When brands fail, does brand valuation too?

Last month Wally Olins, the man synonymous with the London brand agency that still bears his name, pronounced brand valuation an “utterly meaningless process”.

The bedrock on which many brand consultancies, accounting and valuation firms have built their reputations and practices, Olins pulls no punches on the value of brand valuation, describing it as “about as meaningful as sticking your wet finger in the wind and shouting out a number.”

He says this “ apparently rational process” is conducted through a “series of complex, arcane and to a lay mind more or less incomprehensible statistical measurements” but which ignores a number of well known truths.

“The truth is that brands of all kinds jump around all the time. They are in fashion, then they go out of fashion. They are well managed, then they are badly managed; brand managers become too risk averse or take too many risks.”

And his point is well made. Here in Australia we only need to look at a company like Babcock and Brown (B&B). Founded in 1977, this international finance and investment company had at one time 28 offices and in excess of 1,500 employees worldwide including offices in Europe and the United States. In December 2006 it had a market capitalisation of just over $8.5 billion and in 2007 its share price peaked at AU$33.90 but by December 2008 its share price had nose-dived by 99.6% to AU$0.14, representing a market capitalisation of less than $50 million. Last week the company was placed into voluntary administration.

Here Olins’ point is easy to support. Obviously, if a brand like B&B has no financial value (as the B&B board announced in January) - on what basis can any brand valuation be made?

Similarly, as BusinessWeek ranked Citibank the number 11 brand in the world in 2007 with a valuation of U$23 billion by 2009 some estimates put its brand value at around $9 billion and with that its ranking would fall to around number 40. No one can or would dare predict what Citibank’s brand value will be by the end of 2009. And given the level of US government assistance (US$25 billion to date), it’s brand may yet cease to exist (like I saw Washington Mutual close it’s doors and disappear overnight) and what then is the meaning of any valuation?

It Olins is does oversimplify of the brand valuation process in that it does examine both net present value as well as attempts to construct an idea of future value. However, he is right about how often brand valuation is trumpetted as an absolute measure of value and that, almost without exception in most valuations I have seen, the process takes no account of what either customer or market perception and sentiments is for a brand.

And Olins is only half right when he says brands have “no objective, absolute value” but the truth is that brand valuation can be used to establish an objective value but its ability to measure “absolute” value that is somewhat questionable.

The four standard brand valuation methodologies accepted by both the Financial and Accounting Standards Board and the International Accounting Standards Board for use on balance sheets around the world do provide an objective guide to what people should pay for brands. However, they can, in no way, be used to demonstrate absoluteness

The real fact is that by any measure there has only been a small reduction in the brand value of most of the world’s top brands and as market conditions and sentiments change values continue to change. Last week brands like Apple, Google, UPS and Amgen were being touted as possible replacements in the venerable Dow Jones Industrial Average for stricken companies like Citi Group, General Motors and General Electric.

Brand values do reflect balance sheets, market trends and sentiment but can only do their best to take account of black swan moments. In that way there can be no absolutes, and that is meaningless.

This blog was also cross-posted in Marketing Magazine Australia on March 17.

When brand value turns to zero.

Amidst the escalating world economic turmoil the world's most well known and successful financial brands have stared down possible dissolution, others simply disappeared and most lost substantial economic and subsequent brand value. Is brand value relevant?

On the back of the disappearance of Bear Sterns and Lehman Brothers, the takeovers of Wachovia, Washington Mutual, Northern Rock, Bradford and Bingley there is plenty of evidence there is evidence to suggest that the concept of brand value is being questioned.

Take Lehman Brothers as an example. In 2007 it had an estimated brand value of $8 billion, by September 2008 it had lost close to 78% of its brand value and when it filed for bankruptcy it still had $639 billion in assets under management before it was broken up and sold to UK bank Barclays (who basically bought the building for under $1b!) and Japanese brokerage firm Nomura but little brand value.



While conventional thinking has it that in either a merger or acquisition, brands and their equity come with the entity being bought, the Lehman Brothers example serves to challenge this thinking.

As financial markets have dried up, banks and other financial institutions have had no reference point against which to set the value of their investment assets. Between January and September this year brand valuation agency Brand Finance estimated the brand value of the 100 most valuable globally branded businesses had decreased by 4.2 percent, a drop of US$67 billion. Brand value is going to continue to decline as prices fall and markets become mere ciphers of liquidity.

