Who is responsible for looking after a company’s most valuable asset after its people? Is it accounts? Sales? Perhaps the HR department?
The answer of course, is the marketing department, which takes everyday responsibility for a company’s brand.
Of course, the board is supposed to be accountable to shareholders for the proper management of company assets. Yet boards of directors are not required to report to investors what they are doing with their most important assets – their brands.
This is despite the fact that brands account for 28% of companies’ total intangible value on average, according to Brand Finance. Indeed, in some sectors, such as clothing, average brand value accounts for more than two-fifths of a company’s entire market value.
For too many executives the quarterly pressure to report short-term financial success can mean that disclosing marketing spend is counter-productive. Subsequently, marketing has come to be seen as discretionary rather than potentially “value-creating”.
Apart from a select few companies that have proven themselves over decades as leaders in the field, marketing activity is all but left off of annual reports and other forms of financial disclosure.
Such an ommission illustrates the lack of understanding and communication that have existed between marketers and the City.
Recently however, there is evidence to suggest that investors are curious to know more about this side of the business.
Some financial analysts are recognising that marketing needs to be taken seriously. There have been calls for greater detail about marketing in company reports, beyond meaningless statements claiming “we look after our brands”. The realisation has struck that such information is crucial if they are to identify companies their investors should back.
“I find it absolutely baffling that boards of companies don’t disclose brand equity. It is their most valuable asset. That they don’t consider it is unbelievably stupid”
Deutsche Bank recently issued a note to investors entitled The Importance of Advertising and Promotions (A&P). In this document, Deutsche Bank says it understands that brands and brand investment are critical in consumer markets. After conducting its own research, it wrote that companies which continue to invest in marketing grow faster, with this trend being amply demonstrated during the financial downturn. This may be an old message as far as Marketing Week’s readers are concerned but it is coming from a brand new mouthpiece.
The note also points out that disclosure of marketing items is “generally poor” and in an investor survey conducted by Deutsche Bank, 73% admitted they did not have a good idea of how marketing budgets are spent.
Deutsche Bank research analyst Jamie Isenwater explains: “In most cases analysts might get a single number for A&P spend and in some cases, not even that. Given how important it is, we want more detail to appraise future growth and brand values from the market’s point of view.”
Just what should and should not be in annual reports has long been the subject of debate, but not only is there no agreement on what a company should disclose, there is no common terminology for what A&P encompasses or even what “marketing” means.
Isenwater says that some kind of industry-wide consistent terminology would be “hugely appreciated” by investors, and adds: “Companies that aren’t prepared to do that could still give more detail of what’s actually meant by whatever it is they disclose. For example, some companies report marketing and selling expenses – what do they mean by that? Tell us what that involves.”
Inconsistency also occurs in other areas of reporting. For example, what one company describes as profit can differ from what another regards as profit.
As a result, some might feel that since there are few disclosure norms, trawling through the extensive pages of notes in company reports and coming to a conclusion is where analysts can claim to offer value. Nevertheless, there is widespread acknowledgement that disclosure related to marketing is one of the weakest areas of company reports.
There have been various moves to force companies to be more explicit in financial reporting. The European Modernisation Directive (2005) called for greater transparency. Following this, the UK considered introducing legislation requiring companies to provide greater clarity on company performance related to human capital, corporate social responsibility and marketing. Similarly, the Institute of Practitioners in Advertising (IPA), The Marketing Society and the Worshipful Company of Marketors submitted recommendations to the Financial Reporting Council, but legislation was never enacted.
While many feel that companies vary too much for legal standards to exist, others believe that, until they are required to, many boards will fail to explain properly how they are managing their most valuable assets.
This also leaves marketing open to being regarded as an inferior element of the business compared with other types of investment, for which boards have to account in public.
The lack of boardroom representation for marketing, the department with most insight into the attitudes and behaviour of a company’s customers, has always seemed shortsighted to its practitioners. But the growing value of a company’s intangible assets including brand equity, mean there is also a business argument for including another seat at the table.
