Measuring the Contributions of Brand to Shareholder Value

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a paper we wrote for The Journal of Applied Corporate Finance, a Morgan Stanley publication that contains our argument the ‘three c’s’ -- consumers, creativity and commerce. When brands are customer-centric and prolific, they are more likely to be profitable to their firms and their shareholders. We modeled a fund to prove it. In these times, the economic value of creativity matters more than ever.

Transcript of Measuring the Contributions of Brand to Shareholder Value

V O LU M E 2 1 | N U M B E R 4 | FAL L 2 0 0 9

Journal of

APPLIED CORPORATE FINANCEA MO RG A N S TA N L E Y P U B L I C AT I O N

In This Issue: Market Efficiency and Risk ManagementThe Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned? Contingent Capital vs. Contingent Reverse Convertibles for Banks and Insurance Companies International Insurance Society Roundtable on Risk Management After the Crisis8

Ray Ball, University of Chicago

17

Christopher L. Culp, Compass Lexecon and University of Chicago

28

Panelists: Geoffrey Bell, Geoffrey Bell & Company; Nikolaus von Bomhard, Munich Re; Prem Watsa and Bijan Khosrowshahi, Fairfax Financial Holdings. Moderated by Brian Duperreault, MMC

Lessons from the Financial Crisis on Risk and Capital Management: The Case of Insurance Companies

52

Neil A. Doherty, University of Pennsylvanias Wharton School of Business, and Joan Lamm-Tennant, Guy Carpenter & Co. and the Wharton School

The Theory and Practice of Corporate Risk Management

60

Henri Servaes and Ane Tamayo, London Business School, and Peter Tufano, Harvard Business School

Measuring the Contributions of Brand to Shareholder Value (and How to Maintain or Increase Them) Creating Value Through Best-In-Class Capital Allocation

79

John Gerzema, Ed Lebar, and Anne Rivers, Young & Rubicam Brands

89

Marc Zenner, Tomer Berkovitz, and John H.S. Clark, J.P. Morgan

Using Corporate Inflation Protected Securities to Hedge Interest Rate Risk

97

L. Dwayne Barney and Keith D. Harvey, Boise State University

The Gain-Loss Spread: A New and Intuitive Measure of Risk Assessing the Value of Growth Option Synergies from Business Combinations and Testing for Goodwill Impairment: A Real Options Perspective

104

Javier Estrada, IESE Business School Francesco Baldi, LUISS Guido Carli University, and Lenos Trigeorgis, University of Cyprus

115

Measuring the Contributions of Brand to Shareholder Value (and How to Maintain or Increase Them)by John Gerzema, Ed Lebar, and Anne Rivers, Young & Rubicam Brands

inancials alone cannot explain why some companies outperform their competitors. Macroeconomic factors, the quality of the management team, expected growth rates, and the value of the brand can help explain why some companies break out of the pack. But quantifying the value of such intangibles is not an easy task. Since 1993, Young & Rubicam has invested over $130 million in collecting and interpreting data on consumers perceptions of some 44,000 product and service brands in over 50 countries. At the core of Y&Rs research effort is the BrandAsset Valuator (or BAV), a model that converts the firms hoard of data on global consumer perceptions and behavior patterns into assessments of brand strength and value. When combined with the findings of independent research by academics in marketing and finance (using Compustat data on corporate operating and stockprice performance), the BAVs assessments of brand values can be used to quantify the contributions of brands to both corporate earnings and market values. Another important corporate use of the BAV is to provide insight into what causes brand values to rise and falland, in some cases, recover. For each of the more than 44,000 brands covered in our database, we have identified (or in many cases developed) and tracked more than 80 brand metrics, which include indicators of consumer awareness, perceptions and preferences, and usage. With the help of such metrics, our BAV model breaks down the value of a brand into four major components that we call Energized Differentiation, Relevance, Esteem and Knowledge. And as we suggest in the pages that follow, a solid understanding of a brands positioning along each of these four dimensions can be used to guide companies in maintaining and building their brands. One of the main findings of the research cited above is that brands contribute to the market value of companies by increasing not only current earnings, but also the priceto-earnings (P/E) multiples that investors assign to current earnings. Such increases in P/E multiples in turn reflect investors expectations for lower risk, higher growth, or both. And while only about one-third of the total estimated

