Strong brands drive financial performance
The special guest presenter of the Australian Marketing Institute’s August webinar, the chief strategy officer of Interbrand in New York, Gary Singer, tackled one of marketing’s most compelling issues – measuring and building brand strength.
Singer was able to take part in the webinar from the United States using the Internet-based technology provided to the AMI by series sponsor Premiere Global Services.
Singer began by addressing the central question in the brand debate: do brands really matter in the creation of economic wealth? Singer pointed to how intangibles now dominate corporate value. In 1978, 95% of the Dow Jones industrial market capitalisation was accounted for by tangible assets (plant and equipment, etc). By 2004, this had fallen to just 28%, with the majority of value now residing in intangibles.
Using the top 100 brands in Interbrand’s annual global brand study as a type of mutual fund, Singer compared the returns of investing in branding’s top 100 as compared with the S&P 500 and the MSCI index. The result was a clearly superior return from investing in the top 100 brands.
“There are a couple of explanations for this,” Singer said. “One is that strong brands actually drive financial performance. Another is that well-run companies happen to have strong brands.”
Two US professors, one from Harvard and the other from the University of South Carolina, then looked at the performance data in a different way. They confirmed the superior return of the top 100 brand companies, but they also looked at risk as measured by beta.
“The theory of the market is that the higher the risk or the higher the beta, the stronger the returns you should expect; therefore, you should be compensated when you’re investing in something that’s quite risky,” Singer said.
“What they found is that the strong global brands have a lower beta or a lower risk than does the market as a whole. That suggests that strong brands not only outperform weaker brands, but act as a risk mitigator and provide good performance at a lower level of risk.”
Effective brand management
Singer advocated that all marketing activity should be measured. “Don’t do something unless you actually plan on measuring it,” he said.
“So if you don’t do it unless you measure it, don’t measure it unless it does one of two things: either makes you money or saves you money, or ideally does both. Marketing should play by the same rules as everybody else.
“Historically, marketing may not have been given the same level of respect by CEOs and CFOs. We feel the way to achieve that is by measuring what you do and only proceeding with the things you are planning if it’s going to drive the creation of wealth – the making or saving of money,” Singer said.
He also strongly recommended measurement be tied to specific outcomes, and that the only outcomes that mattered were those that drove behaviour.
“A lot of marketing measurement is about things like attitudes and attributes, but it’s very hard to make money on a changed attitude,” Singer said. “Where you make money is by getting somebody to do something a little bit differently than they did before, whether it’s to get a current user to be more loyal and continue to use you or to extend your relationship with current users so that they are buying more from you or to even get new users to use you.
“Use the rigour of making sure your measurement is about behaviours and that you only use attitudes in as much as they inform or predict what impact it is going to have on a behaviour.
“It takes a while to actually change a behaviour, and therefore there are statistical tools available that can isolate what are the attributes or the attitudes that are going to be predictive of changed behaviour.”
Singer used as an example a retailer that was able to correlate the attitudes it was getting from its continuous tracking with the daily cash register reads at its stores. It found that a willingness to recommend the store to a friend was highly predictive of people’s actual purchasing behaviour.
Measurement should also offer advice, Singer said. It should not just tell whether something was working or not, but also provide information on how the thing being measured could be made better, leading to continuous improvement in the effectiveness of marketing activities.
Finally, Singer said, don’t measure it unless you are going to do something with the results. “The only thing that really matters is that it is going to help drive decisions, that the information that’s being collected is going to be attended to by the folks who are really driving the organisation and is going to help them actually make those decisions smarter.”
How Interbrand measures brand value
Interbrand, as far as it can tell, invented brand valuation and was the first company to use the term more than 20 years ago. Since then, it has done more than 5000 brand valuations around the world.
Singer said the company’s definition of brand value was simple and specific: the present and future revenue specifically driven by the inclusion of a brand. For example, if you had two cans of brown sugar water and one is called Coke and the other is called Fred, what will be the difference in present and future sales just because of the brand?
Interbrand includes three components in its measurement of brand value.
- A financial analysis that looks at all of a company’s revenue, then segregates from that revenue that which can be attributed to a specific brand. For Coca-Cola, it would be revenue directly resulting from the products that are branded Coke, such as Coca-Cola, Diet Coke, Coke Zero, etc. (Brand value should not be equated with overall company value.) An EVA (economic value added) is calculated, which is essentially the intangible earnings of the current balance sheet. The brand value is a subset of the EVA.
- Role of brand, expressed as a percentage from 0-100. Of those intangible earnings, what can be attributed to the brand itself? This can be somewhat industry specific; for example, in cosmetics and softdrinks the brand is the primary driver of value and the percentage will be in the 80s or 90s, whereas in industrial products it might only contribute 10-30%.
- Brand strength analysis. Brands also affect future earnings, and stronger brands should provide an ‘insurance policy’ that makes future earnings less volatile than they would be if you had a weak brand. Brand strength analysis basically asks what the discount rate of premium is on the bond rate based on the strength of a brand. Strong brands will have minimal incremental discount, weaker brands will have significant discounts.
Interbrand distils these components into a single number that it calls the brand valuation.
Singer then conducted some polls among the webinar participants based on the results of the 2006 Interbrand top 100 brands study.
- Which brand entered the top 10 this year? Was it American Express, Citi Group, Hewlett Packard or Mercedes Benz? (Answer: Mercedes Benz, up from 11 to 10.)
- What was the fastest growing brand? Was it ebay, Google, Starbucks or Yahoo? (Answer: Google, which was selected by 69% of webinar participants. It grew 46%.)
- Which brand lost the most value in 2006? Was it Ford, Gap, Intel or Kodak? (Answer: Gap, which was selected by only 6% of participants. It lost 22% of its brand value.)
Interbrand’s list of the world’s top 10 most valuable brands in 2006 is:
| Rank |
Brand (2005) |
2006 brand
value $b |
Change in
brand value |
| 1 |
Coca-Cola (1) |
67.0 |
-1% |
| 2 |
Microsoft (2) |
56.93 |
-5% |
| 3 |
IBM (3) |
56.20 |
5% |
| 4 |
GE (4) |
48.91 |
4% |
| 5 |
Intel (5) |
32.32 |
-9% |
| 6 |
Nokia (6) |
30.13 |
14% |
| 7 |
Toyota (9) |
27.94 |
13% |
| 8 |
Disney (7) |
27.85 |
5% |
| 9 |
McDonalds (8) |
27.50 |
6% |
| 10 |
Mercedes (11) |
21.80 |
9% |
Rankings 1-6 remained the same as in 2005, and the only new entrant was Mercedes Benz at 10. Toyota grew strongly, up from 9 to 7, and the top two, Coca-Cola and Microsoft, lost ground.
The webinar participants then had 20 minutes of excellent question-and-answer with Singer covering topics including:
- Different brand valuation methodologies.
- The key factors that contribute to brand value.
- How much should be spent on brand valuation.
- The effect on luxury brands of the rise of China.
- The relationship between profit and brand valuation.
- How big brands will survive in the future against nimble challengers.
- The role of brand for education institutions.
- The role of brand in service offerings.
- How to convince a sceptical CEO why they should be investing in brand measurement.
- Brand valuation for small and medium business.
The full text of the question and answer can be heard on the recording of the webinar, which can be downloaded to your computer (see right hand panel).
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