Marketers and market driven organizations have long had a strong appreciation for the value of brands. Jim Mullin, Scottish businessman and CEO of Reach, PLC, expressed this value well: “Of all the things that your company owns, brands are far and away the most important and the toughest. Founders die. Factories burn down. Machinery wears out. Inventories get depleted. Technology becomes obsolete. Brand loyalty is the only sound foundation on which business leaders can build enduring, profitable growth.” Yet, marketers have done a poor job of communicating how the value of a brand, and the investment that builds and maintains it, translates into financial returns for the firm.
This failure has begun to be addressed by the financial community and some financially savvy marketers. Evidence of this change is not only found in the “C” suite. Private equity and venture capital firms, which have traditionally focused on standard accounting and financial measures of performance and value, have increasingly turned their attention to the value of intangible assets, especially brands. One reason for this is that the value of businesses increasingly resides in such assets. Failure to consider intangible assets results in under-valuing an enterprise. But, there is more driving attention to intangible assets than a desire to get immediate valuation right.
A focus on intangible assets in general, and brands more specifically, is a strategic, long-term play.
A plethora of empirical research has demonstrated that brand-driven companies achieve superior financial returns. Companies with strong, well-managed brands grow faster, are more profitable, and command higher multiples. Well-managed brands are strategically positioned to dominate their market. In highly competitive markets that lack meaningful differentiation, a strong brand enjoys both competitive and market advantages. These advantages are numerous and relatively easy to measure.
Strong brands induce repeat purchases by virtue of consumer loyalty. Such repeat purchase not only increases market share, it also reduces the costs of marketing because it is always less expensive to resell to a loyal purchaser than convince a non-purchaser to buy for the first time. Even as marketing costs decline, loyal customers will pay a premium for a product to which they are loyal. Thus, there is both a revenue driver and a cost driver to higher margins. But the advantages do not end with higher margins. Loyal customers are more likely to recommend a brand to others, becoming a part of the firms marketing efforts and further reducing marketing costs while making a very effective and credible appeal to others. Strong brands can be leveraged across multiple products, increasing sales and revenue and reducing total marketing costs. Finally, strong brands attract talented people who want to be associated with a winner and learn about being a winner. Thus, it is no surprise studies have repeatedly shown that firms with strong, well-managed brands create a return for shareholders that is substantially above average relative to the equity market as a whole and grow faster than the market as a whole.
There is one more reason private equity and venture capital firms are interested in brands and companies with strong brands. Many brands in today’s markets are not well-managed. Years of short-term management, emphasis on price promotions, and focus on cost-reductions have resulted in the under-performance of otherwise strong brands.
This is a reflection of management problems, both in the “C” suite and at the board level. The potential return on an asset is always a function of how that asset is used, but the return on intangible assets is especially sensitive to how these assets are used. As one example, consider the increase in the value of the Marvel catalog of characters when Disney purchased it and changed the characters into movie stars rather than comic book characters – same characters, different use. Another example, the Twinkies brand, was purchased out of the bankruptcy of parent company Hostess by private equity, returned to the retail shelf, and ultimately sold for five times the purchase price three years later.
Private equity firms have come to recognize the untapped value of many brands, value that is not being realized by current management. New management, in terms of both people and strategy has the potential to unlock unrealized value. The lesson for those currently managing brands is that there may be opportunity waiting to be realized – by someone.
Contributed to Branding Strategy Insider by: David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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