The future of brands

19th December 2011

Why was McDonalds worth nearly three times  more than a run of the mill burger bar chain in 2002?  Because it was sprinkled copiously with brand value.  What was the difference between Coca-Cola and Pepsi – let alone a supermarket label fizzy drink?  Again, brand value. Intangible but real. 

The £450m acquisition this week by the London Stock Exchange of the 50% stake it did not already own in the FTSE series of indexes from Financial Times owner Pearson was criticised by some. They said the Exchange paid too much.  A defence?  The worth of the FTSE branding (which will remain) that has been built up over decades. 

But compared with a decade or so ago, we are in a different brand world where the equity value placed on a name has largely been replaced by "brand advocacy". The theory of Brand Advocacy focuses on a person who talks favourably about a brand or product, and then passes on positive word-of-mouth (WOM) messages about the brand to other people. The customer now creates the brand rather than the brand bringing in the customer. 

It is more difficult for investors to value this than to put a money sign on the old brand value model where shareholders and analysts thought they could bottle the worth of the name on the label and stick a price on it. Takeovers often depended on acquiring "brands"  – sometimes names in decline which, managed well, could be revived or at least turn a profit such as out of favour foodstuffs or life insurance companies with little life left.

The brand value would appear somewhere in the accounts as an intangible item – but still one that was vital to investors, especially in fast moving consumer goods. 

Brand values can still attract attention.  Earlier this year The Guardian reported that Coca-Cola's star was waning while technology firms are moving up the label approval charts.

David Haigh, chief executive of Brand Finance, which compiled the list said: "From a global perspective, five of the top 10 largest growers are technology-related companies, reinforcing the importance of embracing technological innovation to give a seamless, value-enhancing brand experience."  Haigh's firm works out the value of the brands by calculating how much it would in effect cost to rent the name, and takes into account sales forecasts.

But while a brand may still have a value, it has effectively disappeared from the balance sheet. 

Investors have realised that there is nothing magic about name. It can be unbuilt as quickly as it is built – take myspace or Friends Reunited as examples in social media. And rebranding can bring derision – the Royal Mail will never live down the Consignia episode from ten years ago.

Brands now have a chicken and egg quality. Take computer maker Dell. What came first – the name or the machine?  Are the machines well regarded because of the name or because the management of the company has focused on quality?  It's the William Shakespeare name of the rose question.

The brand value argument is even more confusing when it comes to individuals.  It helps to be female and it helps to have an unusual name – Britney, Nigella, Oprah, Rihanna, Beyonce. These are brands that can extend to fashion or advice or perfume.

But investors should tread wary of the one person brand.  Last year AOLpaid $30 million to buy the TechCrunch blog, in large part for its outspoken, controversial and well-connected founder, Michael Arrington.  But it did not work out.  According to the New York Times he turned out to be a little too controversial for AOL. They parted company in September.  Now the TechCrunch site is bereft of its main man  – suggesting AOL overpaid for a firm whose major asset could (and did) walk out of the door.

So if the concept of brand value is out-moded, what should investors look for?  They should aim to find both a high level of brand advocacy and a firm's ability to react and profit from it.

A recent New York Times article suggests that firms are still spending a fortune on conventional advertising and marketing but only a fraction on social media. Investors should look for companies that are changing that paradigm.

A paper from management consultants Deloitte talks of the "early days of a profound transformation in interacting with consumers."

Consumers have increasing knowledge of products both through technical and peer-to-peer reviews while social networking allows customers both to praise and condemn.  The day of the one to one interaction in store – the "expert" steering the prospective purchaser – are over.

Many companies believe that all they get from social media is a string of negative comments. If so, they need to ask why but also what they can do to encourage positive brand advocacy. The trick is to find consumers who are willing to be brand advocates, who will recommend and share. .

Some phone companies in the UK, for instance, now send small gifts (usually vouchers) to customers who tweet or Facebook favourably.  It's a thank you,  which costs little – especially compared to the price of a TV spot.  We tend to disbelieve advertising but embrace reviews from other consumers.

And what happens to firms which ignore all this?  In mid 2009, United Airlines annoyed a musician customer. He wrote a song about it which went global via YouTube. The result? The airline's stock market value dropped $180m and the story still smarts with it today.

Negative advocates are more than ever empowered.  No company is perfect – even the sainted John Lewis can make mistakes.  But in these days where consumers can enjoy the same publicity as big concerns, it's the way of dealing with problems that counts.  Firms can turn knockers into positive advocates if they have the right strategy.

Investors who note a rapid and respectful response to difficulties reported on social media can have more confidence in a company than in one that tries to sweep these problems under the corporate carpet.

More from Mindful Money:

How healthy is your news diet?

Does ‘crowdfunding' stack up for investors?

The Overton Window – How does a radical opinion go mainstream?

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