ADS, BRANDS AND BEAN COUNTERS: The value of a brand can now be measured in hard cash terms. In an extract from the new edition of Excellence in Advertising, Leslie Butterfield says ad agencies should view themselves as partners working to enhance corporat

It was Oscar Wilde who said that a cynic is someone who knows the price of everything but the value of nothing. He was not talking about finance directors of marketing companies - and indeed this would have been an uncharitable observation. But he might have been talking about brands, and expenditure on them.

It was Oscar Wilde who said that a cynic is someone who knows the

price of everything but the value of nothing. He was not talking about

finance directors of marketing companies - and indeed this would have

been an uncharitable observation. But he might have been talking about

brands, and expenditure on them.

Because while in business one generally talks about the value of assets

(rather than their price), it is only relatively recently that we have

started to talk about brands as assets.

But we should, and until we do, many people elsewhere in those

organisations will continue to view marketing and advertising

expenditure in support of those assets as a cost rather than an

investment. Yet an investment is what advertising expenditure is, and

what it should be seen as.

This is true today more than ever for two reasons. First, because brands

represent trust, and trust is the precondition to loyalty. Ultimately,

it is loyalty that delivers sustainable income to brand owners.

’Trust’ may seem a strange word. Unless, that is, you have read the 1998

Henley Centre research that places brands like Kellogg’s, Heinz and

Sainsbury’s ahead of the police, the Church and Parliament in people’s

’trust’ league.

It’s not an accident that those brands also have a consistent history of

quality advertising support. They’ve earned their trust - and it will

stand them in good stead for years to come.

The second reason is that brands are valuable. If anyone is in any doubt

they need only do two things.

First, look at the extent to which the market capitalisation of branded

goods companies exceeds their tangible asset value. For Cadbury

Schweppes, the excess of market capitalisation over tangibles totals

some pounds 1.5 billion (+33 per cent), for Sainsbury’s it’s pounds 2

billion (+55 per cent) and for Scottish and Newcastle Breweries a

whopping pounds 3.5 billion (+158 per cent).

Second, look at what acquisitive companies are prepared to pay for


Nestle paid pounds 2.8 billion for Rowntree, five times its book value,

for brands that included Kit Kat and Polo, both of which have

subsequently been exploited and exported to their fullest potential.

From December 1998, the Accounting Standards Board’s financial reporting

standards 10 and 11 came into effect, requiring for the first time that

the value of acquired brands be included in a company’s accounts.

Finally, analysts and shareholders will be able to judge for themselves

the real value of a company’s brand assets.

Advertising comes and goes but brands live on. And that’s because it is

brands rather than just their advertising that deliver sustainable

long-term value to clients’ businesses. But is this appreciated beyond

the advertising world and is the marketing contribution to this value

recognised? I suspect the answers would be ’partially’ and


In 1997 the Institute of Practitioners in Advertising in conjunction

with KPMG commissioned a survey of finance directors’ attitudes to

marketing and advertising. In answer to the question, ’To what degree do

you see the following as a necessary investment to long-term growth?’

marketing came fifth out of five. But when it comes to cutting budgets

to reduce costs, marketing and advertising are first.

This is hardly surprising when one realises that the criteria most

finance directors use to measure marketing and ad effectiveness are

pretty blunt.

Sales volume is rated more than four times as important as brand image,

for example, in making those judgments.

It is the twin issues of effectiveness and accountability that sit at

the heart of the debate about brand valuation. The position today is

that brand valuation points a way forward for marketing companies and

their agencies in attempting seriously to monitor the value of their


In doing so it becomes a means to an end, by providing a common language

at board level between the key functions of a branded business.

I consulted the finance directors of some of my clients. The overriding

impression I came away with was of a lack of understanding of the role

the brand could play - and, above all, the lack of a common language

with which to construct that understanding.