The common objection among companies to disclosing marketing information however, tends to be that it could reveal something of “commercial sensitivity”. Ambler rejects this excuse as “bogus” and Deutsche Bank’s Isenwater agrees, saying: “Most of these companies that deal in the same markets know each other intimately and therefore to give a bit more detail wouldn’t mean giving secrets away.
“I would be amazed if companies felt they could not at least disclose marketing expenses by geography and on an organic basis.”
The IPA has published a document entitled KPIs for Marketing Reporting in which it outlines a framework for effective reporting of promotional spending. It aims to address the lack of marketing information both in company reports and in the boardroom (see Marketing Reporting, below).
Like many company executives in his position, Dairy Crest executive managing director Martyn Wilks is against enforceable reporting guidelines. He cites reasons of commercial sensitivity, specifically the concern that too much detail could reveal how well the company is buying marketing services and media, which he states is definitely commercially sensitive.
Wilks claims Dairy Crest’s reporting already answers the bigger questions many analysts seem to have (see Viewpoint, left), despite being admittedly “quite light on numbers”.
Wilks says: “We are careful to be consistent in our messaging. Each time we use the same chart on strategy, each time we talk about the importance of brands and each time we show them our top five brand results. We try to demonstrate that branding for our business is strategic, not just tactical.”
Harvard professor and non-executive director of WPP John Quelch says that a fundamental part of the problem in the relationship between marketing and the City is that, being finance-focused, analysts have no management perspective. He contends that analysts have a responsibility to improve their understanding (see Viewpoint, below).
There are signs that the appetite for marketing information is growing, especially among long-term investors. Yet others are seemingly placing less importance on it; Barclays Capital, for example, was unable to provide a view for this article because “none of our guys seem to look at this issue”.
As part of the team that floated the Britvic Soft Drinks business and an experienced senior marketer, Andrew Marsden believes these issues are “at the heart of shareholder value, at the heart of managing a modern branded system and at the heart of the value of stock on the stock market”.
He summarises: “This is all about brand building, which is about building corporate assets for shareholders that are more resistant to economic changes and stress and have better prospects, are capable of innovation and developing future cash flow. Unfortunately, most marketing people don’t talk in the language of the boardroom and shareholders.”
Dairy Crest’s Wilks says if marketers are failing to talk in the language of the boardroom, then that is the board’s fault for asking the wrong questions. “It’s certainly not the case at Dairy Crest and it’s not the case at Mars, where I was for 20 years.
“Junior marketers tend to get excited by what they do but the more senior they get, they more they realise that what they do needs to matter. If the board is doing its job, it is asking for the right information.”
Yet if this is the case, how can the disconnect between boardrooms and marketing be accounted for? A study by Deloitte reveals only 50% of marketers, compared with 77% of chief executives, believe there is either complete or a great deal of agreement across board members on marketing priorities and agenda (see Deloitte research, below).
Perhaps this is a reflection of the UK’s management system, which is often based around short-term financial aims, rather than the long-term objectives of marketing.
Ultimately, analysts’ increasing interest in marketing disclosure is about holding people responsible for what they are managing, so they can identify winners and losers.
In the battle to get marketing measures communicated effectively to their own boards and from there to the City, senior-level marketers might do well to enlist the support of their corporate relations colleagues, with whom they could find common ground and a mutually beneficial relationship.
But the problem remains that accounting professionals must judge performance on financial terms, while marketers must find ways of expressing what they do in financial terms. And boards need to bridge the gap between the two.
The situation will remain complicated and solutions will be hard to find. But as Ambler states, when the current situation is “unbelievably stupid”, it falls to everyone involved to improve it.
Viewpoint: The board
Martyn Wilks, Executive managing director, Dairy Crest
At Dairy Crest, we attach enormous importance to the success of our brands. We know that this interest is shared by all those who follow our financial fortunes, from shareholders and financial institutions to other stakeholders, such as our employees and the dairy producers who supply us with milk. Everyone is keen to know how our key brands are performing.
As a result, our communications are geared up to reflect this and we report regularly on the performance of our brands to both internal and external audiences. At least four times a year, we provide a detailed report on the performance of our five key brands, comparing against the markets they compete in. We may also provide specific highlights, such as progress on our “lighter” brands, where appropriate.
