ama - the brand bubble

8/8/2019 AMA - The Brand Bubble

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6 Spring2009

Wa Str t va s brandshigh r than Main Str t.

Watch o t.


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u B B lThe Brand

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Time destroys the speculation o men, but itconfrms nature. Cicero, 106-143 B.C.

As we leave behind 2008, the numbers are bothhistoric and dismal. The S&P 500 declined by 38 per-

cent, and almost 2 million jobs were lost. The medianhome price ell by 22 percent, while almost 7 trilliondollars in market value evaporated rom the Dow

Jones 5000 Index. Taxpayers unded $700 billion tobail out nancial institutions, with another $17.5 bil-lion to keep General Motors and Chrysler operatinginto the new year. The credit crisis intertwined virtu-ally every economy and sector in the world, shatteringconsumer con dence to its lowest point in decades.

The market bubbles in the S&L crisis o the 1980s,the dot-coms o the early 2000s and the home equitymarkets o today all exempli y the regular and recur-ring danger o rampant speculation, when un ettered

zeal bids prices up to levels that ar exceed the realvalue o the assets they represent. Yet bubbles are,as Shirley Bassey sings, Just another case o historyrepeating.

Tulipmania. One o the rst bubbles on recordoccurred some 400 years ago, in Holland. Andthe asset that perpetrated this bubble was a tulipbulb. The Dutch aristocracy had acquired a particular

ondness or a type o tulip rom Turkey that grewvery well in the ertile lowlands o Holland. Citizens

rom all walks o li e, rom businessmen to average

workers and paupers, quickly jumped at the oppor-tunity to invest in tulips. Some even took out a crude

orm o utures contracts on unplanted tulips.The market or tulips created such renzy that

no one stopped to question i the cash fows would

continue in perpetuity. No one paused to discountthe risks inherent in the trade and instead continuedto reinvest in more bulbs. And then at some pointbetween 1636 and 1637, the appetite or tulipsplummeted. So too did the ortunes o the thousandswho had participated in tulipmania.

Snap, crackle, pop. In early 2007 we identi edanother bubble, one twice the size o the residentialsubprime mortgage market and almost $4 trilliondollars o the S&P 500s market capitalization. Again,this bubble was created by the reckless run-up o hype, devoid o underlying consumer logic. And, likecomplex derivatives, it was hidden in black boxes

and proprietary modeling. Yet, in this instance, theassets at risk cannot be traded away or hedged againstuncertainty. Rather, they are the undamental driverso competitive advantage or most organizations:their brands.

Brand value accounts or approximately 30percent o the market capitalization o the S&P 500(Millward Brown Optimor, 2007). While this variesby sector, brand value as a percentage o a companysmarket value has risen steadily rom 5 percent 30years ago.

John Gerzema


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8 Spring2009

Execut ive Summarydeclined 24 percent, and trust in brands has eroded by almost50 percent.

Within 2,500 brands we analyzed, almost 70 percent werestagnant or eroding in brand di erentiation. And, o the 30percent that changed, it was twice as likely that change wasnegative. Curious as to why, we cross-examined Interbrands

top 100 most valuable brands (2004-2007) with those in ourstudy and ound that 45 percent were actually declining inconsumer perceptions. Despite this, the top 100 reportedlygained 16 percent in overall value, or approximately $16billion dollars. Clearly it was beginning to dawn on us thatWall Street was valuing brands more speculatively thanMain Street.

We then turned to other researchers or insight and expla-nation. And the act that consumers are losing interest inmany brands was reported by several other reputable sources,

rom the Henley Centre in the U.K., which detailed the declineo Britains largest iconic brands, to The Carlson MarketingGroup, which ound the percentage o people who said they

were loyal to one brand declined rom 40 percent to 9 per-cent since 2000. Meanwhile, Jack Trout and Kevin Clancysresearch reported that brand di erentiation declined in 40o 46 categories as studied by Copernicus/Market Facts.

How can brands account or a growing percentage o market capital when most arent growing in consumer estima-tion? Why would brands be ailing, and why at this point intime? Interestingly, this diminution o brand value is occurringprecisely at the same time that media ragmentation andtechnology are creating tectonic shi ts in how consumersinteract with brands. Far rom a mere coincidence, its acanary in a coal mine.