Rather than tolerate the ’parallel universes’ of finance and marketing,

companies can start to use brand valuation as a way of bridging the two

disciplines. And at this stage we can add a third ’universe’: that of

the chief executive. He or she has an interest in the value of brands

and hence the value of the marketing and advertising contribution to


Within this triangular relationship between chief executive, finance and

marketing, all three of the ’linkages’ can in part be better informed by

a greater understanding of the value of brands to the business. This

would lead to a more open relationship between disciplines because of a

common goal, as well as greater dialogue between all three because of

the existence of a common language. It would also lead to greater

disclosure, both within and outside the company, of the marketing effort

and investment going behind those brands.

The issue of disclosure is critically important if the role of brands

and the professional marketing of them is to be taken seriously by the

wider financial community where there is a strong and growing demand for

it. Indeed, a survey commissioned by the IPA last year showed that 78

per cent of City analysts believed Stock Exchange listed companies

should publish more information on ad spend levels.

Agencies should take responsibility for the effectiveness of their work

for a client; effectiveness in all senses, including financial


The ultimate contribution an agency can make is to enhance the

shareholder value of its clients’ business.

But while brand valuation is a useful method for measuring the

contribution of brands to the total value of a business, it doesn’t of

itself explain how advertising contributes to the brand value (and hence

shareholder value).

Nor does it show how advertising can affect shareholder value via its

impact on profitability or how it might even affect share prices


An outstanding paper on the subject published last year in the US talked

about a ’quiet revolution’ in the way that marketing activities are

being viewed by some marketing professionals, by chief executives and by

enlightened finance directors.

In a nutshell, the paper argues that marketers will increasingly be

called upon to view their ultimate purpose as contributing to the

enhancement of financial returns. This in turn will mean that customers

(and indeed distribution channels) will be viewed as ’market-based

assets’ that need to be captured, cultivated and leveraged.

In tandem, marketers will need to move beyond traditional measures such

as sales, share and margin to measures based on maximising the net

present value of future cash flows - and hence shareholder value.

To the more straightforward question of whether advertising affects

profitability the answer is yes. The evidence comes in a study carried

out among more than 200 European branded goods companies focusing on the

relationship between advertising and profitability.

The conclusion is clear. Namely, that in influencing customer

perceptions of the quality of your product (and hence its value) it is

not a question of how much you spend but how much you outspend your

competitors. The point about outspending competitors should not be taken

as a ’counsel of despair’ by number two brands and below. It’s just that

those brands need to outspend relative to their share of market, and not

absolutely more than, for example, the brand leader.

Now let’s get down to brass tacks. What if we were able to demonstrate

that advertising affects not just cash flows and profitability but that

it can directly affect share price.

Well, we can. A Connecticut-based company called Corporate Branding

Partnership has developed a model to disentangle the various linkages

and drivers that affect the stock prices of listed companies.

CBP’s research has shown that image alone explains 5 per cent of the

variation in stock price. Image is not a huge percentage when you

compare it with cash flow, earnings and dividends. But it is an

important factor.

Among other business-related factors that a company has little control

over, image is a tool that can be used to affect a company’s stock


Agencies are increasingly trying to reposition themselves as business

partners to their clients, often in an attempt to cement their top-table

position. Here, of course, they face the encroachment of management

consultants in what is fast becoming an advice market.

But while management consultants have numerous skills, branding and the

understanding of consumers’ relationships with brands are not their

strong suit. For this reason, agencies should take more interest in the

whole area of brand valuation and shareholder value.

In the cases of Mars’ entry into the ice-cream market and Virgin’s

controversial foray into the rail network, brand valuation in particular

could have a part to play - hopefully as a way of gauging risk in

advance rather than assessing damage in hindsight. As brand guardians,

or just as business partners to their clients, agencies can help steer

brand strategies with expert consumer advice, to temper more

opportunistic financial arguments in areas such as brand extension.

More than ever, marketers, agency people and senior managers will need

to understand and be able to demonstrate the impact of advertising on

shareholder value if they are to secure and grow the advertising

investment in brands. My guess is that they will.

Leslie Butterfield is chairman of Partners BDDH. A fuller version of his

chapter appears in Excellence in Advertising: The IPA Guide to Best

Practice, published this week by Butterworth Heinemann at pounds 19.99.


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