Since delivering my presentation, I have been able to sit back and listen to what the other presenters have to say at Conexion Internacional here in Mexico City. Some common themes have emerged across our presentations, but no one seems to have realized that this convergence could fortell the death of the very brands with which we are all so concerned.

Brand marketers might want to consider the long and interesting history of Mexico City. Founded as Mexico-Tenochtitlan in the 1300s by the Aztecs, the city grew rapidly to become the capital of a sophisticated and growing empire. But the siege of  Spanish conquistador Hernán Cortés  in 1521 destroyed the city, and little remains to testify to its glorious past. It’s a classic example of a clash between two cultures, in which might, not right, prevailed. (For information on the Aztec empire, click here.)

Why might brand marketers want to consider the fate of the Mexica at the hands of the Spanish conquistadors? Because we have a similar clash of cultures going on today. Only this time, the clash is between brand marketers and the financial folks who believe that marketing activities are a cost rather than an investment. And if brand marketers lose out, they may not be the only unhappy people out there. A lot of investors could end up seeing their portfolios decimated in a new “Black Monday.”

What is my justification for  such a bold assertion?

My fellow presenter, Raj Srivastava, executive director at the Zyman Institute of Brand Science, pointed out that the market value of an average company is about four times its book value. He then mentioned a few companies which deviate from this rule. Coca-Cola, for example, has a market value seven times higher than the accountants think the company is worth. So where does that intangible value come from?

Raj suggested that it could come from three possible sources: human capital, intellectual property and brands.

Brands, Raj proposed, add value well beyond the short-term growth in revenue. They help to reduce volatility for established goods and services by reducing churn, increasing a company’s leverage with retailers and resellers, and ensuring faster market penetration. Coca-Cola’s high valuation is due, in large part, to the fact that it has the brand and distribution system to capitalize on growth in the emerging markets. It is certainly not based on returns from the United States, where the brand is locked in a battle for share with Pepsi and sells much of its volume on deal. Raj use a slide produced by Millward Brown Optimor to prove that the longer-term value of brands is recognized by Wall Street (if not by companies’ own financial teams) in higher share prices over the long-term.

After doing a great job of demonstrating that brands create value, Raj pointed out that CMOs and CEOs value different metrics of success. CMOs are more likely to think in terms of revenue growth, while CEOs think in terms of bottom line profit. Raj encouraged the audience to go beyond the familiar metrics of revenue and share growth, and engage with finance and management on their own terms of profitability, cash flow and net present value. 

What happens if we fail to convince management that brands represent investments in long-term value, and budgets for brand building are cut? Could this become a trend whereby brands start to weaken – not just individually, but en masse? What happens to that intangible value that Raj ascribes to them–does that weaken too? Could shareholders wake up one day to find that their confidence in brands has been misplaced, because the companies they have invested in have not only underestimated the value of their own brands, but have also starved them of marketing support? Sounds like Black Monday, Round Two to me.

Is there any evidence that the ability of brands to create and sustain value might be weakening? Pulling together some themes from two days’ worth of presentations, I think there might be–if not now, then in future.

In his presentation Raj also mentioned the following:

1. The average tenure of a Chief Marketing Officer is roughly half that of the typical Chief Executive Officer. On average, CMOs have less than two years to prove that their activities are worthwhile, and even that time horizon is shrinking. Therefore, it seems unlikely that their focus is going to shift from short-term gains to long-term investment any time soon.
2. Consumers in developed markets are less brand loyal than those in emerging markets. Based on analysis of BRANDZ™ data, I come to the same conclusion that Raj does. People in developed markets are less loyal to brands and more likely to seek the best price than the best brand. Initially people may choose between a set of accepted brands on the basis of price, but this is the first step toward buying generic and store brands. In large part, marketers in developed markets have failed to sustain consumers’ belief in the value of brands – in part because brands have become reliant on price promotion to drive volume.
3. When companies cut back on above-the-line investment in brands, they risk losing sales in the long-term. Raj supported this assertion with a case study which concluded “When we lose share it goes to the competition. They may not be ready to give it back when you start to advertise again.” He then turned a negative into a positive by citing research that demonstrated that the best time to grow share was when other brands were cutting back. Overall, however, his message was clear. Brands have a value only as long as you treat marketing spend as an investment, not a cost.

So what are the threats to that investment?

First, we have the failure to recognize that brands contribute to the longer-term profitability of a company by acting as a multiplier to distribution and sales activities. Unless we can turn our attention to what matters to the finance team, we will continue to see marketing expenditures treated as a cost not an investment. And what happens to costs? They get cut.

Second, we have the continued shift toward direct response and point-of-sale activity at the expense of activities to build brand preference. My own presentation highlighted the fact that the vast majority of consumers believe that their brand choice is determined more by opinions they hold before they begin shopping than by things they encounter during the shopping process. That said, few research tools provide a holistic understanding of the role played by different touchpoints in creating demand for a brand, or activating that demand at the point of purchase. Without that understanding, the last touchpoint on the path to purchase is all too likely to get credit for the sale. The effects of direct response marketing, point-of-sale activity and price promotion are readily measured, and too little thought is given to how many consumers would have bought the same brand irrespective of these activities.

That’s the situation today, but if Irwin Gotlieb, CEO of GroupM, is to be believed, things are only going to get worse. His presentation was a well-reasoned look at the future of media. I loved the fact that he asserted that TV was not dead and that all new media concepts “have to pass the tests of consumer acceptance and satisfaction.” I could not agree more. He did, however, also state that in future, we will see direct targeting enabled by technology, as when, for instance, an individual’s search has provided “a direct indication of interest.” He then suggested that we might see the battle for sales move away from the real shelf space to a virtual one. If I interpret him correctly, creating brand preference will become irrelevant and all will hang on how well you execute your incentives at the point-of-purchase.

If we have done a good job of training consumers to be price sensitive today, what might this “sense and respond” world of the future mean for brands? If consumers learn which behaviors will get them the best price, then I think brand preference and loyalty will become a thing of the past–particularly since increased price and promotion activity will hide eroding base sales in a tumult of wildly fluctuating sales volume. Bye-bye, brand value, hallo, lower margins and increased volatility. And bang goes that intangible value.

How do you like my doomsday scenario? Are brand marketers destined to disappear like the Aztec civilization? Or will something else happen? Let me know.

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