E*Trade Financial (ETFC) may boast some of the most popular advertisements on TV, but the company still can't make a profit. Hobbled by bad loans that blew up in the financial crisis, it's stuck at fourth place in the highly competitive online brokerage industry.
E*Trade executives are thus trying a new strategy: While not entirely abandoning their talking baby campaign, they're spending more than half of an increased ad budget on messages without the stock-trading infant. The talking baby ads, which began airing during the 2008 Super Bowl, have been a hit with TV viewers. Nielsen (NLSN) said on Feb. 9 that an ad featuring the E*Trade baby with a sneezing cat was the third most-liked commercial during the 2011 Super Bowl, watched by a record 111 million people. Because of the baby, "we have much higher brand recognition vs. the competition," says Nicholas Utton, E*Trade's chief marketing officer.
Despite the attention, the New York-based company has fallen behind rivals in assets and new customer signups. Since the end of 2007, E*Trade has boosted its number of brokerage accounts by 9.4 percent, to 2.7 million. That's solid growth, but much of the online brokerage industry has seen a heavier influx of assets. Charles Schwab (SCHW) has increased its active brokerage accounts by 13.5 percent since 2007 and TD Ameritrade (AMTD) has boosted total accounts by 24 percent in that period.
The growth lag dates back to 2007, when many potential customers were spooked by financial problems caused by bad mortgages and other loans made by E*Trade's bank. In November 2008, a Citigroup (C) analyst estimated a 15 percent chance of bankruptcy for E*Trade. Customers closed 256,000 E*Trade accounts during that quarter. From the start of 2007 through 2008, E*Trade's stock price tumbled 95 percent.
The problems severely harmed E*Trade's brand image, says Alois Pirker, research director at the Aite Group, a financial services consulting firm in Boston. "The online brokerage market has done very well," Pirker says. "E*Trade has definitely lagged behind." E*Trade's larger rivals—which include not just direct competitors Schwab and Ameritrade, but also Fidelity Investments—"stayed very nicely out of trouble during the downturn," Pirker said. "They didn't have a near-death experience. That obviously helped them."
In response, E*Trade has shrunk its bank, reducing its loan portfolio from $25.5 billion to $16.9 billion over the last two years. Some of the damage to E*Trade's brand may be starting to heal, says BMO Capital Markets analyst Michael Vinciquerra. "The troubles they had are starting to get further in the rear-view mirror." A rising stock market may also be improving customers' moods, he says. E*Trade said on Jan. 26 that it had added 27,600 net new brokerage accounts during the last quarter, up from 7,200 in the previous quarter. Trading activity rose 19 percent over that of the previous quarter.
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