Brand Equity drives business performance

An ‘enigma’, a ‘logo’, a ‘colour’, a ‘swash’, a ‘legal trademark’, a ‘sign of ownership’, a ‘shorthand device’, an ‘asset’. These are just a few of the words that are frequently used in connection with brands.

Today’s consumers are brand savvy, they understand more than ever what a brand is and how marketeers promote them. At the same time, as consumers’ awareness of branding has grown business owners have increasingly come to recognise the value of brands and the need to build, maintain, invest in and protect brand assets.

Brands – Owned by Consumers

Brands are the subject of regular media attention which is often critical despite the fact that brands empower consumers, providing them with choice whilst holding the brand owners to account. To protect brand values companies must act responsibly, meet promises and maintain reliability whilst not undermining the need to innovate and refresh.

Despite the importance of brands, those charged with looking after brand assets still rarely make the boardroom and marketing budgets often continue to be the first cut during a downturn. Brand equity measures and methodologies, vital to proving the importance of brands are still not employed robustly and systematically, marketeers and Financial Directors are often polarised.

Fig 1. Value of select Superbrands

Source: Interbrand, Business Week, and JP Morgan

The Superbrands

Superbrands like Coca-Cola are valued at billions of dollars and this is often reflected in strongly branded public companies’ share prices. Evidence that strongly branded organisations outperform weakerly branded rivals over the long-term exists in a variety of studies, for example as evidenced by Datastream’s analysis of the relative performance of heavily branded versus weakly branded FTSE350 stocks. Brand assets also constitute a growing percentage of a company’s total asset base. Brand Finance estimate intangible assets constituted 50% of total assets in the 1990s and this is set to grow to 70% by the decade 2010. A separate study by AT Kearney’s on shareholder value revealed that only 10-20% of total shareholder returns (TSR) could be explained through financial performance. Much of the missing 80-90% of TSR, representing future earnings potential, can be attributed to successful branding.

A strong brand benefits its owner in many ways. For example impacting positively upon the volume and the value of the product or services sold by an organisation.  In simple terms attracting more custom and repeat custom. Research by NFO WorldGroup (now TNS) on behalf of Superbrands Ltd. showed that between 40-60% of UK consumers would not switch brands at any price. Studies by NFO WorldGroup on our behalf since 1998 have illustrated that brand loyalty and consumers’ willingness to pay a premium for a Superbrands has remained high throughout the period 1998-2003.

Strong brands can stabilise demand and help to minimise the impact of macro environmental change.  Downturns have a greater impact upon weaker rivals who feel the pinch quicker and recover later.

A powerful and reputable brand allows organisations to lower supplier costs whilst aiding geographical or product/service extensions.  Take MARS bar or Maltesers® move into the Ice Cream market or Tesco and Sainsbury’s move into financial services as examples of where a strong brand with a loyal customer base can expand revenue sources by streatching the brand into new sectors.

Above and beyond supplier and customer markets an increasingly important concern for companies is the market for talent. The employee base is vital for the long-term health of organisations and as the talent pool reduces the best talent is increasingly drawn towards highly regarded and well known branded organisations.

To illustrate that a strong brand benefits its owners it is worth illustrating how strong brands outperform in traditionally un-branded sectors. Superbrands like Intel, in semi-conductors, or Conqueror, in paper manufacturing, have developed powerful brands resulting in increases in market share, price premiums, customer recognition and loyalty versus the plethora of weaker branded rivals. These organisations have moved their businesses from being commodity-based to ones offering premium brands, clearly benefiting the owners and shareholders in the process.

Marketing Brands – from the Shareholder to the Boardroom

In a 1999 McKinsey’s survey of executives at 545 UK companies, 80% of the respondents cited marketing as either very or critically important in achieving financial objectives, and more than three-quarters said that its importance was growing. A recent Brand Guardians survey of the UK’s Superbrands showed that 82% believed that continued investment in marketing could help offset an economic downturn. 94% believed that marketing is necessary for long-term growth and the large majority agree that marketing has a major impact on a company’s financial performance.

Despite this 54% of Brand Guardians believed that marketing and advertising budgets would be cut first if business costs came under pressure. These figures reveal that marketing and advertising budgets continue to suffer ahead of other business costs, even at the UK’s biggest brands, despite the important role both areas play in building shareholder value and offsetting the effects of an economic downturn.

A survey of Finance Directors conducted by NOP for the IPA in 2000 highlights the route of the problem. Those that hold the budgets do not hold marketing in the same high regard. Only 57% felt that marketing was a necessary investment for long-term growth, compared to 92% who believed it is necessary to invest in IT, 86% in training, 79% in human resources and 59% in research and development. Superbrands brand guardian survey showed that only 35% of brand guardians viewed marketing as a boardroom concern at their company. Both surveys are concerning for the marketing industry.

To counter these concerns the need therefore to illustrate the impact of marketing campaigns on financial performance continues to improve. 79% of Brand Guardians questioned by Superbrands felt they had adequate metrics/procedures in place to measure marketing effectiveness, 69% brand health and 44% brand value and these figures are growing.

Measuring Brand Value

The series of Brand Finance equity analyst reports in the 1990s showed a strong and growing appetite in the City for information on brand metrics. At the same time brand equity, brand value and brand health models and methodologies are becoming more sophisticated allowing the gulf between knowing that brands are vital and proving that they are to shrink. These methodologies will not be analysed here, but all brand guardians must investigate, understand and explore these and apply appropriate system to their brands. Marketeers have an increasingly diverse array of options in proving their brands’ worth such as Brand Health Tracking, Brand Economics or Brand Due Diligence. Equally databases such as Y&R’s Brand Asset Valuator and WPP’s BrandZ are ideal for correlating the proportion of intangible value with brand image tracking, to determine a relationship between the strength of a brand and the earnings of the business.

The true value of brands, however, is often only established when a transaction takes place. The recognition of the importance of brands by Investment Bankers and Venture Capitalists is reflected in the increasing use of Brand Due Diligence and brand valuations in Management Buy Out’s, mergers, hostile and friendly takeovers, brand divestments etc. SAATCHiNVEST’s acquisition of Complan from Heinz used a Brand Due Dilligence assesment which according to Andrew Leek, the MD of SAATCHiNVEST at that time provided the buy-in team with a clear insight into the value and potential of the brand, and also helped the bankers understand the strong heritage of the brand and how it could be leveraged by the buy-in team. There are many examples of brand value being illustrated in a transaction, from the price paid for the Roll-Royce brand through to the initial RHM purchase, which sparked off the debate about brands inclusion on the balance sheet. Simple evidence of branding and marketing effectiveness can be seen in the campaigns identified by the IPA and CIM Effectiveness Awards.

Conclusions

Brands are essential to corporate performance. Brands represent a major source of value as evidenced by the continued out-performance of heavily branded organisations versus weaker branded rivals. Yet work still needs to be done to convince the City, boardrooms and finance directors of the benefits of investing in a strong brand. Increasingly sophisticated brand measurement systems and a focus by brand owners of measuring and highlighting brand performance and effectiveness will show that brands truly are the company’s most critical strategic assets. This is the vital mission that must be taken up by the marketing fraternity to push branding onto a higher platform.

Stephen Cheliotis

Superbrands Ltd/The Brand Council

This article was adapted from an article written by Stephen Cheliotis for the CIM as part of the joint CIM/Brand Council ‘Brand Power‘ campaign in March 2003.