While brands continue to remain quantifiable assets, their contribution to the equation of a takeover or merger price is now more difficult to extract.

In a takeover or merger brands are among the costs CFOs and their audit firms identify that contribute to any premium paid which exceeds net asset value (NAV) or, what used to be known as goodwill. Under current international accounting standards as much as possible of that margin must be explained by listing, along with their values, such intangibles as can be identified and which meet the standards' criteria. Residual amounts (brand value) that cannot be reliably explained remain goodwill. As such brand value is dumped into a bucket along with a whole lot of other assets that have been subsequently dramatically reduced. And as was the case with Lehmann's, their New York headquarters was worth more than their brand.

So what happens now?

Brands are assets in that they conform to accounting standards. As these standards develop and are refined, it's likely that in the future all brands will need be properly valued on the balance sheet. As far as consumer contribution and preference go towards a contribution to brand value, this is an issue as I pointed out in DIFFUSIONblog 22/9/08 The battle of the brands 2 that is still to be dealt with and that the value and return on marketing investment is required to provide for. And as consumer sentiment and therefore confidence in brands waxes and wanes, we are likely to see continued fluctuations in brand value that take no account of the balance sheet. It is clear that Alan Greenspan's idea of irrational exhubrance cannot exist in a whirpool.

Is $130m the only cost to Fonterra's brand?

New Zealand dairy cooperative Fonterra has been forced to write down $130 million this week as it's global brand reputation increasingly comes under attack.

The write down comes in the wake of the everwidening Chinese milk tampering scandal, which could result in one of the largest food recalls in the Asia-Pacific region.

One of the largest dairy companies in the world, Fonterra was widely regarded as a "clean and green" brand. Not only does the company own a 43 per cent stake in San Lu, the Chinese firm that sold the poisonous milk formula, but it seems on the face of it, the company's directors had prior to knowledge of the tampering but seemed unable to act on it.

A carefully stage managed press conference in Auckland New Zealand this week saw executives once again running for cover as they fended off press accusations that the company could have done more to avoid the scandal, which so far has claimed lives and hospitalised thousands of children in China.

Despite a presence on the San Lu board, who may have known about the introduction of the contaminant as far back February this year, Fonterra CEO Andrew Ferrier insisted their lack of knowledge of Mandarin hadn't have hampered their efforts to understand the extent of the tampering and in interviews said he "was appalled that this could go on."

Fonterra claims they first knew of the contamination in early August and took what it regarded as the best course of action, which was to work with the Chinese government on a product recall.

However, the depth of problem is demonstrated by the extent of the write down, as the company paid $100m for a 42% stake in San Lu, which is now valued at $62m and with some reports suggesting that San Lu's brand is now virtually worthless. It also seems likely to anticipate a much more substantial write down on Fonterra's brand value.

Fonterra appears to have stumbled at the farmgate - first denying knowledge of the scandal, failing to achieve a product recall and now having to admit it had knowledge of the tampering prior to it going public.

Fonterra would do well to have learnt a lesson from Perrier, once the leading brand of sparkling water in the US and the world.

In 1990 benzene contamination was found in bottles of its popular sparking water leading to a complete global recall of more than 160 million bottles which, like Fonterra, was also similarly poorly handled by its executives. The result was an overnight collapse in market share and a takeover by Nestlé in 1992. Perrier is yet to regain its pre-1990 marketshare.

As the scandal widens to Australia, HongKong and other Asian countries it seems that in this escalating attack on its brand reputation is likely to result in a significant drop in its share price, market share decline and community disquiet in its respective markets.

All of this could and should have been avoided if the company had some proper risk assessment and crisis planning in place. In short, this would involve training for its key executives so they can plan responses and ensure various constituencies are actively tracked. For a company of this size I would have expected this was mandatory. However, Fonterra appears to have already broken one of the cardinal rules for protecting brand reputation and ensuring trust - when in a crisis provide as much certainty as possible around how you are dealing with the problem. They haven't and now it's too late.

I wonder if this is going to be a long, slow debilitating drip.

The battle of the brands 2: new global brand survey just more deck shuffling.

There's nothing very surprising in BusinessWeek's annual survey of the 100 Best Global Brands, just that Google isn't already closer to the top of the pack and that it pre-empts the rapid decline of some world's major financial brands.

