The danger of a "brand bubble"

In 1841, Charles Mackay wrote his famous book, Extraordinary Popular Delusions and the Madness of Crowds, to describe various marketing phenomena. Of special note was his passage on 'Tulipmania', the madness that resulted from the Dutch aristocracy's craze for tulips which lead to fantastical prices paid by ordinary people. At the height of the hysteria – a few months between 1636 and 1637 – the craze for tulips suddenly withered, leaving thousands s of Holland's most successful businessmen holding worthless assets while the less affluent who had invested in the flower lost entire life savings over a bunch of dried bulbs.

Tulipmania might have been no more than a footnote in Dutch history were it not such a clear example of something that has happened time and time again around the globe over the last several centuries.

Financial busts stemming from the dot-coms, internet equipment manufacturers and subprime mortgages are but a few examples of recent market tumbles after which investors, like the Dutch and their shrivelled bulbs, were left with inordinate losses – continually proving that even the most intelligent analysts and savvy consumers can be every bit as susceptible to selfdeception as giddy flower speculators in clogs.

A bubble is a curious thing. In hindsight, it seems so obvious and predictable, while anyone caught up in the middle of one is blind to its potential for disaster. In all bubbles, one constant always predicates a collapse. That is the optimistic assumption that someone else will always be willing to buy what you are selling, regardless of how irrationally high the price is relative to the bare facts of the product's underlying value.

THE IMPENDING BRAND BUBBLE

Now, another bubble is hiding in our economy. This bubble represents $4 trillion in S&P market capitalisation alone. It's twice the size of the subprime mortgage market and accounts for over one third of all shareholder value. Credible evidence suggests that financial markets think brands are worth more than do the consumers who buy them. The constantly rising valuation of major brands is creating a brand bubble, one that could erase large portions of intangible value in firms and send a shockwave through the global economy.

Figure 1 illustrates the typical value exchange between brands and consumers. In essence, the multiples that markets place on brand value overstate actual consumer sentiment, so the value creation that brands bring is greatly exaggerated. That is, Wall Street is long on brands; consumers are short on brands.

Fissures are forming in the pillars of brand equity. This conclusion is based on our research of 15 years of brand and financial data from Y&R's BrandAsset Valuator (BAV), the world's largest study of consumer attitudes and perceptions on brands. Working with professors from several leading business schools, we've identified a growing divergence between brand valuation and brand speculation. Our data indicates that investors are irrationally over-valuing brands, and that if leading companies don't take steps to change their approach, more than a few of them might soon experience dramatic declines in market value.

Of course, this is not to suggest that some stellar brands are not genuinely outperforming the market and setting new standards in customer loyalty and financial performance. But in most cases, these are precisely the brands that serve as examples of what other companies must do to inject value back into their own brands. These are the brands consumers love, the ones that drive a company's stock beyond the estimates of financial experts.

The problem is these stellar brands are becoming fewer in number. In today's changing consumer climate, exceptional brands are just that – exceptions. Most of the brands lining our supermarket shelves, hanging from department store racks or touting their superiority on television are experiencing a rapid diminution of perceived value.

This warning about the prices of assets such as brands being in decline is, without doubt, contrary to what most people believe. Just as with equities and property in past bubbles, the market value of brands have been consistently rising for decades. Even in today's recessionary climate, brand valuations reports continue to proclaim consistently rising brand values each year.

How then is a brand value collapse possible? Thousands of brands have experienced large and long-term successes driving their corporate stock in a continuous upward pattern, enriching executives and investors alike. What exactly is the nature of this bubble? Are we talking about a simple market correction that will be forgotten in a few months or a year? And, if that is so, then why bother with it?

In reality, this is not a simple market correction. Our research foretells a significant loss of value for many brands that will jolt business and investors alike. Markets, being about expectations, have pushed brand values to unsustainable levels, where the earnings potential imputed to thousands of brands far outstrips their value to the consumer. These expected future cash flows that brands are expected to account for have grown to become a dominant force in driving total business value. But their future value is unsustainable when we uncover and analyse the true state of most brands today.

As CEOs search for future pathways to growth, their brands now account for a growing proportion of total enterprise value. This means their brands are making bigger promises of future earnings. So when future earnings are in question, it's more than a brand problem; it's a business problem.

Most of the discussion surrounding the tectonic shifts in the digital, consumer and media landscapes has been held at the marketing and brand level. By examining these phenomena through the lens of brand value, we can see how new consumer behaviours are causing widespread perceptual damage to the values of all but a handful of brands. Let's begin by examining the origins of the brand bubble.