Wheres the Beef?The rampant speculation in something as ordinary as abrand exempli es one o the most basic undamentals inbusiness: the concept o value. Indeed, the core purpose o any business is to acilitate the trans er o value rom oneentity to another in a way that provides adequate value orcustomers and adequate returns or shareholders.

The concept o business as a vehicle or value trans er isnothing new, and it is utterly simple. But in todays highlycompetitive and complicated business environment, it is cru-cial to understand the repercussions on the way the trans ero value between a business and customer is to (ideally) existin a steady state o per ect harmony: The business entity keeps

the value created by the di erence between cost and price,while the customer keeps the value created by the di erencebetween price and perceived utility.

But interesting things happen in the real world, especiallywhen multiple parties perceive the utility o a good, serviceor asset to be di erent. In these situations, value corrections,sometimes drastic, must take place. We have seen it multipletimes in the past rom the dot-coms to most recently the creditcrunch. When multiple parties perceive the value o a good,service or asset to be di erent, we enter into unsustainableconditions encapsulated by the dreaded B word: a bubble.

Brand ValueToday, the 250 most valuable global brands are worth

$2.197 trillion dollars, which is larger than the GDP o France. (Calculation is rom the 2007 IMF list based on GDPunder purchasing power parity.) Even the worlds top 10 mostvaluable brands exceed the market capitalization o 70 per-cent o U.S. public companies (Booz & Co., 2007). Googlesbrand value makes up 50 percent o its market capitalization.PepsiCo shows a tangible book value o $9.8 billion againsta market value o $108 billion, indicating that investors arebanking on Pepsi, like thousands o brands that o er productsand services to consumers and businesses.

What drives this appreciation in brand value that isrefected in market capitalization? A brand is a promise toits customers. And i brand value is growing, consumers must

be deriving greater value rom the promises companies aremaking to them vis a vis their brands. Yet empirical evidencebased on thousands o brands suggests the value creation thatbrands bring to a companys enterprise value is exaggerated:The nancial markets think brands are worth more than theconsumers who buy them.

Working with pro essors Robert Jacobson and NatalieMizik at The University o Washington and Columbia Busi-ness Schools, we studied consumer perceptions o thousandso brands across 13 years o data collected through BrandAs-set Valuator (BAV), the worlds largest global database onbrands. Because o its scale and longevity, BAV is recognizedas a reliable diagnostic tool or understanding how success ul

brands are built. We have interviewed more than 500,000 cus-tomers in 44 countries across 40,000 brands on more than 70brand metrics since the studys inception. We conduct surveysin more than 40 languages. From Arabic to Zulu, we ask con-sumers how they eel about local, regional and multinationalbrands, media and celebrities. Weve invested almost $115million dollars in our study, and our data tracks back to 1993.

Main Street vs. Wall Street. The brand study ound that,while brand valuations have risen steadily, consumers are sell-ing brands short: Brand awareness is down 20 percent, brandesteem is sliding by 12 percent, perceptions o brand quality

The BrandAsset Valuator (BAV) brand study found

that, while brand valuations have risen steadily, con-

sumers are selling brands short: Brand awareness is

down 20 percent, brand esteem is sliding by 12 per-cent, perceptions of brand quality declined 24 percent,

and trust in brands has eroded by almost 50 percent.

The authors conclude that an entirely new approach to

analyzing a company and managing its brands is need-

ed to stave off the inevitable decline in brand value.


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The Accelerated Decay of BrandsThats precisely whats happening again right now.

Emboldened by the tools o the new digital world, consumer-ism is drastically and pro oundly changing, which is rapidlyaccelerating the decay o brands. Fragmentation, social mediaand digital acceleration are causing a widespread attack onbrand value. Consumers are quicker to punish uninterestingand undi erentiated brands. Today, brand equity is decayingin compressed periods o time.