In its latest and eigth iteration, the brand rankings compiled from data from JPMorgan Chase, Citigroup and Morgan Stanley, see little shift in the dominance of global brands with the exception of Disney's failure to grow, Mercedes-Benz departure (down to 11) replaced by Google's (10) much anticipated entry into the top ten.

What's most interesting in this list is the fact that $157 billion Google hasn't already surpassed Microsoft (ranked 3) and that Swedish megaclothing retailer H&M is rocketing up the charts(22) while Thomson Reuters (44), Blackberry (73), Ferrari (93), Armani (94), FedEx (99) and Visa (100) are all marked as new entrants to the pantheon.

Behind Google, Apple (24, up from 33), Sap (31, from 34), Nintendo (40, from 44) and Amazon (50, up 62) all signalled significant growth off the back of strong sales and increasingly focussed efforts of true and marked differentiation via technology.

In what must have anticipated the seismic shocks in financial markets, big value declines were posted by Merril Lynch (-12%) Citi (-14%) and Morgan Stanley (-16%), while old school brands such as Ford (-12%), Gap (-20%) and Motorola (-10%) all struggled to hold onto their market and customer relevance.

Outside of the financial giants, Ford, Gap and Motorola have all been characterised as so bogged down in moribund cultures that their ability to innovate has had significant effects on their share price and caused subsequent declines in brand value.

Indeed for Ford, Gap and Motorola it must signal that lessons can be learnt, not from big ticket investing in advertising but in building cultures that are imbued by technological and design innovation, which big risers Google, H&M, Amazon and Zara already know.

The battle of the brands: the contest for the best brand surveys in the world.

Dr Hunter S Thompson must be smiling. The Hells Angels are Australia's number one brand, if yet another brand popularity survey is to be believed.

Brand rankings, brand affinity, brand preference, brand valuation studies - dress them up as global and national rankings and name them the World's Best Brands, the World's Most Valuable Brands, the World's Most Recognised Brands, the World's Most Powerful Brands, the World's Most Loved Brands and you get some sense of the beauty contest that is going on for companies claiming authority in battle of brands.

Advertising agency the Belong Group's Australian study of national brand awareness, appears just another example of yet another advertising agency trying to climb onto the brand popularity surveys bandwagon, with what can best be described as a very "independent" study.

According to Belong, the top five brands in Australia are the Hells Angels, Apple, Star Wars and the diary and stationery manufacturer, Moleskine!

While there is little detail on the study methodology, it seems that a 1000 consumers were polled on the basis of what a brand stood for, if there was a clearly articulated belief and whether the brand elucidated a particular type of behaviour in people. A panel of, what Belong describes as, "industry experts" then ranked and shortlisted 20 brands.

It's not too dissimilar to advertising agency Saatchi and Saatchi's Lovemarks project.

A love mark is a product, service, person or place a consumer can’t imagine living without, has a specific name that is identifiable by others and is based on a personal experience.

Lovemarks is about consumer's identifying a small, everyday product or brand that embraces and infuses people's live to make them a little better via the Lovemarks' website listing.

Interestingly there is some affinity with Belong top 20, Lovemarks contributors rank Apple at 4 and Moleskine at 6 among their top 200 and also Nike at 87 and Star Wars at 148.

Belong's top five of the top 20 brands (Alannah Hill, Free Hugs, Peter Alexander, T2 and the Bra Boys) are Sydney based, would suggest that either Belong are looking for new clients (Saatchi and Saatchi reportedly won US$430 million JC Penney contract because of Lovemarks) or that the brand menu was very selective and the research net wasn't cast too widely outside of Sydney.

Compare this to the top five in last years The World's Best Brands, an annual global study published Business Week for the last seven years, which lists CocaCola, Microsoft, IBM, General Electric and Nokia and you'll see why things must have gone a little awry over at Belong.

In the Business Week study, Nike which ranked 12th on Belong's list slips in at 29th, Harley Davidson motors in at 45th and Apple manages to get 33rd. No mention of Smiggle, The Body Shop and shoe brand, Ecko.

Unlike the Belong study, this ranking uses a combination of analysts’ projections, company financial documents, and own qualitative and quantitative analysis to arrive at a net present value of company earnings to establish the brand value.

To even qualify for this list, brands must make at least a third of their earnings outside the home country, be recognisable outside of its customer base and have publicly available marketing and financial information.

