Measuring the Contributions of Brand to Shareholder Value

VOLUME 21 | NUMBER 4 | FALL 2009

APPLIED CORPORATE FINANCEJournal of

A M O R G A N S T A N L E Y P U B L I C A T I O N

In This Issue: Market Efficiency and Risk Management

The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?

8 Ray Ball, University of Chicago

Contingent Capital vs. Contingent Reverse Convertibles for Banks and Insurance Companies

17 Christopher L. Culp, Compass Lexecon and

University of Chicago

International Insurance Society Roundtable on Risk Management After the Crisis 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 Pennsylvania’s 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)

79 John Gerzema, Ed Lebar, and Anne Rivers,

Young & Rubicam Brands

Creating Value Through Best-In-Class Capital Allocation 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 104 Javier Estrada, IESE Business School

Assessing the Value of Growth Option Synergies from Business Combinations and Testing for Goodwill Impairment: A Real Options Perspective

115 Francesco Baldi, LUISS Guido Carli University, and

Lenos Trigeorgis, University of Cyprus

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 79

Measuring the Contributions of Brand to Shareholder Value(and How to Maintain or Increase Them)

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

BF

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&R’s research effort is the BrandAsset® Valuator (or “BAV”), a model that converts the firm’s 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 stock-price performance), the BAV’s 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 fall—and, 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 brand’s 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 price-to-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

effect of brand equity on corporate values is reflected in current earnings, the remaining two-thirds of a brand’s contribution to value is attributed to its effect on investors’ expectations.

So that’s 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 2005–2007), 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 crisis—underscores 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 overvalued—and 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 groups—finance and marketing—closer together by demonstrating the role of marketing strategy and brand equity in driving shareholder value.

80 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009

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 brand’s 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 brand’s 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 consumer’s depth of experience with the brand.

In Figure 2, we try to suggest how our four-pillars framework can be used to assess a brand’s 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 brand

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 PerformanceThere is an old adage that says, “The value of something that’s truly innovative can’t be measured.” With the help of our BAV, researchers have provided persuasive evidence that a strong brand can raise a company’s 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 on a large sample of multinational “mono-brands” with data on corporate earnings and stock prices from Standard & Poor’s Compustat database at the University of Chicago’s Center for Research in Security Prices. Mono-brands are companies like Intel, McDonald’s, and Microsoft that stake their entire name on a single “power” brand and derive more than 80% of their annual revenue from that brand.

With the help of marketing professors Robert Jacobson of the University of Washington and Natalie Mizik of Columbia Business School, we analyzed a large number of consumer variables for such companies with the aim of identifying the brand attributes that are most successful in explaining unanticipated increases in stock prices. By “unanticipated,” we mean those stock price changes that cannot be explained by simultaneous changes in corporate fundamentals such as sales and operating returns on capital.

One outcome of this joint effort was a regression model that, using our BAV data, links increases in brand asset values

Figure 1 BrandAsset Valuator Model

ESTEEM

How you regardthe brand

Relates to perceptionsof quality and loyalty

KNOWLEDGE

An intimateunderstanding of the brand

Relates to awareness andconsumer experience

RELEVANCE

How appropriatethe brand is to you

Relates to considerationand trial

BRAND STRENGTH

Leading Indicator

Future Growth Value

BRAND STATURE

Current Indicator

Current Operating Value

ENERGIZED

DIFFERENTIATION

The brand’s pointof difference

Relates to marginsand cultural currency

81Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009

2. Natalie Mizik and Robert Jacobson, “How Brand Attributes Drive Financial Perfor-mance,” (2005), MSI Reports, Vol. 3, 21–39.

