“With the increasing recognition that brands are assets that have to be actively managed, we need keys to unlock the processes for managing brands in a disciplined way.”
Raoul Pinnell, Chairman, Shell Brands International AG
Brand-driven shareholder value creation
An examination of how some companies achieve far greater financial benefits from their brands than others. By Christian Dorffer, Senior Vice-President – Europe, Millward Brown Optimor
T
otal shareholder returns vary tremendously between eminent companies. Research and analysis conducted by Millward Brown Optimor reveals that total shareholder returns are strongly correlated with the performance of brands. Brands with great market presence and a superior ability to convert customers from brand awareness to strong relationships (Brand Voltage) significantly outperform the market, producing annual average total shareholder returns of 10 percent to 29 percent in the period 1998 to 2006.
In comparison, the market on average yielded a mere four percent return to shareholders annually. This article provides evidence that wellmanaged brands produce superior shareholder returns and it gives an introduction to WPP’s ‘BrandZ Top 100 Most Powerful Brands’ study which is published annually by the Financial Times. In addition, this article reveals five key lessons for ambitious CEOs interested in improving the role their brands play in generating superior shareholder returns. >>
“Millward Brown Optimor has developed a superior system because, unlike Interbrand, its valuations are based on consumer data from a Professor Mark Ritson, London Business School survey known as BrandZ.”
47
Branding
Annual Average Total Shareholder Returns 1998 – 2006
“Millward Brown Optimor, has created a ranking of the world’s most powerful and valuable brands. Driven by real research insights into the power of brands, it provides actionable information for finance, marketing and businesses professionals that can drive decision making into managing and growing a company’s brands.”
brand is deriving its earnings from (Bloomberg), and outputs from the BRANDZ database. The use of real consumer and customer research insights from BRANDZ makes this new ranking unique and far more comprehensive and actionable than any other brand valuation study currently available. BRANDZ is a diagnostic and predictive brand equity measurement tool that was developed for WPP’s operating companies by Millward Brown in 1998 and has been running every year since then. It is based on Millward Brown’s established BrandDynamics framework. BRANDZ data is collected from interviews with category buyers or users (eg new car owners) who are asked about brands within a competitive framework (eg BMW, VW, Ford, Toyota etc). Five lessons for the ambitious European CEO In working with our clients across sectors and geographies, we are exposed to many interesting activities, that we believe are very likely to separate the corporate winners from the losers during the next 12 to 36 months. The five key lessons below represent our recipe for success. 1. Push yourself to understand your customers better Many leading European companies are getting very few benefits from the immense volume of customer data they possess. We are often shocked by how much data lives in large corporations yet how little of it is actually used to build the business around a detailed understanding of customers. Working with some of the world’s most sophisticated companies, we assist in building clear links between customer satisfaction, brand perception, employee satisfaction, business metrics and shareholder value. In summary, most companies have vast databases that, if analysed correctly, could allow them to improve substantially their competitive edge through building stronger customer relationships. 2. Let marketing meet the same performance criteria as your business Most marketing departments are dreading presenting the results of their activities to top management. This is actually the case in a surprising number of Fortune 500 companies across Europe. However, with the marketing ROI and brand-related financial methods available today, there is really no reason for marketing to not speak the language of top management and apply rigorous financial methods to evaluate the effectiveness of marketing activities. Almost any brand or marketing related question today could be measured in the same financial terms any other business question would be addressed. In summary, CEOs should expect their marketers to demonstrate the financial returns of their major activities. 3. Stop wasting money on poorly performing brands A great number of Europe’s largest companies have been growing through acquisitions over the past decade, and great cost and scale synergies have been achieved. However, in many cases, companies are today sitting on bloated portfolios of brands, and this is not only causing suboptimal return on marketing investments, but also preventing companies from further strengthening the brands that will reward shareholders in the future. In many cases, companies will already have sufficient data on the performance of their brands and the impact on their business to inform this analysis. In summary, we recommend CEOs to take a close look at their brand portfolio and decide which percentage of your brands are truly strategic and which ones need their existence questioned. 4. Strive to double your organic growth by improving your brand leverage Once companies have identified the brands that have the greatest potential to maximise shareholder wealth in the future, it is time to evaluate the myriad of ways to improve returns on these assets. Working with clients across sectors we have developed a Brand Equity Ripple Model. This quantifies the revenue, risk and profit available to powerful brands if they were to follow the innovative brand extension routes that have been successful for companies across the world and across sectors. In summary, based on our analysis, we believe that a large number of Fortune 500 companies can drastically grow the size of their business by leveraging their strongest brands to enter into new business areas, be it through fully-owned product or categoryextensions, or brand licensing opportunities with partner organisations. 5. Transform your global marketing department into a BrandCo There is no better method both to improve the way brands are managed and to build company wide accountability for building deeper customer relationships, than to manage brands as intangible assets, and establish a BrandCo to own and manage global brands. BrandCos have their own P&L and balance sheet, and generate profits from licensing trademarks and brands to both external and internal licensees. Further, in line with establishing new operations in low cost geographies, BrandCos are often setup in tax efficient locations with significant fiscal savings to follow.
