of Martha Stewart Living Omnimedia [MSO]—was sentenced to 5 months in prison, 5 months home confinement, two years of supervised probation, and ordered to pay a $30,000 fine for lying about a 2001 stock sale. On March 3, 2004 , a jury found her guilty of conspiracy and making false statements regarding her decision to sell 3,928 shares of ImClone stock on December 27, 2001 —one day before the FDA announced they were rejecting ImClone's request to market Erbitux, a cancer drug. Also convicted on similar charges was Peter Baconovic, Stewart's former stock broker with Merrill-Lynch.

MSO is an integrated content and commerce company that creates how-to content and domestic merchandise for homemakers and other consumers. The Company's business segments are publishing, television, merchandising and Internet/direct commerce. Some of the better known MSO products—all components of the Martha Stewart” brand—include publications like Martha Stewart Kids, and Martha Stewart Weddings, radio programs like askMartha, the popular TV show Martha Stewart Living, merchandise brands Martha Stewart Everyday and Martha Stewart Signature, along with a wide range of products via the Internet at www.marthastewart.com.

Martha Stewart is best known for embodying the American dream. She devoted most of her life to improving the quality of the home, emphasizing modesty and decorum over extravagance and luxury. The daughter of a father who taught her gardening and a mother who taught her how to cook and helped her make her wedding dress, Martha Stewart came from humble, middle class America beginnings. The entrepreneur defied expectations as she went on to start her own catering business and expanded it into a media empire trading on the New York Stock Exchange. She was not only the founder of a company; she was its public face and chief spokeswoman. Martha Stewart and Martha Stewart Living Omnimedia are inextricably linked. No other woman has created this kind of business in such a short time, from scratch, from baking cookies in the basement,” Stewart told CBS News. If you can find that person, let me know, who took a company public and in the first day made over $1 billion.”

Impact

MSO
In part because Martha Stewart's name is directly linked to all MSO brands, and because the investigation, indictment and trial spanned close to three years, the impact on MSO was severe. Early on, Stewart chose to remain silent about her involvement. By June 18, 2002, when she issued her first formal statement—professing her innocence—MSO stock price was close to half of what it had been at the end of 2001. For the next two years, MSO was unable to improve its stock price by more than a few percentage points.

The progress of this ordeal also took a significant toll in the profitability and cash flow of MSO. On June 24, 2002, MSO halved its third quarter projections stating that the scandal was taking a toll. On November 1, 2002, Sharon Patrick—president and chief operating officer of Martha Stewart Living Omnimedia—announced "We will not be producing an annual prime-time holiday special, …principally because of higher costs of buying prime time [television slots] and the continued uncertainty with Martha's personal situation.” On January 3, 2003 Chrysler withdrew from a 12 month advertising agreement with MSO. The contract included special advertising sections in the Martha Stewart Living magazine, TV ads and contests. "That would fall into the ‘oops, screwed-up category,' and we exited out of that as soon as we could,” Jim Schroer, Chrysler's executive vice president for marketing said at the Detroit auto show. "That was not consistent with where we wanted to take the Chrysler brand.” On March 14, 2003, MSO reported its 1 st-ever Quarterly loss (-$2 million) "Our business continues to be negatively impacted by the ongoing uncertainty related to the investigations into the sale of non-company stock by Martha Stewart,” Sharon Patrick said in a news release. "Until this situation is resolved, we will likely continue to face challenges throughout our businesses.” By this time, MSO was spending close to two million dollars a quarter on public relations and legal advice. MSO's flagship periodical—Martha Stewart Living—had 35 percent fewer advertising pages last year than in 2002, causing its revenues to drop 31 percent to $161.8 million, according to the Publishers Information Bureau. The magazine's performance was in stark contrast to the industry, which reported only a 1 percent decline in ad pages, while revenues grew 6 percent.

During January 2004, as the jury was being picked, three Canadian networks dropped the Martha Stewart Living TV show, and on March 8th (three days after being found guilty) Stewart's show (Martha Stewart Living) was removed by 12 CBS stations owned by Viacom, and a few UPN stations. Finally, on May 19, 2004, after 11 years, Martha Stewart Living was placed on hiatus which included the loss of over 40 jobs at MSO.

Martha Stewart
Martha Stewart also suffered great personal losses from this scandal. On October 3, 2002 she resigned from a prestigious board position with the New York Stock Exchange. On January 27, 2003, Stewart told Jeffrey Toobin—during an interview for the New Yorker—that the ordeal had cost her four hundred thousand dollars. On March 15 th, after her conviction, she resigned her position as a director and the chief creative officer of MSO—the company she founded. As a convicted felon, she will be unable to ever hold an officer position in a publicly traded company in the U.S.

RI Analysis

An age-old parable states that our greatest strength is often our greatest weakness. When it comes to corporate reputation and brand favorability nothing could be closer to the truth, and is a recurrent theme running through countless corporate catastrophes.

In the case of Martha Stewart Omnimedia, Martha Stewart, herself, was the brand, in name, function, and icon. This was a well known, and appreciated fact at the corporate level; so well known that the need to reduce the firm's dependence on Martha Stewart that the risks were spelled out in a prospectus for the public offering in 1999. In one mention early on, it warned investors: ""Our business would be adversely affected if Martha Stewart's public image or reputation were to be tarnished."” It even spelled out strategies to nip any future problem in the bud, most notably to "evolve the brand through team-based content and reduce dependence on our founder."” While the firm took steps to achieve those goals, including taking Stewart off the cover of its flagship Martha Stewart Living magazine, and mentioning her less frequently in the magazine's features it was "too little too late."

Certainly, brand strength, when attached to celebrity, can carry some of the personality and character of the namesake, it is not without risk. Ralph Lauren has done an excellent job diversifying into a range of brands not associated with or bearing his name—Polo, Purple Label, Safari, Chaps, and others. Further, Ralph Lauren has been successful in keeping his fashions and home products in the media while keeping himself out.

Any organization tying their wagon to celebrity should be aware of the risks, diligent in constructing their brand offering, and delivering product and service attributes which lead to favorable reputation outside of celebrity alone.

Other information on Martha Stewart:

New Yorker Article (alternate)

Wolf Popper Civil Suit

Forbes: The Case Against Martha

Fox News: Martha Stewart Convicted

Baltimore Sun: Faneuil's Testimony

Court TV: Martha Stewart Trial

CBS News: Pasternak's Testimony