3. See Natalie Mizik and Robert Jacobson, “The Financial Value Impact of Perceptual Brand Attributes,” Journal of Marketing Research, Vol. XLV (February 2008), 15–32. Jacobson and Mizik attempt to isolate the effects of brand on a company’s value by re-gressing its current-year stock on three main variables: the “unexpected” parts of both the company’s current-year (1) sales (2) return on assets, and (3) changes in measures

of each of its major brand components (which vary depending on category). Each of these three variables proved to have significant explanatory power, suggesting that the brand asset measures provided “incremental” information over and above the informa-tion provided by unexpected sales and returns. More specifically, their three-factor re-gression model explained 65% of the variance in stock returns, with the financial vari-ables metrics accounting for 77% of the “explained” variance, and the brand metrics accounting for the other 23%.

by reducing investors’ assessments of a company’s risk or raising its expectations for future growth. For example, if an increase in a company’s perceived brand value not only increases current earnings to $1.10, but also causes investors to raise the P/E multiple from 10 to 12, there is said to be a “direct” effect of brand on value of $2.20 per share ($1.10 x (12 – 10).

Using BAV and Compustat data for the period 2000–2006, a more recent study by Jacobson and Mizik supports, f irst of all, our earlier statement that the explanatory power of valuation models can be increased by including information about brand values along with (unexpected) sales and earnings.3 And as we stated at the beginning of this article, since only one-third of the effect of brand assets on financial performance appears to be reflected in current earnings, two-thirds of the financial impact of brand assets on stock returns is information about future performance. But perhaps even more telling, it was the forward-looking Brand Strength metrics—the indicators of Relevance and, to an even greater extent, Energized

to (1) increases in current and future earnings, and (2) current stock returns.2 Using this model, professors Jacobson and Mizik produced compelling evidence that changes in brand asset values affect stock market returns in two ways—one “direct” and the other “indirect.” The indirect effect is on current earnings. All else equal, companies whose brand assets increase in value during a given period are likely to experience higher-than-expected earnings during that period. And to the extent the higher current earnings attributable to branding also increase investors’ expectations of the firm’s future earnings and cash flows, the increase in brand asset values results “indirectly” in an increase in the company’s market valuation. To illustrate, if brand-building alone is assumed to increase a company’s EPS from $1.00 to $1.10 in a given year, and the stock has a P/E of 10, then brand is assumed to have an “indirect” incremental effect on company value of $1 per share (or $0.10 x 10).

At the same time, Jacobson and Mizik suggest that effective branding can increase a company’s value “directly,” or independently of any effect on current sales or earnings,

Figure 2 BrandAsset Valuator Model – Diagnosing Brands

BrandStrength

BrandStature

DE > R DE > RDE R

RELDE RELD

ERELD

E

E > K

KNOEST

E K

KNOEST

E < K

KNOEST

Examples:iPhoneMiniRed BullGucciWiiZip Car

Examples:Trader Joe’sCoachProduct RedGoogle EarthLG

Examples:Home DepotVISACoca-ColaMcDonald’sColgateFord

Examples:SpamSlim-FastTV GuideYellow PagesBudget Rent-a-CarDays Inn

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The brand has captured attention andinterest and can build relevance andpenetration. This often reflects a new,noteworthy, niche or luxury brand. This condition also suggests the brand has more creativity than functionality.

High levels reinforce that the brand is relevant and energized. It is a leader, commanding high margins as well as volume.

The brand’s uniqueness has faded and price or convenience become a dominant reason to buy. The brand faces commoditization. This opposite condition indicates the brand is overloaded with rational meaning and low on creativity.

The brand is liked but not well-known.Consumers are curious, and there’s a desire to find out more. The difference in the two pillars measures the real love for the brand.

The brand is both well-known andwell-regarded.

The brand is better known than liked. It has become too familiar, and consumers are likely looking for better options. The quantitative difference in these two pillars measures the distaste for the brand.

Examples:AppleDisneyGoogleIKEANike

Examples:Applebee’sExxonHanesMidasAmerican AirlinesUSPS


4. See Natalie Mizik and Robert Jacobson, “Talk About Brand Strategy,” Harvard Business Review, (October 2005) 1.

5. See Natalie Mizik and Robert Jacobson, “Valuing Branded Businesses,” Journal of Marketing Research, Vol. 75 (November 2009) 137-153.

but high potential and pricing power, these brands have Energized Differentiation and Relevance but only a small audience.

