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Chapter 2

BRAND ASSETS HAVE REAL VALUE

Brand value is very much like an onion. It has layers and a core.The core is the user who will stick with you until the very end. —Edwin Artzt, former CEO P&G

Brand assets have real value. This assertion is critical to living in the new brand-as-asset world, with all its implications, from business strategy to marketing programs to the resourcing and management of brand building. But as branding becomes strategic and earns a seat at the executive table, the CEOs and CFOs of the world, who may have sympathy with the brand asset concept, will ultimately need proof that value actually exists. A conceptual argument will be part of the persuasion, but more empirical evidence may be necessary as well.

Investments in brand were easy to justify under the classic brand management paradigm, which focused on short-term sales. Brand programs either delivered immediate sales and profits or they did not. Building brand assets, however, may involve consistent reinforcement over years and only a small portion of the pay-off may occur immediately—in fact, in the short run brand building may depress profits. So the need is to measure long-term brand impacts or its surrogates. We have left the tactical world, in which short-term measures work.

There are a variety of ways that brand asset value can be demonstrated, including case studies, brand valuations, quantitative studies of the impact of brand equity, and the role of brand assets in conceptual business strategy models.

CASE STUDIES

A vivid, convincing, and memorable way to demonstrate brand asset value is to look at case studies. Look to brands that have undeniably contributed to the creation of enormous value. The Apple brand, for example, with its creative, independent personality and reputation for being a leading innovator, is a driver of one of the most valuable firms in the world. BMW has gotten traction in large part because of a brand defined around the “ultimate driving machine” and the self-expressive benefits that the badge lends to the driver. Trader Joe’s has dominated a subcategory with a brand that has crystalized a set of values and life-style that delivers both self-expressive and social benefits.

Consider also the value of creating a brand that is so strong it can survive business blunders that sometimes undercut the brand promise. Such brands can lead a come-back that otherwise would be infeasible. Apple had a down period in its product line and business performance before Steve Jobs returned in 1997, but its brand allowed the business to come back when the product problems were remedied and innovation returned. The same can be said about Harley-Davidson, which went through a period of quality problems and saw the brand lead the business back once those problems were resolved. AT&T, the leading communication brand for three generations prior to the 1980s, spent almost two decades shouting price and fighting service issues, and yet today it is still one of the strongest and most relevant brands in its category. These stories testify to the resilience and asset value of a strong brand.

Consider finally those brands that did collapse when managed badly, thereby losing enormous enterprise value. In the mid-1970s, Schlitz, the “Gusto” beer, was a close number two behind Budweiser when the firm decided to cut costs by using a yeast-centered brewing process, which cut the processing time from twelve to four days, and by replacing barley malt with corn syrup.¹ Blind taste tests showed that the taste did not change. However, competitors were only too glad to talk about Schlitzes’ efforts to reduce costs. Their suggestion that Schlitz had compromised quality became very real when it turned out that the beer, after sitting on the self, would turn cloudy and lose carbonation. Schlitz returned to its old production method and ran blind taste tests during the Super Bowl to prove the quality was back, but customers had lost confidence in the brand and the thought of finding “gusto” by drinking Schlitz became a joke. The brand damage led to its virtual disappearance from the market and caused the business to lose more than one billion dollars in value. This story, and others like it, shows that even strong brands can be vulnerable to decisions insensitive to the brand promise and customer relationships.

THE ASSET VALUE OF A BRAND

Another approach to demonstrate the asset value of a brand is to directly estimate the value of its equity. There is a logical process that yields an estimate of a brand’s asset value, which can be helpful in demonstrating that brands are indeed assets and in showing how those brand assets are dispersed around the product-markets in which the firm is engaged.