THE WORTH OF AN ENTERPRISE IN INTANGIBLE VALUE

Every bubble presents an appearance of value that is eventually contradicted by reality. In the case of the brand bubble, it begins with the value business places on intangibles. In the last five decades, the intangible value of firms has formed a larger and larger proportion of overall enterprise value. In 2006, Fortune magazine conducted a survey indicating that 72% of the Dow Jones Market Cap is now intangible. Accenture estimated that intangibles accounted for almost 70% of the value of the S&P 500 in 2007, up from 20% in 1980. Brand Finance plc stated that the market-to-book ratio (market capitalisation divided by book value) of the S&P 500 grew from around three in the early 1990s to nearly 6.6 prior to the dot-com bust, dropping back to around 5.1 today, a growth indicative of a rise in intangible value (see Figure 2).

BRANDS AS DRIVERS OF INTANGIBLE VALUE

While estimates vary based on sector and company, David Haigh also found that in some cases, brand value constituted the bulk of enterprise value. Nike's brand value accounted for 84% of its total company value. Prada's brand represented 73%. In 2007 alone, the aggregate value of the brands in the BrandZ Top 100 report increased by 21% to $1.94 trillion, more than double the increase of the preceding year (see Figure 3).

SNAP, CRACKLE AND POP GOES BRAND VALUE

But as with Tulipmania, the belief that brands are worth so much is really only as sound as the credulity of the Wall Street investors, pundits and executives who are driving up market prices. Beneath their belief is another story.

The reality shows a precipitous decline in consumer respect and loyalty for brands. While brand value has been increasing, brand components that impact current performance have been decreasing. Lost in the discussion of new media, channel fragmentation and the digitisation of the world is the fact that the changing consumer landscape has hollowed out brand value.

To illustrate the basis for our prediction, we need to present the differences in brand metrics that drive intangible value and stock price versus those that drive current performance and sales. While these are both measures of the success of brands, they are based on different methods of assessment, which in turn lead to different results in evaluating a brand's future potential and sustainability. When the two measures correspondingly rise, a brand is achieving the results its management is working toward – growth in asset value and sales. But when the two measures don't jibe, there's something rotten in Brandville.

Since 1993 we've conducted extensive statistical and attitudinal research through our proprietary research tool, BrandAsset® Valuator (BAV). Working with leading academics and undertaking enormous waves of consumer studies, we've produced one of the most stable financial models for valuing brands and branded businesses in the world. Y&R has invested more than $113 million to track 40,000 brands across 44 countries on more than 75 brand metrics.

Collectively, the information we obtain forms the world's most comprehensive and longest-running global database on brands. In 2004, we were examining the correlations between changes in various brand measures in BAV and changes in the future financial performance of companies. At the time, we were trying to measure how brands impact the current and future financial performance of their enterprises.

Much as meteorologists analyse the various forces of nature to assess which combination causes hurricanes, we began analysing many consumer variables based on our years of BAV data to see if we could tell which group of brand attributes came closest to explaining unanticipated changes in stock price, especially upward valuations.

We mapped 48 different brand attribute scores in BAV against the brands' stock prices, trying to pinpoint which combination of attributes created the greatest market movement. But while doing that research, we discovered an enormous anomaly, a huge gap in valuations.

While Wall Street has been bidding brand values ever higher, consumer perceptions toward brands are substantially eroding. To our astonishment, as we were not even looking for it, we found that the consumer ratings on four key classic attitudes toward brands – awareness, trust, regard and esteem – were tumbling!

According to the data, consumer attitudes toward brands were in double-digit decline. And this erosion did not pertain to just a few brands, but to thousands. We saw large numbers of well-respected brands that had, on average, lower scores on these metrics – results low enough that marketers would consider them indicative of'commoditised attitudinal patterns.'

This discrepancy was enormously puzzling. We couldn't understand how brand values could be rising during this entire period when the data showed sharply falling consumer perceptions. If brand values were rising, why weren't the traditional metrics of brand equity as seen by consumers rising with them? The sane marketing professional would expect a positive correlation between brand value and the classic metrics of performance and sales. Instead, we found a significant negative correlation, as illustrated in Figure 4.

This inconsistency became a burning incentive for our analysts to look around to confirm if our measurements and conclusions were sound. Sure enough, we found other market researchers around the world noting some early signs of the same brand meltdown. The Henley Centre highlighted an erosion of big brands beginning in 1999 in the United Kingdom. In their annual study of the 17 largest, most iconic British brands, 16 showed a decline in consumer trust.

In July 2008, we found further evidence of the bubble when we examined the highest-performing brands in BAV on the basis of their contribution to intangible value creation. In that analysis, we found an increasingly smaller number of brands accounting for a disproportionate share of the value being created.

While the aggregate contribution of brands to intangible value creation was once distributed fairly evenly across our database, now it's becoming more like the 80/20 rule: Consumers are reserving their devotion and dollars for a basket of truly 'irresistible' brands, leaving the rest to fight for existence on a hostile terrain of promotion and discounting. Fewer and fewer brands are actually creating the business value, leaving more brands on the bubble.