• The Leadership/Mass Market Quadrant: These brands have high earnings and margin power, and the greatest potential to create future value. They’ve built both Brand Strength and Stature. But when they slip below the diagonal, their Stature exceeds their Strength, which is often a sign of diminishing pricing power and future growth potential.

• The Erosion Quadrant: These brands are likely becoming Commodities. Or they may be companies that do not rely on their brands as a driver of their growth, such as low-cost providers that create sales velocity at low margins. Consumers may know these brands well but find them less distinctive or relevant.

To provide some sense of how such brand differences translate into value, the ratio of intangible value to sales for Leadership brands is nearly twice that for Niche brands, and more than double the ratios for Commodity brands.

Although this may not be clear from Figure 3, there is continuous movement of brands among the four quadrants. And the BAV is a flexible and fluid model that allows us to identify clear patterns of growth, health, decay, or recovery over time. By plotting such brand PowerGrids at repeated intervals, we can track the evolution of a brand, identifying the changes in relative value it experiences during its lifecycle and designing different strategies for producing revenue and profit during different brand phases.

As a general rule, Niche brands with more Strength than Stature encourage trial by consumers without creating loyalty, and so are generally run with the aim of maximizing near-term return on capital. But for those brands that develop into Leadership brands, managers are more likely to succeed in achieving higher sales growth, margins, and EBITDA—along with the higher growth and higher valuation multiples. When their brands begin to decline into Commodities, companies tend to increase dividends while giving more thought to customer retention and possible transactions.

These rules of thumb point to the importance of matching brand and business development strategies. For example, if you have a Leadership brand, make sure you provide enough investment to allow the brand to expand; don’t starve it of capital. But in the case of Commodity brands, harvesting is likely to be the value-maximizing strategy. The biggest mistake in such cases is to pour too much capital investment into a saturated marketplace. When too many companies do this, the result is a brand bubble.

After tracking the movements of over 2,500 brands on the PowerGrid from 2001 to 2008, we concluded that most

Differentiation—that had the strongest correlation with stock returns. Specifically, the brands that were the top gainers in Energized Differentiation enjoyed an increase of 4.8% in the average risk-adjusted stock return one year after the brand improvement, and the top ten losers experienced a decline of 4.3% in the following year.4

The bottom line, then, is that changes in stock prices and corporate values reflect not only financial performance, but changes in brand metrics as well. And as this research also shows, the explanatory power of brands (and brand components) varies widely among different industries. To cite one example—the case of financial services companies—64% percent of the variance in stock returns is explained by a regression that contains only current financial variables like sales and earnings. But when brand metrics are included in the model, the explanatory power of the model increases to 71%. In the case of telecommunication companies, introduction of the brand metrics variable provides an additional 19% of explanatory power—and in the case of casual dining companies, the incremental explanatory power is 18%. On the basis of these and similar findings across a range of other sectors, we conclude that brand indicators provide information about stock returns that cannot be found in a company’s financial statements.5

Putting the Metrics to Work It may come as little surprise to most senior executives that corporate branding efforts show up in stock prices. But how can this knowledge be used by companies and their brand managers to increase shareholder value?

One goal of corporate marketing is to create “leadership brands” that aim to maximize brand value and, ultimately, shareholder value. Our research suggests that the value of a brand is maximized when two conditions are met: (1) our measures of Brand Strength (which, again, combines Energized Differentiation and Relevance) and Brand Stature (Esteem and Knowledge) are both at their peaks; and (2) Brand Strength is greater than Brand Stature.

To help illustrate this relationship, Figure 3 shows a “PowerGrid” that positions a large number of well-known brands along the two dimensions of Brand Strength and Brand Stature. The figure places each brand in one of four “quadrants,” with the upper right reserved for Leadership brands. Starting at the lower left and moving clockwise, we have:

• The New and Unfocused Quadrant: These brands have little strength or stature, with low scores in all pillars. Many are new to the market. Others are poorly defined, middling brands that have lost their way.