The link between brand performance and shareholder returns
A hot topic for over a decade, brand valuation has come a long way and is today used as a sophisticated tool for strategic decision making among many of the world’s leading companies. In the early days consultancies used judgment and rules of thumb to estimate the financial value of brands. Today, leading companies are using data-rich, scientific and more actionable methods that also meet generally accepted accounting principles. Millward Brown Optimor, has created a ranking of the world’s most powerful and valuable brands. Driven by real research insights into the power of brands, it provides actionable information for finance, marketing and businesses professionals that can drive decision making into managing and growing a company’s brands. To derive these insights the study drew on data from BRANDZ, the world’s largest in-depth brand equity database that interviews 650,000 consumers around the world on 30,000 brands. BRANDZ provides broad sector and geographic coverage of market facing brands, including brands in apparel, beer, cars, fast food, financial services, luxury goods, mobile communications, motor fuel, personal care, retail, soft drinks, and technology. It covers brands in both the developed markets currently driving world GDP, and BRIC countries whose share of world GDP will grow in the future. The ranking is based on ‘dollar value’ of customer-facing brands, calculated using an economic use approach. This means that the value is based on the present day value of the future earnings the brand is expected to generate for its current owner. The value of these future earnings is estimated based on three key steps: Firstly, using publicly available financial data, ie from Bloomberg, Euromonitor and other sources, MBO have measured the current
48
About the company
Millward Brown (www.millwardbrown. com), one of the world’s top marketing research organisations, is recognised as a leading authority on advertising, marketing communications, media, and brand equity research. Through the use of an integrated suite of validated research techniques, both qualitative and quantitative, Millward Brown helps clients build strong brands and services. Millward Brown has more than 70 offices in 45 countries and also has several specialised global practices including Millward Brown Optimor (a global unit focused on helping clients maximise the returns on their brand and marketing investments), a Global Media Practice (a global media effectiveness unit), Millward Brown Precis (a global PR measurement practice), Dynamic Logic (an online research firm specialising in measuring advertising and marketing effectiveness), and KMR (provider of global Target Group Index (TGI) the world’s leading media and market profiling tool). Millward Brown is part of Kantar, WPP’s insight, information and consultancy arm.
earnings of the company. Additional information from Euromonitor and other sources is also used to allocate the company’s overall earnings to each individual brand, line of business and geography. From these earnings, operating costs, profits, tangible taxes and a charge for the capital employed are deducted which gives a figure for the ‘intangible earnings’ coming from the branded business. Secondly, BRANDZ data is employed to establish what proportion of intangible earnings coming from the branded business is driven by brand relative to other factors, such as price, availability or performance. This we call the ‘brand contribution.’ The score is calculated using three inputs from BRANDZ: the degree of market sector commoditisation, the influence of structural factors such as distribution or switching costs, and the strength of each individual’s relationship with the brand. Brands that drive the highest proportion of value are
typically where the structural barriers to switching are low, the buyer perceives the brands to be highly differentiated and the brands have strong, relevant and distinctive images. The third and final step is to project the brand’s future earnings. This projection is based on forecasted growth and risk expectations. Future growth is based on three factors: the projections of growth for the market sectors and countries the brand is operating in (data used from Bloomberg, Millward Brown Optimor research and Euromonitor), and Voltage (from BRANDZ) a validated research-based estimate of the brand’s ability to grow share in the future. These growth inputs are used to calculate a ‘brand momentum’ score. However it is not enough just to project the future growth in earnings; Millward Brown Optimor also estimates the risks associated with those revenues. The risk assessment is based on the risks associated with the company, market sector and countries the
About the author
Christian Dorffer is Senior Vice President of Millward Brown Optimor, a specialist consultancy team within Millward Brown (WPP) focusing on helping clients optimise marketing ROI and improve the value brands bring to a business. The author can be contacted on +44 (0)207 126 5118 and at Christian.dorffer@ uk.millwardbrown.com
49