Brand Valuation and the Stock Market

A couple of days ago I was making some observations about the way brand valuations seem to be disconnected from the values of companies.

In response we received a comment from a member of Interbrand saying,

Firstly, let’s be clear that there is no link to stock market prices and brand valuation. As you know, stock markets set a price on a company based on investors’ perceptions of whether share price will go up or down. 

However Interbrand does make an argument that there is a connection between the valuation of a brand and the stock price based on their own study with JP Morgan.

Several studies have tried to estimate the contribution that brands make to shareholder value. A study by Interbrand in association with JP Morgan (see Table 2.1) concluded that on average brands account for more than one-third of shareholder value. The study reveals that brands create significant value either as consumer or corporate brands or as a combination of both.

Table 2.1 shows how big the economic contribution made by brands to companies can be. The McDonald’s brand accounts for more than 70 percent of shareholder value. The Coca-Cola brand alone accounts for 51 percent of the stock market value of the Coca-Cola Company. This is despite the fact that the company owns a large portfolio of other drinks brands such as Sprite and Fanta.

 

 

 

 

This is an interesting connundrum.  

If there is no connection between stock prices and brand valuation, then the Interbrand/JP Morgan study is wrong.  But if there is a connection, then there is a tremendous disconnect between the valuations put on brands by Interbrand and others and the market valuations of the companies.  

I do not mean to single out Interbrand.  Brand Finance and others have similar measures. It is just that Interbrand is the most public in their efforts with BusinessWeek.

It is well established by this time that brands have value (sometimes a negative value!).  No disagreement there.  So how does a company place a value on that?  It has been and will continue to be debated for quite some time.  The brand valuation method of Interbrand is among the best in the market.  Even so — there is a commonsense logic that the brand valuations published in BusinessWeek are highly inflated.  

The relative values of one brand to another probably hold true.  But the actual numbers?  Unlikely. Is the Cit brand really worth $20 billion?

Can a brand be valued by the stock price?

Back in the dark ages of 1987 I was working at an ad agency where my clients were The Prudential and its stockbrokerage, Prudential Bache.  Our offices were on the 20th floor of 1515 Broadway, overlooking Times Square itself.  It was a glorious view from there, particularly at night.  The military recruiting station was still there.  The seedy parts of the neighborhood were still in ascendance. While we didn’t have the internet we had something even better — the news ticker on the side of the One Times Square.

One day my boss called me over the windows looking out on the square.  On the news ticker was the announcement of the stock market crashing, dropping hundreds of points.  By the end of trading the market was down about 508 points — over 22%.  It was stunning.

When we could pull ourselves away from the windows, we turned to the business of setting up a market research study for our clients to assess the impact of this drop on willingness for people to buy stocks, mutual funds and universal life insurance. Back then, a relatively small percentage of people actually owned stocks or even mutual funds.

The agency quickly rushed out new Prudential Bache advertising to reassure investors with the tagline, “Rock solid.  Market wise.”

No one was particularly thinking that the stock market collapse would have any bearing on the strength, equity and value of brands in general.  What did the stock market have to do with brand valuation?

Flash forward to 2008 when the stock market tanks.  By this time there are well established measures and indexes of brand value tied directly to stock values.  For more than a decade brand consulting companies such as Interbrand have been selling brand valuation studies showing how many billions of dollars this or that brand is worth.  This listing is published every year in a the top global brands in Business Week.

In this past 2008 ranking Citi was valued at $20 billion.  The stock market valuation of Citi today is about $14 billion.

Does that mean if you took the Citi brand away that the rest of the company is worth negative $6 billion?  

Or that the Citi brand itself is now worth a negative $6 billion?  In other words, the bank would be better off without the Citi name attached to it.  Certainly in Wednesday’s testimony the head of AIG indicated that they would be better off without their brand.  At Citi the recent advertising campaign of “Live Richly” have contributed to making the company a target.  And the same is true for Bank of America’s “Bank of Opportunity” campaign.

The standard approach to marketing, the Brand Positioning approach, would say that you cannot change the minds of people about these brands.  You need to change the brands since you cannot change minds.

So we now see two standard marketing tools failing companies today.  Brand valuation is setting up the wrong benchmark.  And Brand Positioning is directing companies to dump their brands instead of changing their marketing approach.

Rather than changing the brands, it would be more effective for the banks to change their approach to marketing.  If they reinvent marketing so that it is better integrate and aligned with the rest of the organization, then they would begin to see a change in how people perceive them.  It would not solve the underlying financial problems.  But it would go a long way to creating public sympathy instead of the current anger.

What’s up with all these sound-alike branding firms?

Someone I know and respect recently joined a branding firm, so I went to their site to check them out.   What did I find there?

I found the same things that I find at nearly all other branding firms.  I was particularly fascinated by the way they all seems to be using the same language.  The following 4 examples were culled from the home pages of 4 different branding firms. Can you guess which phrase goes with which branding firm?  Can you do it without using Google?

1. “Creating brands that transform business.”

2. “Create value”

3. “Building strong brands that drive revenue and create financial value”

4. “Creating and managing brand value”

Every one of these firms goes on and on about the need for brands to stand apart  in the market, to have an ownable point of differentiation.

In fact one of the firms features a new whitepaper they have written about “Differentiation in a Downturn”

Here are some of their key points:

• To prevent your differentiation from disappearing overnight, keep in touch with your customers and understand their needs and concerns
• Brand attributes and assets that may be cost of entry in good times become more important as customers look for reassurance from companies they can trust.
• Cut away neutral brand assets and attributes that have no measurable on your brand’s bottom line.
• If your brand is in a rut, take the long-term view; but if you follow tips 1-3 you might be able to stop your brand’s decline before it’s too late.

To all of these firms I say, “Eat your spinach!”  If you really believe in differentiation, then why don’t you practice it?  

Oh, and the answers are:

1. Landor

2. Lippincott

3. TippingSprung

4. Interbrand