• The Niche/Momentum Quadrant: With low earnings


6. The Brand Bubble (Jossey-Bass, 2008), cited earlier.

fight for existence in a hostile terrain of promotion and discounting.

The big question, of course, is what’s behind this malaise. Why have consumers lost trust in, and respect for, brands? The issues are complex, with a wide range of factors dragging down brand perceptions among consumers. Nevertheless, as we argue in our recent book,6 the main problem can be summarized by three fundamental causes that are working together to diminish consumer desire for brands. Although none of these phenomena is entirely new, they’ve never before operated at the same time or with such intensity. These developments are taking a far greater toll on brands than anyone had previously thought possible, particularly set against the dramatic changes of a new digital landscape.

The first major problem is excess capacity. The world is overflowing with brands, and consumers are having a difficult time assessing the differences among them. The average supermarket today holds 30,000 different brands,

brands experienced little change in Brand Strength in just one year. On average, in one year, fewer than one in ten brands show any positive movement—in fact, over 80% of brands were essentially motionless. Even after five years, 74% of brands showed no development. And that’s why the BAV “brandscape,” as pictured in Figure 4, looks like a parking lot: little movement, with the few brands that do move twice as likely to fall as to go up. In the Niche quadrant, for example, 10% of brands moved into the Leadership quadrant, while 20% became Unfocused.

Increase Firm Value from the Brand OutIn 2008, as noted earlier, we found growing signs of a brand “bubble.” When we used our BAV to identify the best-performing brands (in terms of Brand Strength without sacrificing Stature), we found a steadily shrinking number of brands accounting for a disproportionate share of the value being created. Consumers are reserving their devotion and dollars for the truly special brands, leaving the rest to

Figure 3 BrandAsset Valuator PowerGrid

Buick

ToyotaBarq’s Root Beer

Fanta

Jones Soda

Orangina

Pepsi-Cola

Schweppes

Jamba Juice

Naked Juice

Pom Simply Orange

Sunsweet

Dunkin’ Donuts

StarbucksTrader Joe’s

Tazo

J. Crew

Lululemon

Polo Sport

Ralph Lauren

Gucci

Dyson

TiVo

iMac

Nature’s Own

Thomas’ EnglishMuffins

Wonder Bread

Amy’s

Chef Boyardee

Grape-Nuts

Ronzoni

Nutella

Sun -MaidBazooka

Balance Bar

Equal

Method

Palmolive

Henkel

Miller Coors

Devon Energy

Greenpeace

Oxfam

YMCA

Mont BlancAmerican Girl

Barbie

Leadership

NicheMass Market

Commodity or Eroded

New, Unknown or Unfocused

Cirque du Soleil

Sundance

Channel

Tide

Nespresso

Voss

LinkedIn

DavidYurman

WinstonDiners Club

Chevrolet

Coca-Cola

Dole

Yoplait

Nouriche

Snapple

No Nonsense

Joe Boxer

Boss/Hugo

Boss

FUBU

Lee

Route 66

Oakley

Ray-Ban

BrandAsset Consulting: 2009 First Half USA All AdultsB

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to move companies back into alignment with Wall Street’s valuations and the expectations that are driving them? How can we predict the future brand leaders? Our BAV model helps marketers focus on each component of the brand and focus on building their brand for today and tomorrow.

Brand Rx: EnergyLet’s start by understanding how certain brand superstars—Apple, Nike, Virgin and Google—continue to capture the hearts, minds, and dollars of consumers. How are they creating such wondrous relationships with consumers? Answer: They inspire us with creativity, excitement, and innovation. They’re not just different; they’re always working at redefining their Differentiation, inventing new ways to keep Differentiation vibrant. And thus our notion of brand “Energy” was born.

Since the early 1980s, Professor Jacobson has been finding evidence that analysts and investors pay attention to a company’s marketing and brand measures when forming

up threefold since 30 years ago. Globalization and increased competition compound the number of new brands launched every day. According to a Datamonitor report, 58,375 new products were introduced worldwide in 2006, more than double the number in 2002.

