Signs of a drop in consumer confidence, a decline in employment opportunities and a reduction in retail spend indicate that our economy is heading for, at best, a slow down and, at worst, a recession.
At such a time, managements will carry out an assessment of their assets to decide which are critical to their business and which are expendable. Unfortunately, they sometimes make decisions that could cause irreparable damage in the long-term. A prime example is to cut investment in intangible assets, particularly their brands, without considering the ramifications.
For too long the value of brands was underestimated. Increasingly though, leading companies are recognising that brand investment generates an economic return and is worthy of evaluation in the same long term framework as tangible assets.
According to a study carried out by Interbrand and Citibank, intangible assets can account for as much as 85% of market capitalisation. Brand value accounted for 71% of market capitalisation for Nike, 64% for BMW and 27% for IBM.
Statistics also show that, when one compares the market capitalisation of companies with strong corporate or product brands to their net tangible assets, it reveals a significant goodwill gap. This represents investors' perceptions of the unrecognised intangible value of the company. You cannot, however, assume that the entire goodwill gap is accounted for by the brand. There are usually other intangibles, such as management expertise, patents and know-how, that are the key drivers for success.
Table 1 illustrates that out of the 75 most valuable brands in the world, 55% of the market capitalisation on average is made up of intangibles and 33% alone is brand. This was illustrated when Ford bought Jaguar - it was estimated that the physical assets were only 16% of the value; when Vodafone bought Orange, they were only 10%.
Herein lies the problem. Intangible assets are increasingly the most important assets in the business yet, when there is uncertainty in the economy, the marketing budget is the first to be slashed.
This year there has already been a cut back in advertising. In some ways this was inevitable after last year's technology and telecommunications boom. It now appears that the outlook, particularly for B2B, is gloomy and consumer confidence is weakening. Recently, Zenith Media adjusted its figures three times in a single month to be more conservative in its forecasts of worldwide advertising spend.
Perhaps the answer lies not in a cut in advertising but in a more efficient media spend. In the past, we have seen a switch away from advertising to promotion. In 1983, advertising, on average, accounted for 70% of marketing budget while promotions accounted for 30%. In 1993 25% was advertising and 75% was promotional activity.
In a recession, companies aim to cut costs to increase margin, and marketing is traditionally the first cost to be cut. It has a far lower profile than laying off employees has and is the easiest cost to reduce. And, if all companies cut back, then their share of 'voice' may well stay the same. Companies may also reduce price to stimulate demand – but where is the incentive to compete in such a commoditised market? Market share will be eroded and margins squeezed. Some businesses may even go out of business. The end result is less choice for the consumer.
These strategies ignore the fact that the best way to ensure long-term profitability is to ensure security of demand. A reduction in prices may well increase sales, depending on the elasticity of the product, but who is actually buying the goods? Is it existing customers or the bargain hunters? Price cutting may even be detrimental to the brand. The perception of the brand may be of quality and service and the higher price may offer reassurance. While it is true that customers want value for money when they buy a product or service, they also value the brand 'promise'.
These days, as customers become increasingly knowledgeable and demanding, profitability is more about the customer and the 'brand experience' than about price. A lot of money was spent on supporting dot.com brands, to no avail. Building a brand is about providing a consistent experience for the customer, which helps to create and maintain a security of demand into the future. Customer experience is becoming ever more critical, and many businesses are finding that a key way they can differentiate themselves in today's market is through customer service.
Inside and out
It is important to remember the brand inside the company as well. Never is it more important to 'live the brand' than in a recession when employees are being laid off and difficult decisions are being made. Communication is vital. A person who is laid off and feels unjustly treated will talk negatively to two others, who will talk negatively to four, and so forth. According to a study conducted by Thomas Harris/Impulse research, the Fortune top 200 'most admired' companies spend an average of $1.6m each on internal communications. This, says the study, accounts for the majority of their entire corporate communication budget.
Orange is an example of a company where employees live the brand – they are 'bright', 'enthusiastic' and 'loyal'. Orange understands that, in a service industry, the customer's experience is a direct reflection on the brand and can either build or destroy value depending on that experience.
