'When chief executives think about brands, their brains hurt,' said advertising guru Jeremy Bullmore recently. A report launched this week by the Institute of Practitioners in Advertising (IPA) sets out the challenges involved in understanding, managing and measuring the contribution made by intangible assets, including brands, to a company's performance, and provides pointers for marketers and advertising agencies on how to ease bosses' brainache.
The IPA report - 'The intangible revolution: how intangible assets are transforming management and reporting practice' - points out that such assets, including brands, have never been more important. Survey after survey has shown that brands and other intangibles typically account for between 30% and 70% of a company's market value; in certain sectors, including luxury goods, this figure can be even higher.
Brands are the key intangibles in most businesses. Based on Brand Finance's 'Global Intangible Study 2006', a survey of more than 5000 companies, the consultancy's chief executive, David Haigh, estimates that brands represent on average 20% of the intangible value of the businesses quoted on the world's 25 major stock markets. The figure is significantly higher in consumer-facing businesses.
When it comes to individual brands, the BusinessWeek/Interbrand 2006 survey of Best Global Brands, published in July, found that 66% of the Coca-Cola Company's market capitalisation is accounted for by the Coca-Cola brand, while the Ford brand represents 87% of the market capitalisation of the Ford Motor Company; the value of the McDonald's and Kodak brands represent 67% of those companies' market values.
The proportion of tangible to intangible assets has changed dramatically over the past 50 years, as corporate performance is driven increasingly by the exploitation of ideas rather than physical assets.
Andrew Marsden, category director of Britvic Soft Drinks and incoming president of The Marketing Society, believes that brands are important because they provide resilience to economic stress. 'They represent a deal between a supplier and purchaser and offer consistency and credibility,' he says. 'Their predictability means that forecasts of investor returns can be more robust, thereby moderating risk for shareholders.'
Yet intangibles, including brands, remain poorly understood by investors and management alike. This leads to poor decision-making by companies and systematic mispricing of stock by investors.
Michael Bleakley, beverages analyst at Credit Suisse First Boston, says analysts generally do not take a sensible view about how long brands will survive. 'A common assumption is that they will disappear in five to 10 years,' he says, adding that companies' failure to quantify the absolute and relative success of their advertising and promotion does little to help their cause.
In May, Gianni Ciserani, vice-president and managing director of Procter & Gamble UK & Ireland, criticised firms' ignorance about the drivers of brand value, slating their propensity to pour money into promotions to generate short-term sales at the expense of innovation, marketing and advertising, which build long-term brand equity.
The IPA report outlines a number of initiatives that are combining to force companies to get a grip on their intangibles. One of these is IFRS3, an international financial reporting standard to be introduced on 1 January 2007 that will require companies to break down the value of the intangibles they acquire in takeovers into five categories, including customer- and market-related intangibles, rather than lumping them together under the catch-all 'goodwill', as they have in the past.
Critics argue that while IFRS3 might focus attention on brands, it is limited in the extent to which it reflects the value of a company's intangible assets. Only acquired intangibles can be recorded on the balance sheet, giving an incomplete view of a company's value. What's more, the value of those assets can only stay the same or be revised downward in each subsequent year, thus failing to reflect the additional value that the new owner's stewardship ought to be creating.
David Kappler, formerly finance director of Cadbury Schweppes and now chairman of Premier Foods and HMV, describes the discrepancy as bizarre. 'It drives me spare,' he says. 'Cadbury Schweppes has something like 拢5bn of intangible assets sitting on its balance sheet as a result of the acquisitions of brands such as Halls, 7-Up, Dr Pepper, Trident and Snapple, but neither of its inherited brands - Cadbury and Schweppes - gets a look-in. If you do a return on capital employed (ROCE) calculation that is based purely on balance-sheet figures, you come up with all kinds of weird and wonderful numbers - and make lousy decisions as a consequence.'
Part of the problem, Kappler acknowledges, is that there is no robust or consistent methodology for valuing brands. 'Give the same brand to five different brand valuation consultants and they will come up with five different values,' he says.
