How A Brand Can Affect Financial Performance

It's extremely hard to know what to make of the world these days... For business, it's going to be rough, but the degree of roughness, and the duration of it, differs depending on who you ask.

But regardless of how difficult times become, the wise company keeps an eye on the long term and doesn't forget about brand; it's not only essential for business success but is also one of the best defenses to weathering bad economic times. And after all, PIMS research shows that companies who charge hard during difficult times achieve significantly higher return on capital and gain market share during recovery over those who do not. (A good write up on that here.) This is P&G's approach as noted by the following A.G. Lafley quote:

"We have a philosophy and a strategy. When times are tough, you build share."

Along this line, it's important to remember how a brand can affect all measures of financial performance: Profit--Stock Price--Equity.

I was chatting about this the other day and figured it might be helpful to post up some quick, random data/links I have for others to use/build upon...

Profit

Booz Allen and Wolff Olins jointly offer a study called "Managing Brands for Value Creation." The study, fielded in Europe, can be downloaded here and focuses on "Brand Guided" companies and their business success. (Very cool of these companies to post this up.)

A couple of quick points to note from this:

80% of companies managed with a strong brand focus have operating profits significantly higher than their sector average--and oftentimes their profits are twice as high.

Brand-guided companies gain an edge over non brand-guided companies through the attitude of employees--For these companies "Living the brand" is more than cliché and makes a material difference on financial performance.

45% of brand-guided companies regularly assess their share-of-wallet, whereas only 24% of non brand-guided companies do this.

Stock Price

A few years ago I was referred to some work by Ernst & Young Financial Services regarding brands and stocks. This point stuck out:

Effective brands have the power to affect stock performance positively, and can be responsible for 5% - 7% of the change in stock price.

It's also important to look back into history... In 2000 when the stock market was taking a pummeling like it is today, David Aaker wrote a piece called, "Want to give your stock a boost? Then win over the public with a stellar brand strategy." The piece followed some research he had done, part of which stated:

Every 1% increase in brand equity is associated with a roughly 1% increase in stock return. Investors realize that brand is an asset that can lead to higher future-term earnings.

Equity

While Aaker's 1-to-1 ratio may seem aggressive, it makes sense considering that an Interbrand/JP Morgan study concluded that, on average, brands account for 1/3 of shareholder value.

An extreme example of this:  The brand of "Coke" accounts for 51% of the total market cap of the entire parent company of The Coca-Cola Company.

And another way to look at brand equity:

If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better then you." -John Stuart, Past Chairman, Quaker Oats Co.

Comments

[John Volpert]

Great writeup during these difficult economic times.

There's a great deal I can extrapolate from its content and apply to Red Giant's current clients.

[John Drake]

excellent jv... glad to hear it man. hope all is well over there...