Schlitz, the “Gusto” beer, was a close number two behind Budweiser when the firm decided to cut costs by using a yeast-centered brewing process, which cut the processing time from twelve to four days, and by replacing barley malt with corn syrup.1 Blind taste tests showed that the taste did not change. However, competitors were only too glad to talk about Schlitzes’ efforts to reduce costs. Their suggestion that Schlitz had compromised quality became very real when it turned out that the beer, after sitting on the self, would turn cloudy and lose carbonation. Schlitz returned to its old production method and ran blind taste tests during the Super Bowl to prove the quality was back, but customers had lost confidence in the brand and the thought of finding “gusto” by drinking Schlitz became a joke. The brand damage led to its virtual disappearance from the market and caused the business to lose more than one billion dollars in value. This story, and others like it, shows that even strong brands can be vulnerable to decisions insensitive to the brand promise and customer relationships.
THE ASSET VALUE OF A BRAND
Another approach to demonstrate the asset value of a brand is to directly estimate the value of its equity. There is a logical process that yields an estimate of a brand’s asset value, which can be helpful in demonstrating that brands are indeed assets and in showing how those brand assets are dispersed around the product-markets in which the firm is engaged.
Estimating the value of a brand starts with estimating the value of the product-market business units driven by the brand. The Ford Focus business in the United States, for example, would be evaluated by discounting its future expected earnings flow. The value of tangible assets (using either book or market value) is subtracted. The balance is due to intangible assets like manufacturing skill, people, R&D capability, and brand. These intangible assets are then subjectively allocated to brand and others. The key estimated number is the percent of the impact of the intangible assets that are due to brand power. This estimate can be done by a group of knowledgeable people within the firm working together or by themselves taking into account the business model and any information about the brand in terms of its relative awareness, associations, and customer loyalty. There might be disagreement as to whether a brand’s role is 20 percent or 30 percent but there are rarely arguments about whether it should be 10 percent or 50 percent.
The value of the brand is then aggregated over countries to determine a value for the Ford Focus worldwide and then, finally, aggregated over the other Ford products to get an overall value of the Ford brand. This value can be cross-checked with the market cap of the Ford stock and the percentage of the Ford company sales that is driven by the Ford brand.
The value of brands throughout the world has been estimated annually by Interbrand, Millward Brown, and others for well over a decade. In 2013, there were seven brands valued by Interbrand over $40 billion (Apple, Google, Coca-Cola, IBM, Microsoft, GE, and McDonalds). The one-hundredth most valuable global brand was valued at over $80 million.
Although the estimate of the brand value as a percent of the value of its associated business is not reported, the Interbrand data of 2013 implies that the percentage varies from 10 to 25 percent (for brands like GE, Allianz, Accenture, Caterpillar, Hyundai, and Chevrolet) to 40 to 50 percent (for brands such as Google, Nike, and Disney) to over 60 percent for brands like Jack Daniel’s, Coca-Cola, and Burberry).2 Even 15 percent of the value of a business will usually represent an asset worth building and protecting; when it is much higher, the need to protect the brand-building budget becomes more compelling. A brand’s estimated value can be an important statement about the wisdom and feasibility of creating brand assets.
It is tempting to use this measure to manage brands and brand building, but the reality is that it is too imprecise to play this role. The value will be driven by the stock market, competitor innovations, business strategy, product performance, and market dynamics that may have little to do with brand power and is based on several subjective parameter estimates that involve uncertainties and biases.
Brand value estimates can be worthwhile, however, in providing a frame of reference when developing brand-building programs and budgets. If a brand is worth $500 million, a budget of $5 million for brand building might be challenged as being too low. Or if $400 million of the brand’s value was in Europe and $100 million in the United States, a decision to split evenly the brand-building budget may be questioned. Further, the process can add value by stimulating brand-management teams to think through exactly how their brand is working in the business strategy and what its components are. The insights gained will help enhance the business and brand strategy and the associated brand-building efforts.
PAYOFF FROM BRAND BUILDING PROGRAMS
Another approach to demonstrating brand value is to measure statistically the impact of brand equity changes on stock return, which is the ultimate measure of a long-term return on assets. In two studies I conducted with Professor Robert Jacobson of the University of Washington, we explored this relationship using time series data which included information on accounting-based earnings or return on investment (ROI) and models that sorted out the direction of causation.3 The first data base from EquiTrend involved thirty-three brands representing publically traded firms like American Express, Chrysler, and Exxon; the second database, from Techtel, involved nine high tech firms including Apple, HP, and IBM.
Researchers in finance have shown a strong relationship between ROI changes and stock prices. On average, if ROI go up so, does a stock price. We found in both studies that the impact of increasing brand equity on stock return was nearly as great as ROI, 70 percent as much. Figure 1 presents the results of the EquiTrend study. The figure vividly shows that stock return responds to a large loss or large gain in brand equity, nearly as much as the response to ROI changes. In contrast, advertising, also tested in the study, had no impact on stock return except that which was captured by brand equity.
The brand equity to stock return relationship may be in part caused by the fact that brand equity supports a price premium that contributes to profitability. An analysis of the larger EquiTrend database has shown that brand equity is associated with a premium price. Thus, premium-priced brands like Mercedes, Levi, and Hallmark have substantial brand equity (as measured by perceived quality) advantages over competitors such as Buick, Lee Jeans, and American Greetings.
The high-tech study went on to examine the major brand equity changes that were observed. What causes the generally stable brand equity numbers to change? Some of the major changes were associated with significant product innovations (as opposed to incremental ones). But there was more. Major changes could also be attributed to visible product problems, change in top management, major lawsuit results, and competitor actions or fortunes that were notably successful or unsuccessful. The latter, of course, is usually out of the control of the brand’s firm.
These studies show that when a real change in brand equity occurs, which is unlikely to happen with only advertising or promotions, there will be a substantial and measurable effect on stock return. Such a finding is persuasive evidence that brand equity will affect the real value of the business and the brand-as-asset model is valid.
The EquiTrend Study: Stock Market Reaction to Changes in Brand Equity and ROI
Figure 1
A CONCEPTUAL BUSINESS STRATEGY MODEL
The challenge facing those who would justify investments to build brand assets is similar to that facing those who would invest in any intangible. The three most important assets to most organization are people, information technology, and brands. All are intangible; they do not appear on the balance sheet. All add value to the organization that is
