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GrowingShareholderValuethroughBrandsGordonInstituteofBusinessScienceApril2,20032©BrandEconomics2002TheimportanceofintangiblesMarkettoBookRatiofortheS&P500-1991to20022.4x2.7x3.0x3.0x3.3x3.8x4.7x5.5x6.6x6.6x5.0x0x1x2x3x4x5x6x7x199119921993199419951996199719981999200020014.5x20023©BrandEconomics2002TheMarketingParadoxManyseniormanagershavenoticedaparadoxinhowfirmsperceivemarketing.Ontheonehand,everychiefexecutiveandmissionstatementputsmarketingattheverytopoftheagenda…Atthesametime,marketingprofessionals,marketingdepartmentsandmarketingeducationarenothighlyregarded…Theparadoxwillneverberesolveduntilmarketingprofessionalsjustifymarketingstrategiesinrelevantfinancialterms.”PeterDoyle-Prefaceto“ValueBasedMarketing”(2000)“4©BrandEconomics2002TheValuePerspectiveMarketingandfinanceusetheterm“value”tomeandifferentthings...ConsumerbenefitPricepaidMarketingPricereceivedEconomiccostFinance5©BrandEconomics2002TheValuePerspectiveBusinesssuccessrequiresunderstandinghowtodelivercustomervaluethatexceedsitseconomiccost:ConsumerbenefitPricePriceEconomiccostConsumerbenefitEconomiccost=X6©BrandEconomics2002CreateShareholderValuethroughBrandsMeasurebrandhealthDetermineimpactonvaluePrioritizebrandinvestmentsMonitorbrand&businessperformanceCommunicategrowthplans&results7©BrandEconomics2002WhatisBrandValue?Definition:Thecumulativevalueofallthecashflowsthebrandisexpectedtogenerate,discountedtoreflectriskofrealizingforecastProblem:Noneofthesevariablesaredirectlymeasurable.Otherwell-knownapproachesusesubjectiveestimatesoftheprincipalparameters.Oursolution:Acompletelydifferentapproachusingobservedmarketdataforbrandhealthandbusinessperformanceasinputstoobjectiveeconomicmodel,explainingtheportionofbrandowner’smarketvaluedrivenbybrandassets.8©BrandEconomics2002RelativebrandstrengthBrandessence&imageryEVA®financialmanagementIndustryeconomicanalysisDefinitive,financiallygroundedinformationforbetterbranddecisionsBrandEconomicsinaNutshell9©BrandEconomics2002WhatMakesOurApproachDifferent?ObjectiveActionableForward-Looking10©BrandEconomics2002BrandAsset®Valuator,TheWorld’sLargestBrandDatabaseOver300,000consumers20,000brands145studies40countries10years56differentbrandmetricsCommonmethodologyHighlyacknowledgedCanadaUnitedStatesBrazilMexicoVenezuelaColombiaChileSouthAfricaChinaAustraliaJapanEuropeRussiaTaiwanPhilippinesMalaysiaIndonesiaIndiaArgentina11©BrandEconomics2002KnowledgeAdeepunderstandingofthebrand.RelatestooverallcustomerexperienceHowwellregardedthebrandis.RelatestoitsdeliveryonpromiseEsteemThebrand’suniquepointsofdifference.RelatestopremiummarginsDifferentiationRelevanceHowappropriatethebrandistoyou.RelatestomarketpenetrationCharacterizingValuableBrands:TheFourPillarsofBrandHealth12©BrandEconomics2002BRANDSTRENGTH(Differentiation&Relevance)BRANDSTATURE(Esteem&Knowledge)LowHighLowHighChartingBrandDevelopmentNewMomentumLeadershipDecliningEroded13©BrandEconomics2002HowDoOurBrandMeasuresRelatetoValue?14©BrandEconomics2002IntangibleValue&ThePowerGridIntangiblevaluemultiple*increasesasthestrengthofthecompany’sbrandimproves.Themultipledeclinessharplyasbrandstrengtherodes(usuallyreflectingalossofdifferentiation)0BRANDSTATURE10080604020010080604020BRANDSTRENGTH1.4x2.5x1.9x0.9x0.7xDatamodelingusing400observationsforUSmonobrandcompanies1993-2001*Intangiblevaluemultipleisthemarketvalueofacompanyminusitstangiblecapital,standardizedforsizebyannualsales15©BrandEconomics2002Measuresofoperatingperformancerarelyexplainmorethan50%ofmarketvaluations.Thisisnotsurprising,sinceforward-lookingstockpricesreflectinvestorexpectationsforfutureperformance.ExplainingStockMarketValuationsR2=0.500.000.501.001.502.002.503.003.500%2%4%6%8%10%12%14%16%18%OperatingMeasuresofPerformanceMarketValueMultiple0.000.501.001.502.002.503.003.500.000.200.400.600.801.00BrandHealth:Differentiation,RelevanceMarketValueMultipleR2=0.30to0.60Growthexpectationsderivefromcompetitiveadvantagesembodiedinintangibleassets,includingbrands.Ourmeasuresofbrandhealthaloneexplainanywherefrom30%to60%ofmarketvaluations.16©BrandEconomics20022.1x3.5x3.1xH&RBlock1.7x3.7x2.3x3.3x2.9x2.1x2.3x1.9x4.2x0.00.20.40.60.81.01.21.41.60%5%10%15%20%25%30%35%ReturnonCapital(3yr.trailingavg.)BrandStrength5.3xMarket/Bookvaluemultiple=2xMarket/Bookvaluemultiple=3xMarket/Bookvaluemultiple=4xMarket/Bookvaluemultiple=5xAmericanExpressBusinessValueisDrivenbyBrandStrength&OperatingPerformanceR2=0.80FinancialServicesSector200117©BrandEconomics2002PremiumMarginPotentialMarketSizeFutureValue=PositiveEconomicReturnPotentialinvestmentxBrandStrength=DifferentiationRelevancexHowBrandsCreateValue18©BrandEconomics2002Evidence:ChangesinDifferentiationDriveOperatingProfitsandMarginsIngoodtimes(‘97to‘99)…andinbad(‘99to‘01)DifferentiationMargin11%Margin8%Margin7%Margin5%Profit+35%Profit+23%Profit-4%Profit-24%19©BrandEconomics2002RelevanceRelevanceCreditCards00.511.522.533.540510152025303540HHPenetrationCoffee00.511.522.533.540.005.0010.0015.0020.0025.0030.0035.00HHPenetrationRelevanceChocolateBarsHHPenetration00.511.522.533.544.