Brand equity is not the protective insulation it once was.A ter all, brand equity is only what a brand has achieved up

until this point. What consumers are telling us is that past

reputation seems to mean very little. Consumers are atiguedmore quickly with brands that cant adapt and evolve. Theclutter o the marketplace combined with the old models

or brand management that strive to build awareness andreputation are actually back ring in that they are slowing abrands ability to keep pace with a consumer who is moving

aster than their marketing strategies. And the emergence o a new digital consumer only ampli es the d problem:di erentiation in a brand (or lack thereo ).

Brand di erentiation. Today a sea o sameness engul s themarketplace. Consumers have more choice than they knowwhat to do with. Yet theyre emotionally invested in ewerbrands than ever be ore. According to Datamonitor, 58,375new products were introduced worldwide in 2006, more thandouble rom 2002. The report points out that despite the

act that advertising spending was up rom $271 billion in2005 to $285 billion in 2006, 81 percent o consumers couldnot name one o the top 50 new products launched in 2006,an all-time high or lack o recognition and a huge leap up

rom 57 percent in the previous year.(Datamonitor: Sch-neider/Stagnito Communications/IRI Most Memorable NewProduct Launch Survey )

Brands were originally built and sustained on the backs o mass media, repetition and consumer monologue, but media

ragmentation, coupled with the Internet on steroids (e.g.,broadband), enabled low-cost competitors to attack rom anygeography without the need or access to massive capital.Suddenly, all these changes became the catalyst or consumersto morph into di erent creatures.

In act, lets call it Consumerlanda Disneyland-likebroadband- ueled world o limitless consumer potential andendless control. The result is that, with so much access to

content and in ormation, creativity became the currency. Andbrands that dont have it become boorish and mere com-modities in their eyes. Consumerland embraces and demandscreativity. From buying cheap chic in Target to posting

lms on YouTube, consumers have raised their creative expec-tations o brands. Yet most brands exist in state o rational,repetitious and persuasive selling propositions. Without cre-ativity, there is no true di erentiation. Today it takes emotionto di erentiate and be desirable.

Consumers are also losing trust in brands. Because o theparade o Enrons, product recalls, dog ghts, steroids andpolitical scandals, the consumer has had enough already. In

act, consumers now trust each other more than they trust

brands. Media Edge/CIA ound that 76 percent o peoplerely on what others say versus 15 percent on advertising.And 92 percent o consumers now cite word o mouth as thebest source or product and brand in ormation, up rom 67percent in 1977 (Universal McCann study, 2007). No wonderreview sites, such as Digg and Reddit, have become the third-most-common use o the Internet a ter e-mail and search.

Given the patterns o concern emerging in our data, webegan a second study to understand which brands wereoutper orming the marketplace in their ability to creategreater loyalty, pricing power and impact on the nancial

Exhibit 1 Market capitalization of the S&P 500

Exhibit 2 Brands that best their peers

600

500

400

300

200

100

0

1978-2010E

Brand stature(Esteem and knowledge)

New/unfocused

Niche/momentum Leadership

M a s s m a r k e t

Eroding/declined

B r a n

d s t r e n g t h

( E

n e r g

i z e

d d

i f f e

r e n t i a t

i o n

a n

d r

e l e

v a n c e

)

Irrational exuberance

Other intangibles

Brand value

Book value of equity, indexed

M a r k e t c a p

i t a

l i z a t i o n

( i n d

e x

1 0 0

= b

o o

k v a

l u e o

f e q u

i t y

)

1978 1982 1986 1990 1994 1998 2002 2006 2010EYear

100

50

00 50 100

WholeFoods

Internetsearch

iPod

Axe

Deodorants

Geico

Hotels

Insurance

Supermarkets

Co eeW Hotels

Internet commerce

Fast ood

StarbucksGoogle

Target

Subway

OrangeDove

Department stores

UK modile networks

Consumer electronics

Soap

eBay


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per ormance or their rms. In so doing, we uncovered thatconsumers are looking or something more.

A Brand Is a Direction, Not a PlaceBrand di erentiation is integral to business per ormance

by capturing consumer respect and loyalty and ensuring sus-

tainability. However, we identi ed a more power ul orm o di erentiation, which a ects the uture nancial per ormanceo the rm.