Providing regular updates does mean that we have to report bad news as well as good. In 2007, when we had to temporarily suspend production of our Clover brand, we reported a significant reduction in sales. Thankfully, this was more than made up for by strong growth across our other brands and Clover is now fully recovered.
We are facing an increasing number of questions from various parties about the “investment” side of the equation, such as how much is being spent on media, how heavily are you promoting?
Responding to these requests is not straightforward and we don’t favour providing detailed information that could benefit our competitors – even if it does have the advantage of helping to satisfy our financial audiences.
Nevertheless, we have said very publicly that we subscribe to the view that increasing marketing and promotional expenditure on our key brands during the consumer downturn will result in a stronger brand franchise as we emerge from recession. Our commitment to our brands is demonstrated by them all appearing on television over the past few months, three of the five with new advertising campaigns.
We do keep analysts and other commentators informed with top-line data on increases in media investment and, to aid understanding of our strategy, we have also published information on the proportion of our brand sales that are promotionally driven and have had some positive feedback from analysts about doing so.
It really is a question of balance – we all want our stakeholders to more fully understand our business and support the decisions that we make, but we don’t want to disadvantage ourselves in the marketplace.
Viewpoint: The academic
John Quelch, Professor of Harvard Business School and a non-executive director of WPP Group
Analysts are finance-focused individuals who have no general management perspective. Very few analysts have MBA degrees and as a result, they’ve not been exposed to a general management curriculum or, indeed, a basic course in marketing. It’s not just a matter of them understanding marketing – it would need a basic course in operations management.
That having been said, marketing has done a poor job of boiling itself down to four or five metrics, in a consistent fashion, that can be consistently applied across all companies.
The way I like to put it is there is no balance sheet for the marketing function and this is a major weakness. I think that some companies are doing a much better job of understanding that their boards of directors need a distilled package of metrics that represent the true drivers of business performance, as opposed to the once-a-year core dump of market research data.
That is simply information overload for most members of the boardroom and leaves most non-marketing directors with the impression that marketing actually doesn’t know what to focus on or how to deliver against core objectives.
Some of this criticism is justified, but I would say that financial analysts also have a responsibility to improve their general management perspective as well.
There is a certain amount of literature that does suggest investments in marketing and brand building in particular do have a positive effect on stock price performance.
There is also evidence that companies with the cash resources to be able to invest in marketing during a recession at the same rate as they were investing in it prior to a recession, do pick up market share on the cheap as a result. This is either through acquisition or organic growth. Those two propositions, broadly speaking, enjoy a reasonable amount of support in the academic literature.
To give you one anecdotal example; look at Colgate versus Procter & Gamble. What you find is the market has rewarded Colgate in the last couple of years for being more category-focused and having a higher proportion of its total brand portfolio under the single Colgate brand.
On the other hand, P&G, like Unilever, has resources spread across a large portfolio of individual brands. In a global economy, that is a less efficient way of doing things.
I raise that point just as a way of illustrating how marketing and branding decisions really do have the potential to significantly affect the stock valuation of even the biggest companies.
The Institute of Practitioners in Advertising has published a document entitled “KPIs for Marketing reporting”, which aims to offer a framework for effective marketing disclosure.
Neil Simpson, chief executive of Publicis London, is chairman of the IPA’s Value of Advertising Group, a key IPA committee. He says the publication gives the IPA’s view on 20 performance indicators that marketing could make available to give greater clarity to investors about how well they are managing their brand assets.
They have been divided up into lag indicators: ones that report on past performance; and lead indicators – ones that describe what marketing is doing now and give an indication of future performance.
Simpson elaborates: “Some are quite basic sets of data, for example volume sales and value sales over time. Evaluating both sets enables analysts to see average price and get a fix on what percentage are being sold on promotion, which is a negative force.”
He continues: “Another example is marketing expenditure over time [Advertising and Promotion – A&P – as reported in the profit and loss figures]. Is it going up or down overall, allowing for inflation? Is it going up or down as a percentage of sales?”
Other metrics suggested include showing the division between brand building activity (a three to five-year time horizon) versus the cost of sales this year. Other factors include examining trade marketing spend through the sales force, versus consumer promotions through the marketing department.
