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What are brands for?

2014-09-02 12:53:34

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.