Estimating the value of a brand starts with estimating the value of the product-market business units driven by the brand. The Ford Focus business in the United States, for example, would be evaluated by discounting its future expected earnings flow. The value of tangible assets (using either book or market value) is subtracted. The balance is due to intangible assets like manufacturing skill, people, R&D capability, and brand. These intangible assets are then subjectively allocated to brand and others. The key estimated number is the percent of the impact of the intangible assets that are due to brand power. This estimate can be done by a group of knowledgeable people within the firm working together or by themselves taking into account the business model and any information about the brand in terms of its relative awareness, associations, and customer loyalty. There might be disagreement as to whether a brand’s role is 20 percent or 30 percent but there are rarely arguments about whether it should be 10 percent or 50 percent.

The value of the brand is then aggregated over countries to determine a value for the Ford Focus worldwide and then, finally, aggregated over the other Ford products to get an overall value of the Ford brand. This value can be cross-checked with the market cap of the Ford stock and the percentage of the Ford company sales that is driven by the Ford brand.

The value of brands throughout the world has been estimated annually by Interbrand, Millward Brown, and others for well over a decade. In 2013, there were seven brands valued by Interbrand over $40 billion (Apple, Google, Coca-Cola, IBM, Microsoft, GE, and McDonalds). The one-hundredth most valuable global brand was valued at over $80 million.

Although the estimate of the brand value as a percent of the value of its associated business is not reported, the Interbrand data of 2013 implies that the percentage varies from 10 to 25 percent (for brands like GE, Allianz, Accenture, Caterpillar, Hyundai, and Chevrolet) to 40 to 50 percent (for brands such as Google, Nike, and Disney) to over 60 percent for brands like Jack Daniel’s, Coca-Cola, and Burberry).² Even 15 percent of the value of a business will usually represent an asset worth building and protecting; when it is much higher, the need to protect the brand-building budget becomes more compelling. A brand’s estimated value can be an important statement about the wisdom and feasibility of creating brand assets.

It is tempting to use this measure to manage brands and brand building, but the reality is that it is too imprecise to play this role. The value will be driven by the stock market, competitor innovations, business strategy, product performance, and market dynamics that may have little to do with brand power and is based on several subjective parameter estimates that involve uncertainties and biases.

Brand value estimates can be worthwhile, however, in providing a frame of reference when developing brand-building programs and budgets. If a brand is worth $500 million, a budget of $5 million for brand building might be challenged as being too low. Or if $400 million of the brand’s value was in Europe and $100 million in the United States, a decision to split evenly the brand-building budget may be questioned. Further, the process can add value by stimulating brand-management teams to think through exactly how their brand is working in the business strategy and what its components are. The insights gained will help enhance the business and brand strategy and the associated brand-building efforts.

PAYOFF FROM BRAND BUILDING PROGRAMS

Another approach to demonstrating brand value is to measure statistically the impact of brand equity changes on stock return, which is the ultimate measure of a long-term return on assets. In two studies I conducted with Professor Robert Jacobson of the University of Washington, we explored this relationship using time series data which included information on accounting-based earnings or return on investment (ROI) and models that sorted out the direction of causation.³ The first data base from EquiTrend involved thirty-three brands representing publically traded firms like American Express, Chrysler, and Exxon; the second database, from Techtel, involved nine high tech firms including Apple, HP, and IBM.

Researchers in finance have shown a strong relationship between ROI changes and stock prices. On average, if ROI go up so, does a stock price. We found in both studies that the impact of increasing brand equity on stock return was nearly as great as ROI, 70 percent as much. Figure 1 presents the results of the EquiTrend study. The figure vividly shows that stock return responds to a large loss or large gain in brand equity, nearly as much as the response to ROI changes. In contrast, advertising, also tested in the study, had no impact on stock return except that which was captured by brand equity.

The brand equity to stock return relationship may be in part caused by the fact that brand equity supports a price premium that contributes to profitability. An analysis of the larger EquiTrend database has shown that brand equity is associated with a premium price. Thus, premium-priced brands like Mercedes, Levi, and Hallmark have substantial brand equity (as measured by perceived quality) advantages over competitors such as Buick, Lee Jeans, and American Greetings.