Global brand valuation agency Brand Finance's Top 100 Australian Brands, published in June this year, lists National Australia Bank, Woolworths, Commonwealth Bank, Telstra and the Foster's Group in the top five. Coca Cola is listed at number seven.

Happily for Belong - Seven Network, which screens Sunrise (ranked 18th) is ranked 28th by Brand Finance and one of the licensees of the Virgin brand (ranked eight by Belong) Virgin Blue scrapes in at 45.

Brand Finance's rankings are based on the brand portfolios of Australian Stock Exchange listed companies, in terms of their absolute dollar value, and also the percentage contribution that the brands make to enterprise value.

Brand Finance defines a brand portfolio as the value of trade marks and trade mark licenses, together with associated goodwill.

Global marketing research agency Millward Brown's World's Most Powerful Brands or BrandZ Study published in April this year lists Google, General Electric, Microsoft, Coca Cola and China Mobile in their top five.

In their list Apple comes in at seven, Nike at 53 and Harley Davidson at 72. No listing for Dove or Star Wars here though surprisingly Unilever, which does own the Dove brand, (perhaps no one knows who they are in Australia) is unranked but McDonalds ranking eigth and Subway (73) are.

Millward Brown's annual BrandZ Study measures the brand equity of 50,000 global “consumer facing” brands and interviews over 1 million consumers globally (though this is probably across numerous studies of unspecified nature). The Top 100 ranking assesses brand value using market and consumer research, in combination with financial data from Bloomberg and Datamonitor, to calculate and break-down intangible earnings), brand contribution (the brand’s effectiveness in driving business earnings and what they call Brand Momentum (an index of expected short-term brand growth).

The Millward Brown ranking takes into account regional variations since even for truly global brands measures of brand contribution might differ substantially across countries.

The Belong study is based on consumer sentiment with an "expert" filter and provides a simplistic but popularist ranking of the "top" brands in Australia. Alongside Lovemarks, it proves there's a long way to go before we get a more accurate measure of the relevance and influence these brands have on consumers. While the global brand ranking studies do provide a substantial degree of homogeneity in their brand rankings because of common financial inputs, the degree to which they measure power and recognition is something recognisable consumer input could make a significant contribution to.

What drives Booz's brand analytics tool?

Booz&co have ventured into the small but under-estimated brand valuation market with the launch of a brand vitality assessment tool designed to help failing brands redefine themselves..

The announcement comes off the back of Millward Brown's recent alliance with Brazil’s leading brand valuation consultancy, Brand Analytics, designed to complement its Optimor evaluation and measurement products in the South America market.

It also signals the tendency for global brand and business consultancies to merge strategy and engagement with valuation and analytics off the back of increasing client demands for transparency and justification in spend.

In the latest issue of Strategy and Business, Booz&co cite the success of revitalized brands like Abercrombie & Fitch, Johnnie Walker, Olay, and Ford’s Mustang as evidence that the success or otherwise of brand revitalisation and brand extension has been traditionally driven by "instinct and an appetite for risk".

Booz claims its new tool kit provides "data-driven analytics" to minimize the risk associated with these kinds of decisions. Called the Brand Vitality Assessment (BVA) and sounding much like Y&R's Brand Asset Valuation (BAV), it says it examines every aspect of a brand including communications strategy, pricing and the state of its competitors to reveal how much life is left in the name.

Booz's BVA is supposed to help companies "identify latent value — or the lack thereof — in their product portfolios before deciding what to do" or in other words, what the brand equity is. No surprises here and hardly different from their competitors.

Booz's BVA process is based on a brand having what they describe as "residual strengths" such as brand associations, the potential for or meaningful differentiation on at least one purchase driver and basic distribution infrastructure to support the revitalization.

It uses four related evaluations that incorporate consumer (where hoping that B2B hasn't been ignored here) research to create a holistic and data-driven view of how the brand is currently performing in the marketplace.

The evaluations seem fairly qualitative rather than quantitative and Booz is unable to cite any examples of what kind of measures are actually made and what kind of data is produced. Further, they don't provide any evidence of any brands they have worked with that have employed quantitative measures but apply only market share figures as demonstrations of how the process works.

The four evaluations appear almost entirely qualitative. They are:

1. The Purchase Funnel Assessment (PFA) is just another way to evaluate the purchase decision process and from DIFFUSION's experience this is generally qualitative as it relies on customer assessment from awareness to point of purchase.

