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Brands are the most valuable assets many companies possess. But no one agrees
on how much they are worth or why
Aug 30th 2014
WHEN Imperial Tobacco, the world s fourth-largest cigarette-maker, said in July
that it would spend $7.1 billion to expand its business in America, its chief
executive, Alison Cooper, was adamant on one point: it will not be buying
companies. Instead, in a three-way deal with Reynolds American and Lorillard,
it will pick up a factory, a sales force and, above all, a collection of
brands. Two of them, Winston and Blu (an electronic-cigarette brand), will be
the focus for the lion s share of time and money invested .
No management expert would think it strange that Imperial would spend the best
part of $7 billion on something as ethereal as brands. They are the most
valuable thing that companies as diverse as Apple and McDonald s own, often
worth much more than property and machinery. Brands account for more than 30%
of the stockmarket value of companies in the S&P 500 index, reckons Millward
Brown, a market-research company. Everyone knows that a Ralph Lauren Polo shirt
costs more than a polo shirt; Coke without the logo is just cola. Ms Cooper
hopes to exploit Winston s untapped brand equity .
Yet arguments rage about how much brands are worth and why. Firms that value
them come to starkly different conclusions. Most of the time they do not appear
as assets on companies balance-sheets (see article). One school of thought
says brands succeed mainly by inspiring loyalty. Consumers would die for
Apple, believes Nick Cooper of Millward Brown. Others take a cooler view.
Bruce McColl, who as the chief marketer of Mars oversees Snickers chocolate
bars, Whiskas cat food and other brands, is on record as saying that consumers
aren t out there thinking about our brands. And however much brands may have
been worth in the past, their importance may be fading.
Brands, of course, vary. Some identify products that are distinctive (like The
Economist, we hope). Others confer distinction on products that are otherwise
hard to tell apart, such as cola. The brands of banks and insurers are shaped
less by advertising and marketing (the usual ways of building a brand) than by
customers experiences, points out Simon Glynn of Lippincott, a consulting
firm. In such cases, consumers get the message only if employees do.
The idea of brand equity arose in America in the 1980s after a bout of
cut-throat discounting by consumer-goods companies, which prompted them to look
for less-savage and more enduring ways to boost sales. Patiently building
brands became the preferred alternative. They would allow companies to hold on
to customers, win new ones and provide launching pads for new products. David
Aaker, a business-school professor who helped spread the idea, identified three
main components of brand equity: consumers awareness of a brand, the qualities
they associate with it (BMW summons up German engineering, Ryanair says cheap
) and loyalty. The arguments now are partly over how important each element
is.
What s love got to do with it?
Loyalty is what excites marketers and advertising folk. So-called lovemarks
such as Apple and Coca-Cola are trademarks that inspire loyalty beyond reason
, says Saatchi & Saatchi, an advertising agency; the firm runs a website that
lists hundreds of them. They have legions of fans, command a price premium and,
most important perhaps, are forgiven when they fall short. The emotional bond
puts credit in the bank, says Mr Cooper. Brands are a promise to consumers, it
is often said; they also serve as an insurance policy to cover the cost of
breaking it.
Much marketing gospel flows from this view, such as the idea that brands must
differentiate, appeal to distinct groups of consumers and foster fidelity.
Loyal consumers really drive brand profitability, believes Millward Brown,
which is part of WPP, a big marketing group. Loyalty and emotional connection
also figure in the Brand Strength Index devised by BrandFinance, a competitor.
Some companies even link pay to indicators of brand health. At HSBC, part of
top executives bonuses depend on Brand Finance s valuation.
A second view holds that brands are a shorthand for choice , in the words of
Martin Glenn, chief executive of United Biscuits, producer of McVitie s. They
make it easier for shoppers to cut through the information bombardment that
rains down upon them. On this analysis, awareness matters more than loyalty or
passion.
Apple s computers, for example, may have a strong brand; but they command only
a little more loyalty from buyers than do customers of less-ballyhooed makes of
computer, argues Byron Sharp, a marketing expert at the University of South
Australia. Their slightly higher tendency to stick with Apple probably comes
from the hassle of having to convert to a different operating system, rather
than love of the brand, he reckons. Harley-Davidson, a motorcycle company, is
well known to have a devoted fan base. But in fact such fanatics account for
only a tenth of its customers and just 3.5% of its revenue.
On this view, companies that strive to differentiate themselves from their
competitors brands are mostly wasting their time. Take fizzy drinks. Mr Sharp
s data show that less than one-fifth of the people who quaff them think there
is anything unique or special about Coke, Pepsi and the like. Many products
marketed mainly to women are largely bought by men, and vice versa. A
consumer-goods brand that aimed its marketing at its most fervent fans would
lose sales: a typical Coke drinker buys one or two bottles a year.
Forget me not
What constitutes brand equity, Mr Sharp contends, is physical and mental
availability , by which he means the opportunity for consumers to find products
in shops and their propensity to think of the brand when shopping. That is
achieved through traditional methods of mass marketing, such as television
advertising, packaging and celebrity endorsements, rather than through the
fashionable targeted sort made possible by the internet.
Kellogg s takes this point of view. The cereal-maker thinks its
tried-and-tested imagery, such as Rice Krispies Snap, Crackle & Pop, has
proved its worth by planting brands in consumers minds. Hopefully, we re
smarter about retaining things over time, says Jane Ghosh, Kellogg s
commercial-marketing director in Britain. Loyalty is real, but does not vary
much, or show that consumers are passionate about brands. They are loyal to
stuff they can find easily in shops and in their memory banks.
Even this argument is too starry-eyed for Itamar Simonson and Emanuel Rosen,
authors of a recent book, Absolute Value: What Really Influences Customers in
the Age of (Nearly) Perfect Information . They argue that consumers are
becoming more rational and need brands less.
The original job of brands was to assure consumers about the quality of a
product or service. Some, such as Sony in electronics, and over-the-counter
remedies such as Tylenol, still seek to do this. But now customers can review
products on shopping websites, talk to each other through social media and
consult reviews websites like cnet.com and TripAdvisor. Brands thus have a
reduced role as a quality signal, write Messrs Simonson and Rosen. Shopping
websites also make it easier for consumers to find the sort of product they
like and filter out the sort they don t. So brands are less needed as a mental
shortcut. Brand equity is simply not as valuable as it used to be, the
authors contend.
People have been predicting the death of the brand since the birth of
e-commerce. It has not happened, Mr Sharp says, because people are lazier, and
reviews less useful, than the seers assume. Consumers have come to expect
decent products at good prices. Brands guide them to the ones they want. They
are likely to survive the age of (nearly) perfect information, though experts
will continue to debate why.