So that while Wall Street is happily running away with the idea that all or most brands are increasingly valuable, the underlying facts show that most brands are simply riding along, relying on a dwindling number of exemplary brands to prop up their respective values. Their rosy forecasts sound like the makings of another Tulipmania.

MARKETING'S PERFECT STORM

The big question, of course, is what's behind this brand bubble? What explains why brands have lost consumers' trust and respect? What are brand marketers supposed to do about the falling metrics of performance and sales, the most meaningful signs that predict the future of their brands?

Needless to say, we have pondered these questions long and hard. For now, we distil our analysis to just three fundamental causes that we see as collectively diminishing consumer desire for brands. These causes are singular but interlocking, with each one intensifying the others, creating a bad cocktail that consumers are no longer interested in drinking.

Excess Capacity

The world is teeming with brands, and consumers are having a hard time assessing the differences among them. The average supermarket today holds 30,000 distinct items, almost three times as many as in 1991. Any way you view it, there's a glut of brands.

There's more of everything. More channels. More technology. More messages. More devices. More networks. The effect of excess capacity in media fragmentation, multi-channel distribution and ways to personalise content has resulted in more types of consumer behaviours, creating less differentiation among the waves of products on the market. Brands have blurred into a sea of sameness.

An Ernst & Young study of new brands showed over 80% failing due to lack of differentiation. Jack Trout and Kevin Clancy, writing for Harvard Business Review, said that only two categories of brands were becoming more distinct (soft drinks and soap), but 40 other categories are homogenising, as the brands within them become indistinguishable.

Lack of Creativity

Why do so many brands exist? One good reason is it doesn't take much today to launch a me-too brand. Technology has democratised industry, making it easy for anyone to imitate just about any product or service within weeks and market to millions. The internet enables distribution costs to move toward zero. And many of the products being created today are more intellectual-capital-intensive than physicalcapital- intensive.

But it's not just a matter of more products – more of them are better made. Personal computing power is ten times faster in only five years. You can buy a $59 cocktail dress designed by Madonna at H&M. Muji can fill your apartment with incomparable style, at low prices. Mobile phones in Japan, Korea and Scandinavia have so much functionality they practically make love to you. Meanwhile, the shift in power over two decades to the retailer has eroded manufacturer margins and cut investments in innovation. Real creativity is the only way to break through the clutter.

Loss of Trust

The facts show that the amount of trust resting on a brand today is a ghost of what it was ten years ago. In 1997, the majority of brands (52%) enjoyed exceedingly high levels of consumer trust. But society's faith in institutions, corporations and leaders has been severely rocked with scandals and mistrust. One by one, scandal after scandal has knocked corporate credibility, leaving few brands immune.

By 2006, consumers voted only 25% of brands as trustworthy, halving the number of trusted brands in less than one decade (Figure 5).

Consumers also think brands are more disposable due to technology, mergers and acquisitions. So many brand disappearances have occurred that consumers now actively contemplate the concept of 'permanence' in a brand. Why should they feel a brand is going to be there for them in the future when corporations eradicate brands or change how they operate in the name of corporate synergies?

The brand marketer's most cherished tool, advertising, has also taken a big hit in consumer trust. Instead of traditional advertising, consumers are increasingly turning to non-traditional sources of information, such as search engines and peer-to-peer interactions. This information, collected from their social networks and ratings and reviews sites, is often more influential than the millions pumped into traditional marketing.

ESCAPING THE BUBBLE

Now you know why we believe there's a bubble. On the one hand, Wall Street, investors and brand executives believe that brands have limitless potential that will continue to drive already burgeoning enterprise and market values. On the other, consumers are sending out signals that they are no longer enamoured of many of our brands and are not committed to future loyalty.

Where does this leave those of us who are responsible for marketing and managing brands? How can brands build sustainable long-term value to bring them back into alignment with Wall Street's expectations and valuations?

If marketing's role is to create value for the consumer, many marketers have forgotten the definition of marketing. They have replaced the word 'value' with 'sales'. A brand is, after all, a promise. A brand offers a contract that's immensely emotional and personal. A brand reinforces our identity and self-worth. It offers a more opportunistic way to see our world.

So we now have a situation where brands which comprise a third of a company's value are making promises of future earnings to shareholders, but the promises brands make to consumers are now in doubt. Any bubble inevitably bursts. And all bubbles leave winners as well as losers: in this case the winners will be strongly differentiated brands that deliver real value to consumers.

ABOUT THE AUTHOR

John Gerzema is Chief Insights Officer, Young & Rubicam.

[email protected]

Edward Lebar runs Y&R's BrandAsset® Consulting.

[email protected]

 

Figure 1: The Nature Of The Brand Bubble

Figure 2: Intangible Assets Are Making Up A Larger Proportion Of Enterprise Value

Figure 3: Market Capitalisation Of The S&P500 (1978–2010E)

Figure 4: The 'valuation gap' according to consumers

Figure 5: Percentage Of Trustworthy Brands Over Time