We were looking to identi y whether there might be a keycorrelation between various brand attributes and unantici-pated stock returns. We ound that a ew brands were abso-lutely stellar, doing exceedingly well among consumers andadvancing ar ahead o their competitors. Some were leapingout o the category in terms o brand equity. We observedconsumers being captivated by a quality that refected a moreexciting, dynamic and creative experience. Consumers concen-trated their passion, devotion and purchasing power onto anincreasingly smaller port olio o brands simply because they

kept surprising and evolving.In studying these brands, we discovered a key consumer per-ceptual component o brands that was in act highly related tomovements in stock price.

Through urther exploration o these brands with thegreatest sense o momentum in the marketplace, we wereable to quanti y this quality in BAV and named it Energy.This metric o Energy captures the consumers perception o motion and direction. Consumers, in acting like investors,actually seek out brands with momentum and command overnavigating consumers into the uture. To gain a better under-standing o how BAV attributes clustered in energized brands,we used multidimensional scaling and uncovered three percep-

tual territories refecting the ollowing:

Vision: the brands purpose and aspirations, o ten originat-ing rom its leadership, convictions and reputation o thecompany behind the brand

Invention: the most tangible dimension, demonstratingthe brands vision through product/service innovation,design, content and other tactile brand experiences

Dynamism: how the brand expresses its vision in adynamic way in the marketplace to create persona,emotion, advocacy and evangelism through its marketing

and other orms o conversations with consumers

This in turn told us that consumers evaluate a brand romevery vantage point, not just traditional marketing as wethink o it. In order or a brand to create and sustain its realvalue, it cant just be di erent; it has to keep being di erent.Consumers constantly re-evaluate brands and are drawn toones that are continuously innovating and reengaging; thatprovide a sense o direction and creativity.

Modeling o our BAV data demonstrated that Energyplays a signi cant role in protecting and enhancing brand

di erentiation. Then a new, more power ul orm o di eren-

tiation emerged, which we called Energized Di erentiation.It refects a brands questing spirit or continuous changeand evolution. These brands arent just di erentthey keepbeing di erent by utilizing motion, momentum and creativity.Indeed, when we look into our BrandAsset Valuator branddatabase, brands with high levels o Energized Di erentia-tion break away rom their categories. (See Exhibit 2.) BAVmeasures the multiples these brands have over their categoryaverages:

Axe: 3.6 times the level of Energized Differentiation Dove: 1.6 times the pricing power eBay: 3.15 times the emotional commitment

Geico: 2.8 times the momentum Google: 2 times the behavioral commitment iPod: 2.5 times the emotional commitment Orange: 1.6 times the usage and preference Starbucks: 2 times the pricing power Subway: 2.4 times the usage and preference Target: 2.3 times the emotional commitment W Hotels: 1.4 times the pricing power Whole Foods: 2 times the pricing power

Exhibit 3 The brand value equation

$18,000$17,000

$16,000$15,000$14,000$13,000$12,000$11,000$10,000$9,000$8,000$7,000$6,000

Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec01 02 02 03 03 04 04 05 05 06 06 07 07 08 08

The BAV und o the ty energy-gaining brands netted $10,527 (+5%) vs. S&P 50$7,867 (-21%) on $10,000 investment made in 2001.

S&P 500Bex Top 50 Weighted Index

FH2002return

SH2002return

FH2003return

SH2003return

FH2004return

SH2004return

FH2005return

-13.8% -11.1% 10.8% 14.1% 2.6% 6.2% -1.7%

-9.8% -14.0% 18.9% 23.3% 5.9% 9.4% 2.0%

S&P 500

BAV top50 index

SH2005return

FH2006return

SH2006return

FH2007return

SH2007return

FH2008return

SH2008return

4.78% 1.76% 11.66% 6.00% -2.3% -12.8% -29.4%

1.1% 2.2% 11.2% 7.3% 2.9% -11.6% -30.2%

S&P 500

BAV top50 index


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In terms o correlations, when we examined BAV consumerdata (stated responses on which brands they pre er, eel loyalto and would be willing to pay a premium price or, amongother things) we ound that, the more energy a brand has, thegreater its consideration, loyalty, pricing power and brandvalue (as a percentage o rm value). And we observed the

expectations o brand-driven nancial per ormance were inline with consumer perceptions. We modeled a port olio o the 50 top energy-gaining brands each quarter over a ve-yearperiod and ound they cumulatively beat the S&P 500 bymore than 30 percent.

