Are brands becoming the new commodity? It’s now conventional wisdom that brands can have miraculous commercial effects, including the ability to command a greater market share, leverage premium prices, ensure higher levels of repeat purchase or “loyalty”, exercise high “option values” (for example, use the brand name to quickly enter new markets at relatively low cost), seek forgiveness/benefit-of-the-doubt, and more.
More recently, belief in the commercial contribution of brands has been reinforced in two ways. First, the relatively new discipline of brand valuation has focused attention on the financial returns brands can generate relative to their generic, non-branded equivalents. Numerous natural experiments demonstrate this effect, where exactly the same product is sold under different labels (say, private label and manufacturer branded) at very different prices.
Second, we’ve all seen those PowerPoint slides showing the ever-rising proportion of total stock market value of companies attributed to intangible versus tangible assets. Over the past few decades, the value of “intangible assets” (including brands, that are mostly not recognised in formal accounts) has soared relative to the tangible assets that the accounts do enumerate – apparent proof of the incremental value brands bring to stock market performance.
OK. Now let’s step back a bit, starting with those “what brands bring” calculations. Brands deliver a price premium … compared with what? A hundred years ago, real commodities existed. You could go to a shop, scoop out a measure of tea or flour, weigh it, and pay for it. Back then, a branded product was a revolutionary innovation. Today, everything is branded, including private label. In reality, there are precious few “commodities” to compare brands with – only one brand versus another. In such an environment, can we really ascribe differences in reputation or performance to the application of a magic ingredient called “branding”? Now take those slide show comparisons of tangible and intangible value. One factor to remember is the effect of accounting sleights of hand. Accounting rules only require firms to recognise assets on their books using conservative, historic cost values (which they then have to depreciate every year). Inflation accounting died long ago, but if accountants required companies to recognise the current cost, replacement cost, or market value of their tangible assets, then “tangible” values would suddenly expand to take a far higher proportion of the total, with a corresponding fall in the share allocated to intangibles.
You could, for example, draw a graph showing the price of a house you bought ten years ago at say, £100,000, rising to £500,000 ten years later. Is the difference between the historic purchase price and present value (your equity) because of a sudden rise in the intangible value you have added to it? Probably not. Enter factor number two
The market price of your house has also probably fallen over the past year. Is that because you have somehow “impaired” the intangible value of your house? Or is it because a speculative bubble has burst? Many of the charts depicting the apparently inexorable rise in intangible value did little more than illustrate the effects of the latest stock market bubble: if you want to get a handle on “real” value, the last two places to look are formal accounts and financial markets. That’s not to say that intangible assets such as ideas, relationships and reputations are worthless. Far from it. They are very important. But they always have been. Accountants recognised their importance hundreds of years ago with the simple, pragmatic concept of goodwill.
In this context, what are we to make of the new book by Young & Rubicam executives John Gerzema and Ed Lebar, Analysing The Brand Bubble: The looming crisis in brand value and how to avoid it? In it, they make three basic points.
First (writing before the recent stock market crash) they warn that over the past decades financial markets have been bidding up the stock market prices of brand-owning companies willy-nilly, without really looking at the underlying performance of the brands themselves. If investors’ perceptions of brand-owning companies were getting out of kilter with reality, a correction would probably have ensued. Unfortunately, the evidence for any such correction will now be lost forever in the debris of a much bigger crash.
Second, they introduce a new concept of “energised differentiation”. Being different, esteemed, relevant and famous is not enough any more, they argue. Brands also need to build a reputation for being dynamic (via continuous innovation) and visionary. It’s doubtful there’s anything substantially new here. Consumers (and societies generally) have always felt more comfortable with companies with strong ethical systems and values. Look at how many of today’s big brands and corporations herald from Quaker or similar roots.
What could be important, though, is Gerzema and Lebar’s longitudinal tracking data, which shows an ongoing freefall in consumer perceptions of brands. The number of consumers saying they trust particular brands (in the US) has more than halved (from 52% to 25%) over the past 15 years. Product quality ratings have declined by 24%; brand “esteem” (whether the brand is seen as reliable and is highly regarded by the respondent) by 12%; and brand awareness by 20%. As Gerzema and Lebar remark, it looks like consumers have been “falling out of love” with brands – even as a few exceptionally “energised” brands continue to wow consumers and investors.
So what’s happening? Many years of brand hype may have successfully persuaded some suckers that the mere fact of being a “brand” is a guarantee of superior economic performance. Gerzema and Lebar’s data suggests something rather different: there is a big difference between “the real thing” and just going through the motions. The superficial mechanisms of branding (a brand name, logo, pack design, “personality”, high-profile communication strategy, and so on) are just modern business basics (and costs) that are now so common they are effectively commoditised. In themselves, they do nothing special, failing to drive price premiums, “loyalty” or any of the other claimed benefits of branding.
Great brands stand out because they act as outstanding, exceptional beacons of superior consumer value over significant periods of time. The secret lies in managers’ ability to continually spot and deliver superior value. It’s not brands that generate superior value; it’s superior value that generates brands. If we forget this, brands do indeed become little more than commodities.