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
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
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
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
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.