Another driver for businesses to gain a better understanding of brands is the new Business Review, the replacement for the Operating and Financial Review (OFR), which was scrapped by chancellor Gordon Brown last year. The review requires directors to provide non-financial as well as financial details on areas such as customers, employees and the environment, to give stakeholders a more meaningful picture of a company's current and future sources of competitive advantage.
It is here, arguably, that marketers can make potentially their biggest contribution to managing, measuring and growing brand value - and demonstrate their own value into the bargain. Many companies are using the wrong information to run their businesses, according to Tim Ambler, senior fellow at London Business School. 'The typical board spends 10% of its time on the marketplace - the sourcing and harvesting of cashflow - and 90% discussing what to spend money on,' he says. 'If you want to know what your future cashflow looks like, you have to investigate where it comes from: the market.'
Every quarter Rob Malcolm, president of global marketing, sales and innovation at Diageo, reviews with the company's executive committee the effectiveness of Diageo's advertising by brand, medium and market for all its global brands. 'When I first shared this information I was a bit nervous as it put on the line for all to see one of the most closely guarded marketing secrets - does our advertising really work? Does it really grow the business?' he says.
The chief executive's response was overwhelmingly positive, marking what Malcolm calls 'the start of the journey for the kind of professionalism and trust that we need to build for the marketing function and for justifying continuing investment in brand-building'.
In the final analysis, however, intuitive brand management is arguably more important than trying to place an absolute value on your brands. 'You need a bunch of operational key performance indicators to see how your brand is performing in the marketplace, but those should be for effectiveness rather than valuation purposes,' says Martin Glenn, former president of PepsiCo UK. 'We measured lots of things at Walkers, such as customer complaints, why things moved and so on. But we took brands seriously not for the purpose of a balance-sheet valuation exercise, but because they were our lifeblood.'
P&G
28% - Value of brand portfolio as percentage of total intangible assets
Brand portfolio value 拢38,400m
Total intangible assets 拢136,309m
HSBC
25% - Value of brand portfolio as percentage of total intangible assets
Brand portfolio value 拢17,760m
Total intangible assets 拢71,099m
VODAFONE
25% - Value of brand portfolio as percentage of total intangible assets
Brand portfolio value 拢11,590m
Total intangible assets 拢46,473m
TESCO
47% - Value of brand portfolio as percentage of total intangible assets
Brand portfolio value 拢10,050m
Total intangible assets 拢21,391m
BT
20% - Value of brand portfolio as percentage of total intangible assets
Brand portfolio value 拢4,400m
Total intangible assets 拢21,546m
MARKS & SPENCER
25% - Value of brand portfolio as percentage of total intangible assets
Brand portfolio value 拢2,400m
Total intangible assets 拢9,686m
ESSENTIALS - BRAND VALUATION
The pros and cons of brand valuation
'There is too much navel-gazing about this kind of stuff, and I am not sure what tangible decisions get made on the back of it. The brand-valuation people have an interest in turning it into an industry, but the only thing that really matters is that the real value of the company grows when you get sustainable top-line growth, and that will add capital value if the company floats on the stock market.'
MARTIN GLENN, former president, PepsiCo UK
'Brand valuation consultants have a role to play in valuing brands for accounting purposes, but the more important job of understanding and growing economic value, which takes into account all of a company's intangible assets, not just those that are reflected on the balance sheet, should be based on the management's own calculations.'
KEN LEVER, finance director, Tomkins
'The reason for determining the value of brands and other intangibles is not to find a number, but to identify the best way to manage the business, get better statistics, invest better and thereby grow the value that marketing adds to the business.'
JOANNA SEDDON, executive vice-president, Millward Brown
WHAT MARKETERS SHOULD BE MEASURING
- The number of critical brands that are growing market share at a given point in time
- The percentage of advertising budget being spent on campaigns that are proving effective
- Yield on innovation
- Speed to market
- The percentage of marketing spend that the company has analysed and then made more efficient
- The percentage of marketing people who have mastered core training courses
- The continuity and talent profile of key people and jobs
- How talent stacks up against the needs of the business now, and targets for three years hence
Source: Rob Malcolm, president of global marketing, sales and innovation, Diageo.