The second major problem is lack of creativity. In a world with Hulu, Yelp, YouTube and Twitter, consumers are continuously exposed to and able to share creative content. The result of this democratization of creativity is that it has raised the consumer’s “creativity quotient ” Consumers expect more big ideas from brands, and they expect to get them faster.

The final major problem with brands is loss of trust. Our data shows that the amount of trust consumers place in a brand today is a fraction of what it was ten years ago. In 1997, more than half of all brands enjoyed high levels of consumer trust. By 2008, consumers voted just over one-fifth of brands as “trustworthy.”

So, how can brands build sustainable long-term value

Figure 4 Brands are Stuck in a Parking Lot

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20.0%9.7%

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BrandAsset Consulting: 2001–2008 Full Year USA All Adults

Percent of brands that gainedEquity in 1 Year

Percent of brands that lost Equity in 1 Year

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7. See David Aaker and Robert Jacobson “The Financial Information Content of Per-ceived Quality,” Journal of Marketing Research, (1994), 31 (May), 191–201.

also provide a sense of “uniqueness,” a point of difference that consumers don’t feel they can get elsewhere. Today’s consumers are captivated by a certain property in successful brands—a quality that reflects a more spirited, dynamic, and creative experience. This goes far in explaining our earlier observation that consumers are concentrating their passion and purchasing power on an increasingly smaller portfolio of special brands—brands with Energized Differentiation that keep evolving. As already noted, we’re now able to demonstrate the economic value of creativity in brands and explain how brands can break out to affect the future financial performance of their firms. Brands with Energized Differentiation have connected better with consumers, commanding greater usage, consideration, loyalty, and pricing power.

Our research also shows that a renewed focus on Energized Differentiation can reinvigorate even well-established brands. In fact, it almost seems that consumers have short-term memory—they are willing to discard past impressions and see even a very familiar brand in new ways. We see this in so-called “Lazarus” brands like Puma, Adidas, Converse, Gucci, Coach, Burberry, Marks & Spencers, Izod, and Cadillac. And then there’s Dove, which has lately elevated itself from its simple product attribute focus (“one quarter cleansing cream”) to engagement in a cultural conversation with consumers about reframing societal perceptions of beauty. Dove proves that the most ordinary objects can again feel extraordinary.

Apart from consumer perceptions, we have also observed that brands with higher levels of Energized Differentiation and Relevance create more shareholder value. In 2001, we started a hypothetical fund called “BEX Top 50” hat has allowed us to track whether the stock market reflects changes in consumer attitudes in our BAV data. We started by investing a hypothetical $10,000 in each of the 50 brands that posted the largest gains in Brand Strength at the end of 2001, and have since adjusted the companies in the fund every six months to stay current. When we compared its returns to those of the S&P 500 through the midpoint of 2009, we found we had outperformed the broad index in 11 of the 16 periods. (For a plotting of the results, see Figure 5.)

The Power of Irresistible BrandsIn sum, we now know that the brands that are thriving even in today’s difficult markets, and that will succeed in the future, have a more powerful form of differentiation than other brands. They are brands with Energy, brands that offer consumers a palpable sense of movement. Brands with Energized Differentiation drive future corporate financial

their expectations for corporate profits.7 Backing up this finding, the study also reported that changes in brand attitudes can be useful in predicting future sales, earnings, and stock prices.

More recently, in our collaborative work with professors Jacobson and Mizik over the past decade, we began to notice that consumers were focusing their enthusiasm and purchasing power on an ever-smaller portfolio of brands. We also began to compare brand attributes with market performance, seeking to identify which combination of variables best explained the changes in stock price that could not be explained by fundamentals like sales and earnings. What we found is that some brands were constantly creating attitude change that was in turn driving their financial numbers. They were creating brand Energy, if you will.

Brands that currently have lots of Energy: Google, Disney, Sirius XM, iPhone, Microsoft, Wii from Nintendo, Microsoft, Pixar, Bluetooth, BlackBerry, iPod, Toyota Prius. Analyzing our BAV data, we found that a brand with Energy:

1. Has velocity and direction: The brand radiates the sense that there’s more to it, which captures people’s imagination. It hints at that next something.