2. The Brand Equity Review (BER) is designed measure residual brand equity and loyalty within the target customer segment. While it might identify the brand’s attributes, one would think these would be known and those attributes which have been eroded or been rendered irrelevant by competitors, again this seems more qualitative measure.

3. Competitive Dynamics Assessment (CDA) is a look at which competitors are taking away market share, why, and how easily the problems could be rectified.

4. Value Proposition Check (VPC, I suppose) analyses the brand’s benefits including marketing communications and pricing. It includes standard brand attributes and benefits check built around the functional, emotional and expressive against consumer, competitor, and internal perspectives. Nothing new here.

Booz's so-called Brand Vitality Potential (let's call it BVP and not sure how it snuck in) is the final evaluation, where the "cold hard facts, as uncovered by the previous four analyses, come into play". I guess this is where we might see some numbers.

Booz says the BVA is "not a panacea for tired brands" but that it offers is "a rigorous, data-driven approach to deciding a brand’s future" except we don't know what the real data is except it's all qualitative.

Booz could do well to state whether any other quantitative measurements are being used such as total market shares, sales by segment against overall PE ratios and how these are applied by the BVA. What scoring tools will be used? How will one tool be used against another? What are the weightings? If any?

More importantly, how will the assessment be reported and by whom and within what framework, particularly from the point of view of brand stretch and brand extension.

Then there are the issues of brand redefinition, activation and engagement, which follow on from such work. Booz and for that matter few other consultancies, have little capability or experience doing this kind of work despite talking about it and claiming it. The article cites no projects they have worked on this area, just suppose sos.

That there are so few consultancies and their clients who have undertaken these kind of complete lifecycle projects following a brand valuation, says much about the the general market wlllingness to understand the process behind brand creation and to make the actual investment required to revitalise dormant brands as it does about the abilities of the consultancies they use. The one's who have done it and been successful have obviously understood this from the outset.

Image courtesy of Chronicle Books.

Assume the position: branding in 2008

2008 marks the death of “fact free” brand decision making and branding programs as business looks for return on investment. Business will start to get that brand value needs to be understood, measured and acted on. Australian businesses are under increasing pressure to understand and evaluate how their brands impact their bottom lines. Responsibility will start to shift out of marketing departments and into corporate strategy. We will see a move away from a reliance on traditional empiric and historical research models to the use of brand analytics that are forward looking and provide prescriptions for responsible corporate action.

Here’s how we see this shift happening:
Any brand activity can now be subjected to massive and organised digital surveillance. Companies will soon get the idea that their brands and reputations need to be both guarded and monitored. BRAND MONITORING has exploded in the US, particularly amongst digital brands and within the online activity of all brands, and in turn companies will look for more sophisticated ways to measure and understand brand effects in the market.

To do this they’ll need to ratify brand value using BRAND ANALYTICS. It might better be called Brand Valuation 2.0 but it goes well beyond the balance sheet. Analytics creates predictive models around how to build brand value, and how to provide better and more insightful answers to business questions around demand, brand and performance.

Once they get a handle on both brand activity and value they will see that traditional BRAND POSITIONING IS DEAD and move to the new DYNAMIC POSITIONING models. Defining brands to capture a point in a marketplace presupposes that markets and customers are static and clearly defined. It’s a machine age view. We’ll need to throw out the USP along with the single fixed brand idea. Today’s brands need to be dynamic entities, given both direction and momentum, and allowed to change within markets.

While no one says brand identity guidelines are about to be abandoned (after all someone has to define physical and functional attributes of the brand), there will be more reliance placed on BRAND PORTFOLIO MANAGEMENT approaches using BRAND ENGAGEMENT across all stakeholders. It’s not enough to know the touch point, you need to know how to manage the interaction to ensure the integrity of the response and consequent action. This is going to even be even more important as stakeholders push for more meaningful corporate social responsibility programs.

Challenging old notions that corporations own themselves, the concept of the SOCIAL OWNERSHIP OF CORPORATIONS will become a marker for a much larger trend. CSR will increasingly become an element of brand vision and strategy. Business will have no choice but to become more transparent, more comfortable in its own skin, less inclined to communicate through stage managed campaigns and communications and ultimately begin to acknowledge their part in the fabric of the world.

image copyright Keith Haring