And yet while brands have never been more important,there are ewer important brands. The percentage o brandsin our study that beat the S&P 500 index actually declined by36 percent rom 2002 to 2007. This means a smaller numbero brands now account or a signi cantly greater share o market capitalization. And, conversely, more brands may beovervalued.

Takeaways for ManagementThe CEO manages brand value as integral to businessvalue. Given that one-third o all shareholder value is brandvalue, this growing disconnect should be o urgent concern toCEOs, marketers, analysts and investors. Brands now account

or an increasingly dominant share o total business value,which means that CEOs are making promises to shareholderso uture earnings through their brands. But are those earn-ings going to be there in the uture? Have most companiesproperly discounted the risk on their rising brand values?

Its up to the CEO to assess the level o disconnect betweenthe value o the brand and the Wall Street valuation o theenterprise. How much is their brand value contributing to,

or detracting rom, the value o the company? Then the CEOmust not only rethink the brands role in the rms overallbusiness strategy, but look at marketing in an entirely newcontext.

Marketing is not a cost, but a fduciary responsibilityto shareholders. When uture earnings are in question, itsmore than a brand problem; its a business problem. Most o the discussion surrounding the tectonic shi ts in the digital,consumer and media landscape has been held at the marketingand brand level. By examining these phenomena through thelens o brand value, we aim to draw in managers o all levelsto understand and internalize their role as marketers, brandmanagers and creators o brand (i.e., business) value.

As brand value approaches enterprise value, brand market-ing becomes integral to the strategy o the entire enterprise.The CEO must protect uture earnings by placing marketingat the ore ront o business strategy, treating it not as a cost,but as an essential means o discounting the risk on the rmsrising brand values. We o er a detailed method to organizingthe company around its brand and consumer in our book,The Brand Bubble: The Looming Crisis in Brand Value .

The CEO as brand manager in chie . The CEOs brandnow secures a growing proportion o uture earnings in theeyes o todays investment community. But a brand begins rst

as a promise in the mind o the consumer. Many are ailing tokeep their promises. Far rom an isolated incident, this pattern

exists in thousands o brands in our data, leading us to thinko brand equity in terms o a massive sector o our globaleconomy thats in distress. And yet, unlike other industries,brands are entirely intangible and dependent largely on theshi ting whims o consumer sentiment.

Sounds a lot like shareholders, doesnt it? In order to alignthe enterprise around the needs o the brand, the 21st centuryCEO must become the brand manager in chie . This CEOmust treat consumers and shareholders as investors, both o whom must be continuously courted with active listening and

ast reaction management. They must both jointly see thearthest horizons o the companys (brands) vision, includ-

ing its product and service innovation and command over

the uture. The time is ripe or an entirely new approach toanalyzing a company, managing its brands and optimizing itsuture through a more holistic and orward-looking vision o

marketing. Nothing short o this will stave o the inevitabledecline in brand value. l

John Gerzema is chie insights o cer o Young and Rubicamand author o The Brand Bubble: The Looming Crisis inBrand Value (Jossey-Bass, 2008). He may be reached [email protected].

The BAV Model

The BAV model is constructed around our pillars that helpus identi y the movement and success o a brand:

Energized Differentiation: a brands unique meaning, with motion and direction (relates to margins and culturalcurrency)

Relevance: how appropriate the brand is to you (relateconsideration and trial)

Esteem: how you regard the brand (relates to perceptioo quality and loyalty)

Knowledge: your intimate understanding of the brand(relates to awareness and consumer experience)

The our pillars are paired in two categories: Brand Strength(composed of Energized Differentiation and Relevance) andBrand Stature (composed o Esteem and Knowledge). BrandStrength is a leading indicator that predicts the uture growthvalue o the brand, while Brand Stature is a lagging indicatorthat refects the current operating value o the brand(i.e., what the brand has achieved up until today).

ama - the brand bubble

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