2. Constantly reinvents itself: It is adventurous and full of ideas, and brings innovation and surprise to the marketplace.

3. Engages consumers: It is distinctive and authentic, often with deep values and a point of view on the world beyond profit-making.

4. Attracts without chasing: With its magnetism, it draws people in without pandering or persuading. It galvanizes consumers to join in.

5. Moves culture: The brand often becomes a catalyst for change, a spark that fuels movements, mantras, social networks, and communities.

It is not essential that consumers have all five of these perceptions; one can be enough. But the more Energy a brand has, the more powerful it becomes.

The data show that Energy is not a function of brand maturity—in fact, many established brands have as much energy as younger, flashier ones. Both McDonald’s and WalMart, for example, are highly energized. Energy plays a particularly powerful role in commoditized industries where brands usually struggle to build attributes like loyalty. In the airline sector, for example, the highest-energy brands include Southwest, JetBlue, and Virgin Atlantic.

Energized Differentiation But it’s not enough for brands just to have energy. They must


We see similar challenges confronting brands in the “mass market” area of the Leadership quadrant. During normal or non-recessionary periods, our research shows that 82% of the brands remain in the same space from one year to the next, with 10% of brands declining and the remaining 8% building brand strength. In contrast, during the last recession, we saw 71% of brands occupying the same space after a year, while 14% declined to Commodity status and 13% raised their status.

As these last findings suggest, the current environment may well be a great opportunity for many of the “Big Old Brands” that have been languishing in the mass market space for years. These Leadership brands need to follow strategies similar to those pursued by Niche brands, but with one addition: Leverage their established reputations to renew and extend consumer interest. For example, Johnson & Johnson’s Aveeno brand has scored high marks in both Energized Differentiation and Relevance. Now is the time for Aveeno to leverage that strength and capture market share.

This all suggests it is an important time to continue to build your brand. A more recent study by Professors Mizik and Jacobson shows that corporate investments in marketing and R&D during recessions can have significant long-term payoffs. The study reported that, during the period 1989–2005, companies with operating income that continued to invest during a downturn had excess stock returns over the next five years that were four times the returns of companies that simply cut costs. And even companies with net operating losses that managed to invest in their future saw excess stock

performance more than traditional brands that dominated the market for decades.

One revealing exercise is to plot high-energy brands against their category averages. Not surprisingly, some brands have so much Energy that, as can be seen in Figure 6, they transcend their categories and redefine their own market. The brand movements illustrated in this figure reflect achievements that can be summarized in terms of multiples of their category averages. To name a few,

• Dove has 1.6X the pricing power; • Geico has 2.8X the momentum; • Google has 2X the behavioral commitment; • iPod has 2.5X the emotional commitment; • Subway has 2.4X the usage and preference; • Target has 2.3X the emotional commitment; • W Hotels has 1.4X the category pricing power; and• Whole Foods has 2X the category pricing power. During the recent economic downturn, brands have

undergone even more of a shakeout. In a recession, brands are more likely to move, but with increased risk of deterioration. Our research shows that brands were both gaining and falling at faster rates in the last quarter of 2008 and first quarter of 2009 than in the corresponding quarters in the three preceding years. Moreover, brands in the Niche and Leadership quadrants have become statistically more volatile, with the result that the probability that brands will drop from either category has increased significantly. During the current recession, Niche brands were almost twice as likely to fall (to the “Unfocused” category) as they were during the previous seven years.

Figure 5 Brand Strength Fund Up 12% vs. S&P 500 Down 20%

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$6,000

Dec-0

1

Jun-0

2

Dec-0

2

Jun-0

3

Dec-0

3

Jun-0

4

Dec-0

4

Jun-0

5

Dec-0

5

Jun-0

6

Dec-0

6

Jun-0

7

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

BEX Top 50 weighted Index

S&P 500

Data: BrandAsset Consulting: USA All Adults 2001–2009, Bloomberg


8. Natalie Mizik and Robert Jacobson, “Marketing Strategies Across Economic Condi-tions,” Columbia University Working Paper, 2009.

