March 5, 2001
Time Atlantic
With reporting by Helen Gibson/London
LONDON-- Last month, executives of Richard Branson's Virgin companies rode a dingy and slightly delayed rail car--not, as it happened, one of Sir Richard's--up to England's East Midlands to unveil the first of a new line of super-fast tilting trains. The jet-shaped thing only crawled along a test track, but it would have been a beautiful sight for any boy who loves trains. Or a grown man, for that matter. Virgin group director Will Whitehorn sprang up to one of the coaches and pressed his face to the shiny aluminum skin. He later told Branson: "You're going to wet yourself when you see it." If Britain's dodgy railroad tracks were only up to the task, the train could hit 225 km/h. Even as it is, it should cut the trip between London and Manchester to two hours, down from two hours and 40 minutes, when it joins the fleet in 2002, Whitehorn says. But the train has one other, perhaps more urgent, mission: to take some of the tarnish off the aging Virgin brand.
The past year has been rocky for Branson, 50, who still holds the undisputed title of Britain's most absolutely fabulous tycoon. "The entrepreneur in a sweater," as the Guardian newspaper recently dubbed him, owns stakes in hundreds of businesses--from the banal, like Virgin Cosmetics, to the notional, like the spacebound Virgin Galactic Airways--so it's never easy to say if he's up or down. Last March, Branson sold 49% of his Virgin Atlantic airline to Singapore Airlines for a nice $900 million. But his Virgin Trains--about 17% of Virgin revenue--are still notoriously late and slow. Much-hyped experiments like Virgin Cola--remember the curvaceous Pammy bottle?--have quietly gone flat. And now Branson's People's Lottery is locked in an ugly fight over the charity-driven British lottery franchise. For a business built less on a particular product line than on its glamorous, do-right image, this ought to be worrying stuff.
Unless you are Branson. "Having just done massive research on the brand, [Virgin Trains] doesn't seem to have done the sort of damage to the brand you might have thought," says Branson, sitting on a sofa in a surprisingly modest office tucked away in London's Notting Hill Gate neighborhood. Branson, others have noted, can seem shy for a guy equally smiley alongside bare-chested models and Tony Blair. But "shy" doesn't quite capture it; imagine Bill Gates in court, except handsome and well turned-out. Branson crosses his arms as if to hug himself and talks to his shoes.
"We took over the most dilapidated network in the United Kingdom," he says of the railway lines Virgin got from the old British Rail in 1997. "It hadn't had any investment in 30 years. Trains were falling apart." Virgin introduced airline-style pricing, so that the cost of business class and peak standard-fare tickets went up while pre-booked tickets got cheaper. (A testament to the power of brand: the government forced Virgin to paint its name on the trains as a condition of the sale.) Meanwhile, Virgin's two long-distance lines have ranked near the bottom in reliability among high speed lines, according to the Strategic Rail Authority. Virgin group commercial director Richard Bowker observes that in the months before last October's Hatfield rail disaster--which killed four passengers on a non-Virgin train, and led to national speed restrictions--the company's performance was gaining on the competition. Branson believes that as long as consumers can see the investments Virgin is making to improve services down the line, they'll forgive a lot.
A little old-fashioned ballyhoo might help as well. Last month, in response to the steep decline in ridership after Hatfield, Branson announced "The World's Biggest Rail Offer," slicing ticket prices in half. Trouble is, all that demand led to a customer service "meltdown"--Branson's word--and Britain's newspapers were quick to report "chaos" in the rail system. "When Harrods has a sale on and there's a line outside, you don't hear anyone whingeing," says Bowker.
Time was when Branson could do no wrong in the eyes of U.K. opinion makers; now that he has been knighted it sometimes seems he can do no right. Virgin's reams of cheerful consumer research notwithstanding, Branson came in third on BBC radio's lighthearted year-end Villain of the Year poll. And in December an unauthorized biography by journalist Tom Bower--which seems to try the fancy trick of painting Branson as both a Machiavellian schemer and a reckless fool--ranked alongside Branson's own autobiography on the Sunday Times business best-seller list. (Branson has sued Bower for libel over a newspaper article.)
All of this proves only that managing a big brand into respectable middle age isn't easy. Consider that Branson is thinking about asking for up to $43 million from the government to cover the cost of maintaining his doomed bid to wrest the lottery franchise away from its current operator Camelot. All this for a business--not associated with any Virgin company--that was designed to give its profits to charity. Sir Richard says money can come from the Treasury, which taxes the lottery. But Norman Baker, the Liberal Democrats' spokesman on the lottery, warns that it would likely come out of the lottery's own "good causes" fund.
"If it comes out the good causes fund, we'll give it straight back to charity," says Branson. "This is just to deter us from getting our costs back." Branson--who doesn't think the public associates Virgin with his lottery fight--says it's a matter of principle. He actually came within a whisker of getting the business last year and believes he was misled into spending more money to maintain a bid he should have won on the merits. So why did Branson lose the lottery? "It's rather awkward for me to say why," says Branson, coyly. "Ring the editor of the Sun and ask him why he thinks I didn't win the lottery."
"Because basically he didn't deserve to get it," says David Yelland, editor of the aforementioned tabloid. Although the Branson bid promised to improve the games and deliver more money to charity, the commission questioned whether Branson really had the stuff to make sure it all came off. Yelland suspects that with Westminster still reeling from the Millennium Dome mess, the risk was just too great. "You can bugger up the Dome and win the election," he says. "You bugger up the lottery, and you're really in trouble."
The fact is, although some of the best-known Branson businesses are in the black--the main airline, trains, Virgin Direct financial services and the Megastores all turn profits, says Whitehorn--plenty more just plain haven't worked. Virgin Drinks, the cola company, lost millions in recent years. Virgin Express, a Brussels-based discount airline that trades on the NASDAQ for about $1 a share, down from more than $27 in 1998, has been hit by its dependence on connections with Belgium's beleaguered Sabena airline.
About a year ago Branson even had to fight off bankers who wanted to close his Our Price high street shops, which are being retooled into mobile phone and CD stores. Bower's book suggests that Branson had to sell his Virgin Atlantic stake to pay his debts and save Our Price. Branson counters: "We could have kept it afloat through the general funds of Virgin."
All of this makes some wonder if Branson does too much. In fact, Whitehorn told TIME that Virgin is going to stop launching lines in order to expand its current businesses into new markets. But the vital point is that like any brand, the Virgin label is part illusion. (Did Coke ever really teach the world to sing? Is Virgin Cola anything but another kind of bubbly brown-sugar water packed into bright red cans?) Branson says he's the business world's equivalent of Ralph Nader. His Virgin Atlantic really did innovate business-class air travel and as Virgin Blue airline breaks into the sheltered domestic Australian market, perhaps it will fight for consumers against established interests. But what about when Virgin Direct sells a simple index-tracking investment fund for almost twice the annual fee of other firms' similar funds?
Bowker reckons that if Branson's stakes in his various companies were put on the public markets, they'd be worth roughly $3 billion. That would make Virgin a medium-to-big sized company. What's remarkable is how Branson created all this value. He put up only $26 million of the more than $90 million that created Virgin trains, but he owns half of it. He also has half of Virgin Direct, for which he says the Australian firm AMP provided most of the funding. Taking Virgin Mobile phones to Asia, Branson got Singapore Telecom, like Singapore Air a government-linked company, to put up half of the $100 million start-up capital, and SingTel may inject another $400 million in convertible loans. Some brands sell products. Virgin's product is the brand, and the real customers are his deep-pocketed partners. As long as they think Virgin stands for something, Branson's in business.