Building your brand
Building a great brand does not necessarily need huge advertising budgets, but it does require an understanding of customer needs and a willingness to act on them. This means both living the brand and 'walking the walk, not just talking the talk'. It is about delivering a promise.
A recession may be the time to take stock, reassess the existing marketing mix and develop a more efficient approach. Through gaining an insight into the equity within the brand and an understanding of the brand's value, it is possible to divert resources into areas with a higher return on investment.
There is, in fact, an argument for increasing your marketing budget in a recession. The goal is to capture market share and share of mind, thus positioning the brand optimally for when the economy recovers. Every pound spent will be more prominent as competitors cut back. The Strategic Planning Institute concluded that advertisers who boost advertising spend by 50% during a recession gain nearly a full share point from the competition.
Certain individual factors need to be taken into consideration when deciding the marketing strategy. Companies which have a secure balance sheet, efficient working capital and credit line are more resilient to the stress and uncertainty of a recession. Smaller companies will be much more sensitive to changes in advertising budgets and will be less able to carry additional staff.
Similarly, the products and markets in which a company operates are important . Some products and markets are more susceptible to a downturn than others. Generally, people may put off buying a luxury item, such as a new car, but will continue to buy consumer goods. That is not to say that branding is exclusive to fast moving consumer goods or lifestyle brands.
Whether your brand is national or global will also affect its ability to survive a recession. The risk facing your company will depend upon the economic risk in the individual countries concerned and therefore your strategic risk will differ from country to country.
Successful companies such as Wal-Mart have demonstrated that managing your brand assets, with the same intensity as your portfolio of tangible assets can generate significant returns in the long run. Recessionary cycles are not necessarily the time to cut spending on your brand, but rather to spend more efficiently by targeting the segments with the greatest potential and negotiating better deals with media suppliers.
Sony will produce an advertising campaign annually, recession or not, and Coca-Cola have been launching major new multi-million advertising campaigns when media experts have been expecting huge cuts in marketing budgets. Is it then a coincidence that Coca-Cola is regarded as the world's most valuable brand?
Businesses ignore their most valuable assets, their brands, at their peril. You need to consider the trade off between short-term profitability and long term survival and growth very carefully when deciding business strategy. The tools required to meet your objectives must include a strong differentiated brand, both inside and out.
Jane Yates is a senior consultant, brand valuation, Interbrand, Tel: 0207 554 1178, E-mail: email@example.com
UK recession warning
In July, information services company Experian warned that British industry is teetering on the brink of recession as profitability fell for the seventh consecutive quarter in the 12 months to December 2000. Experian's latest Corporate Health Check said that falling business investment and profitability have already resulted in tens of thousands of job losses, factory closures and reductions in forecasts for economic growth this year.
'Across the economy as a whole, the average return on capital – a leading measure of profitability – fell from 11.84% in the 12 months to September 2000 to 11.18% in the 12 months to December 2000. This represents a 15% decline in profitability across the year,' states the report. Reasons for the drop include continued loss of international competitiveness as a result of the strength of the pound against the euro and its weakness against the US Dollar, a drop in exports outside the EU, and high oil prices. In addition, company profitability has been hit by having to absorb considerable additional costs as a result of new work-life balance legislation, which, Experian estimates, has added £15bn to employers' costs.
'There is now a serious imbalance between those companies and industries predominantly serving domestic UK markets, which are fuelled by buoyant consumer spending, and exporting companies – many in manufacturing, IT and telecommunications – which are having to retrench in the face of global economic slowdown. It was expected that the buoyancy of the domestic economy would offset stalling productivity gains because of lower business investment, but the downturn has now hit service sectors as well, with the result that virtually every industry sector suffers from lower profit margins and returns on investment.'
The author of the report, Peter Brooker, says that the decline in profitability by almost one-third in the media sector is "particularly worrying", especially in the light of recent reports of falling advertising spending. "Rightly or wrongly, advertising expenditure is always one of the first expenses to be cut back when economies stall. The media sector in the UK has been hit by the knock-on effect of the US slowdown, with many US-based multinationals cutting back on advertising worldwide."
A summary of the Health Check can be found on www.experian.com/press , under 'Surveys'.