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effect of brand equity on corporate values is reflected in current earnings, the remaining two-thirds of a brands contribution to value is attributed to its effect on investors expectations. So thats the good news about brands and their contributions to value. But our research also has a more troubling message: In more recent consumer surveys (during 20052007), we began to find signs of brand erosion even as the markets were pushing up share prices, presumably with the expectation that intangibles like brand would continue to drive operating earnings in the future. More specifically, while Wall Street was bidding up the aggregate value of branded businesses, our research suggested that consumers overall perceptions of brands were becoming less favorable. Indeed, we were finding steep declines in consumer ratings of all of what we view as the four key classical attitudes toward brands: trust, awareness, consideration and regard.1 This disconnect between brand values and share prices though somewhat reduced by the market decline associated with the financial crisisunderscores the reality that the perceptions that influence the dollar votes of consumers on Main Street can be very different from the financial analysis used by traders and analysts on Wall Street. Even with stock values well below their peaks, we believe that the mismatch between consumer attitudes toward brands and the market values of the companies that produce and own them continues to be a threat. It raises the possibility that many branded businesses are overvaluedand that, when the brand bubble reflected in their stock prices deflates, their valuation multiples and stock prices could fall again. In the meantime, for the leaders of consumer-facing corporations, the mismatch between stock prices and brand values points to a continuing challenge for brand management. Building brand value is important for both finance professionals trying to increase shareholder value and marketers trying to build brand value and increase sales and margin. The aim of our research is to bring these two groupsfinance and marketingcloser together by demonstrating the role of marketing strategy and brand equity in driving shareholder value.

1. This is the main thesis of our recently published book, John Gerzema and Ed Lebar, The Brand Bubble (Jossey-Bass, 2008).

Journal of Applied Corporate Finance Volume 21 Number 4

A Morgan Stanley Publication

Fall 2009

79

Figure 1 BrandAsset Valuator ModelENERGIZED DIFFERENTIATION

The brands point of differenceRelates to margins and cultural currency

RELEVANCE

How appropriate the brand is to youRelates to consideration and trial ESTEEM

How you regard the brandRelates to perceptions of quality and loyalty

KNOWLEDGE

An intimate understanding of the brandRelates to awareness and consumer experience

BRAND STRENGTH Leading Indicator Future Growth Value

BRAND STATURE Current Indicator Current Operating Value

The Four Pillars of Brand Value The BrandAsset Valuator model measures the overall health of a brand by assessing four of its distinctive components, or pillars: Energized Differentiation Relevance Esteem; and Knowledge Each of the four contributes in a different way to building brand and sales. Energized Differentiation is a composite measure of five brand attributes tracked by the BAV: uniqueness, offering, pricing power, innovation and dynamism. Relevance aims to capture the appropriateness of a brand to consumers and is strongly related to market penetration. Both of these pillars, Energized Differentiation and Relevance, have proved to be leading indicators of a brands direction and momentum. And when combined into a single category that we call Brand Strength (as shown in Figure 1), the two pillars provide a forward-looking measure of brand value. By contrast, the third and fourth pillars, Esteem and Knowledge, are current indicators that together determine Brand Stature. A brands Esteem is evaluated using measures of respect, perceived quality and reliability, and is generally viewed as a prerequisite for building loyalty. Knowledge is the culmination and consequence of brand building and reflects a consumers depth of experience with the brand. In Figure 2, we try to suggest how our four-pillars framework can be used to assess a brands health and to diagnose possible problems and solutions. For example, the prescription for brands that score higher on Knowledge than Esteem typically involve efforts to persuade consumers to take a fresh look, with the aim of differentiating the brand80 Journal of Applied Corporate Finance Volume 21 Number 4

and building consumer respect and, eventually, some degree of loyalty. By contrast, in cases where Esteem is greater than Knowledge, the brand generally has an opportunity to expand market share by increasing consumer awareness. Brand Metrics Help Explain Stock-Price Performance There is an old adage that says, The value of something thats truly innovative cant be measured. With the help of our BAV, researchers have provided persuasive evidence that a strong brand can raise a companys market value by increasing not only its current revenues and profits, but also analysts and investors expectations for future profits. To measure how brands affect both the current and future financial performance of their enterprises, we have combined our 16 years of BAV data