• Prove your brand is an enduring advocate. • Make it easy for consumers to take care of themselves. • Couple chic with wallet-friendliness and lasting

quality. • Offer accessible and guilt-free indulgences. • Help consumers make the most of today and be more

optimistic about tomorrow. Not all strategies will be appropriate for all categories or

brands. As an example, financial services companies that have seen consumers lose trust and confidence in their brands need to work on proving they are durable but still innovative. The most promising strategies in such cases are those designed to accomplish the following: Prove your brand has enduring value by showing the brand is authentic, durable, trustworthy, and straightforward, but also progressive, intelligent, and a leader.

Brands must continue to invest in Energized Differentiation while also building Relevance and Esteem to move toward a Leadership position. If a brand shows high Relevance, and still demonstrates Energized Differentiation, it will be well-positioned to come out of the recession. Not

returns that were twice as high as those companies that did not invest.8

To help companies make efficient brand-building investments, we looked at the components of those changes for both the Niche and Leadership brands. We found that while Energized Differentiation is still the most important component, both Relevance and Esteem have become more important in driving change during a recession. How should companies address this challenge?

In the current environment, winning brands will deliver on fundamental needs while also satisfying higher-level wants. By focusing on basic needs, companies will be able to build current sales. Relevance measures how well that brand addresses basic needs: Is the product durable? A good value? Do I get my money’s worth? Higher-level desires are addressed through Energized Differentiation: Is the brand innovative? Does the consumer feel stylish or glamorous? Is this brand a leader or progressive in some way?

Six strategies can help carry brands though a recession and capitalize on newly arising opportunities:

• Build on lasting value with new service or trends.

Figure 6 Brands with Energy Break Out of Their Category

Supermarkets

Internet Search

Insurance

Hotels

Fast Food

Deodorants

Consumer Electronics

SoapsRetailers

BrandAsset Consulting: 2008 Full Year USA All AdultsB

rand

Str

engt

hD

iffer

entia

tionE

/Rel

evan

ce)

Geico

Axe

Google

WholeFoods

iPod

Subway

W Hotels

Dove

Target


john gerzema is Chief Insights Officer for the Young & Rubicam Group.

One of the early founders of account planning in American advertising,

John has guided brand strategies for global businesses to creative acclaim.

Before joining Y&R, John ran Fallon’s international network.

ed lebar is CEO of Brand Asset Consulting, a division of Y&R, and

one of the early architects of the BrandAsset® Valuator. Ed is a 35-year

veteran of Young & Rubicam and a former professor of the City College

of New York.

anne rivers is SVP, Director of Brand Strategy, at BrandAsset®

Consulting. Anne was an investment banker at Bear Stearns as well as

director of marketing, development and corporate finance at several retail

and consumer product companies.

only does it address needs that will result in current sales, but its Energized Differentiation will help drive future value by meeting higher-level desires.

What Can Marketers Do?Managers should focus on building an irresistible brand and infusing it with energy. Since brands, like businesses, are in permanent flux, brand managers must view their job as one of constant reshaping and renewal. They must listen carefully to the market, and continuously modify, personalize, share, and improve upon their offerings. Especially in today’s economic environment, the benefits consumers are looking for in brands are changing. By being keenly aware of these shifts in consumer perception and values, marketers can help their brands survive, prosper, and drive shareholder value.

Figure 7 Brands are More Mobile in the Recession

71%

Mass Market

56%

36.3%

7.0%

13.1%

14.3%

Percent of brands that gainedEquity in Recession Period

Percent of brands that lostEquity in Recession Period

BrandAsset Consulting: 2001–2009 USA All Adults


Bra

nd S

tren

gth

Diff

eren

tiatio

nE/R

elev

ance

)Recession

Commodity or ErodedNew, Unknown orUnfocused

Niche Leadership

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Measuring the Contributions of Brand to Shareholder Value

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