The high-tech study went on to examine the major brand equity changes that were observed. What causes the generally stable brand equity numbers to change? Some of the major changes were associated with significant product innovations (as opposed to incremental ones). But there was more. Major changes could also be attributed to visible product problems, change in top management, major lawsuit results, and competitor actions or fortunes that were notably successful or unsuccessful. The latter, of course, is usually out of the control of the brand’s firm.

These studies show that when a real change in brand equity occurs, which is unlikely to happen with only advertising or promotions, there will be a substantial and measurable effect on stock return. Such a finding is persuasive evidence that brand equity will affect the real value of the business and the brand-as-asset model is valid.

The EquiTrend Study: Stock Market Reaction to Changes in Brand Equity and ROI

Figure 1

A CONCEPTUAL BUSINESS STRATEGY MODEL

The challenge facing those who would justify investments to build brand assets is similar to that facing those who would invest in any intangible. The three most important assets to most organization are people, information technology, and brands. All are intangible; they do not appear on the balance sheet. All add value to the organization that is difficult to quantify. The rationale for investment in any such intangible, therefore, must rest in part on a conceptual model of the business that affirms these intangibles represent key success factors underlying the business strategy.

One conceptual basis for brand investment is to contrast it with its strategic alternative, price competition. It is not a pretty picture. Managers, especially those representing the number three or four brands, respond to excess capacity and price competition by lowering price. Competitors follow. Customers begin to focus more on price than on quality and differentiated features. Brands start resembling commodities, and firms begin to treat them as such. Profits erode.

The choice is between building brands or managing commodities. It does not take a strategic visionary to see that any slide toward commodity status should be resisted. Further, it is usually not inevitable. Consider the price premium paid for Morton’s Salt (few products are more of a commodity than salt), Charles Schwab (a discount broker), or Emirates Airline. In each case, a strong brand has been able to resist pressures to focus on price. Management guru Tom Peters said it well: “In an increasingly crowded marketplace, fools will compete on price. Winners will find a way to create lasting value in the customer’s mind.”⁴

How should brand-building efforts be measured given that such programs will be expected to pay off over years and there are multiple drivers of success? The answer is to use measures of brand equity—awareness, key associations, and loyalty of a customer base. The relevance of these brand-equity measures requires a compelling conceptual business strategy model that shows that building brand strength is essential and will result in a competitive advantage that will pay off financially in the future.

SETTING AND ALLOCATING BRAND-BUILDING BUDGETS

The budget for any organizational intangible is difficult to create, allocate and defend. But some observations about the process can be made.

First, the role of a brand in the conceptual business strategy model needs to drive the budgeting process. What is its role and how crucial is the brand to the strategy? What are the strengths and weaknesses of the brand and where does the brand need to go? Is the priority to enhance awareness, create or change perceptions, or increase loyalty? How do the segments differ? What budget is likely to accomplish those tasks or at least give the strategy a chance to succeed?

Second, the quality of the communication program is much more important than the budget. One classic study found that quality of advertising (as measured by pre-post TV advertising exposure) was several times more able to explain variance in the market impact (as measured by sales gain) than the change in the advertising budget.⁵ An implication is to spend more resources on creative ways to discover home-run ideas. It is possible or even likely that a $5 million budget behind a brilliant idea will be superior to a $20 million budget behind a mediocre idea. It is not just about spending money.

Third, measurement and experimentation can help. Experimenting with different brand-building ideas and budget levels takes a lot of the guesswork out of it. Beware, however, of using short-term sales to evaluate (although sometimes the absence of a short-term sales effect may signal a weak long-term effect). Using short-term sales as a criterion can lead to an over-emphasis on price deals, which can damage brands and thus long-term strategy. If running an experiment for a long time period is not feasible, measures of brand equity can be used as a surrogate for long-term market impact.

THE BOTTOM LINE

Brands are assets with strategic value. That assertion changes everything, but it needs to be communicated in a convincing way to motivate an organization to invest in brand building and in protecting brand assets. Case studies, brand-value estimates, and quantitative studies relating brand assets to stock return are reassuring, but the case still needs to be made in a specific context. That means developing conceptual models of the impact of brands on business strategy and by using “test and learn” experimentation.