Simpson says some of the indicators are less about numbers than giving a flavour of overall marketing ability, such as the number of innovations per year, how many of the company’s marketing campaigns are considered to be winners, and how many need improvement or a complete overhaul. Another such indicator is to state how many marketing campaigns are long-term – such campaigns demonstrate an understanding of brand stewardship.
Some of the indicators in the IPA framework are more complex and relate to more detailed work the association recommends as part of its effectiveness initiative. For example, share of voice versus share of market – if share of voice is bigger, then it represents investment; if it is smaller, then it represents lack of investment. Simpson says: “This is a lead indicator of future performance.”
Q What does the IPA want from analysts?
A The IPA wants analysts to ask “intelligent questions” of company chief executives and finance directors about their overall marketing strategy and marketing activities.
Q According to the IPA, what do analysts want from marketers?
A Proactive participation in the debate. How many marketers currently offer to contribute year-on-year narrative to the annual report; provide data or ask to attend meetings with analysts?
Q What else do analysts want?
A Basic trend data year-on-year, which can be used to do comparative analysis between companies, and within companies. Analysts trade in relativity, not absolutes. Analysts need big picture data. They don’t find the minutiae of individual brand campaign data useful, other than as exemplars. They need answers to the big questions, such as what is the company’s approach to marketing overall? Is it strategic or tactical in outlook?
How well does it understand how to manage its brand assets?
Does it invest in marketing or treat marketing budgets as a discretionary item it can cut when times get tough?
What is its overall portfolio strategy?
What does that mean in terms of brand investment?
Where is future growth going to come from? Why? What does than mean for marketing investment?
Q Why should marketers care about this?
A It’s a push-pull strategy. The more knowledgeable analysts become about marketing, and the more they ask pertinent questions of chief executives and finance directors, the more marketing will be recognised in the boardroom and become
a subject for boardroom debate. By educating analysts, the status of marketing will improve.
Deloitte has conducted research among chief-level executives in Europe’s largest organisations to gather statistics related to the discussion of marketing measurement at board level and how this group communicates with the City.
Since there is no single measure of marketing effectiveness, nor any agreement as to which metrics best demonstrate marketing effectiveness, it comes as little surprise that only 22% of those surveyed “strongly believe” the key performance indicators they use are the right ones to measure the true success of marketing.
“It stands to reason that measures supporting growth are critical and marketing is central to this”
Nick Turner, Deloitte UK
Deloitte’s UK marketing effectiveness lead, Nick Turner, says that a new area being observed is a gap between the strategy and vision from the top level of a business, failing to convert into actionable objectives that senior marketers can deliver on.
The Deloitte study, entitled Marketing in 3D, also found a disconnect between the City/investor community and organisational disclosures around marketing effectiveness.
Almost three-quarters (74%) of those surveyed fail to communicate to the investment community any measurements that relate to the performance of marketing. Furthermore, 36% of organisations do not communicate measures that relate to the performance of marketing to their own board.
Of marketers surveyed, only 38% say that on a scale of 1 to 10, it is “10 out of 10 important” to communicate with the board and 87% say it is “important” (7 or more out of 10).
Only 14% of marketers feel it is “10 out of 10 important” to communicate with the analyst community and 62% say it is “important” (7 or more out of 10).
Turner says: “We could account for some of these statistics through a general immaturity of marketing measurement at board level in organisations – in part driven by this not being a mandatory disclosure in annual reports.”
Turner says there is a “pull” from the analyst community for board reports to have more narrative in them and adds that some industries have been more proactive than others, often driven by a regulatory component. For example, Ofcom instructs telecommunications companies to provide data on Average Revenue Per User churn and customer satisfaction.
Deloitte concludes that measurement of brand equity needs to be provided, alongside more immediate performance measures. On average, 50% of share price value is based on the perception of future growth.
Of the chief executives surveyed, 81% believe marketing is the key driver of growth. Turner points out that, given this figure, it “stands to reason” that measures supporting growth are critical and marketing is central to this.
Yet only half the marketers surveyed (compared to 77% of the chief executives) believe there is either “complete agreement” or “a great deal of agreement” across board members on marketing priorities and agenda.