In my last post, I explored the factors that might cause brands to rise in the 2009 BrandZ Top 100 Most Valuable Brands ranking. Now I want to examine factors that might cause brands to fall compared to last year. Again, while the full results are embargoed until Wednesday April 29, I think there are some general principles that will help identify likely losers.
The BrandZ Top 100 Most Valuable Brands ranking, which identifies the world’s most valuable brands in terms of dollar value, is the first and only ranking that combines solid consumer research with publicly available financial data. There are three steps to creating the valuations used in the BrandZ ranking:
1. Identify and allocate out intangible earnings to brands
Tangible assets such as property and equipment are separated from intangible assets, which include brand and other types of intellectual property. The total intangible value is then allocated to each brand by country of operation.
2. Determine the Brand Contribution
We calculate the degree to which each brand derives sales from people who have a strong emotional relationship with the brand. Critical to this element of the analysis is the use of BrandZ brand equity data. Price-sensitive consumers are factored out using this calculation, as are earnings due to “structural” factors that create barriers to switching.
3. Discount future earnings back to net present value, including a measurement of brand risk
Traditional financial measures of risk are combined with the consumer strength and growth potential measured by BrandZ. This calculation yields two metrics: a discount rate and a corresponding multiple that we call Brand Momentum. Brand Momentum is an index of a brand’s short-term growth rate relative to the average short-term growth rate of competitive brands.
Based on this summary, it should be clear that the major determinant of a brand’s valuation will be the size of its business base. Brands like GE, Microsoft and IBM are vast businesses that derive a relatively small proportion of their value from their brand. However, the sheer scale and diversity of these enterprises (all banded together under a common brand name) helped ensure their position in last year’s BrandZ Top Ten. By contrast, brands like Coca-Cola, Apple and MacDonald’s are smaller in scale, but they ranked alongside the bigger businesses thanks to the strength of their brands. A higher proportion of their valuation rests on the intangible earnings related to their brand.
So which of the two basic factors will drive overall success or failure? I think the answer is obvious. If you do not have a strong business model, then your chances of having a strong brand (in the long-term) are minimal. A strong brand can insulate a business in bad times and in the face of competition, but it cannot make up for an inefficient supply chain, ineffective distribution, or a poor or out-dated product.
On this note, I was struck by the veracity of the post by Don Sull titled, “Five myths about business failure in a downturn.” Don’s central theme is that most companies that suffer during recessionary times are actually reaping the harvest of seeds of failure planted long before the downturn occurred. In countering the myth that the downturn is the cause of most company’s problems, he states, “Instead the downturn reveals (and aggravates) fundamental flaws in their business model.” He then goes on to point out that most companies fail slowly. The origins of their demise are apparent long before they actually disappear. The same is true of brands. The brands that we often refer to as “Fading Stars” can linger on a long time before they are either revived or succumb to more innovative competition.
In his post, Don mentions the automakers, and particularly GM, as companies that have been declining for decades. With almost all car brands hit hard by the recession, there is no prize for guessing that Chevrolet and Ford will probably drop in the BrandZ ranking, but what about the other brands? Which banks will rise or fall? What about retailers and mobile phone makers, who have also been hit hard over the last year? Please share your suggestions.
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August 29th, 2009 at 1:19 am
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