Linking Brand Equity to Stock Equity
By Ed Chambliss
Vice President, Team Leader
The Phelps Group
Balancing short-term sales with long-term brand equity is
a constant struggle. After all, short-term sales are here,
now and tangible, while the impact of long-term brand equity
is not as clear-cut. But publicly traded companies, pressured
to deliver constant growth and increasing shareholder value,
also question how an investment in long-term brand equity
helps them achieve investor goals. This paper attempts to
help answer that question by reviewing information about
four equity areas: Valuation, Linkage, Brand Components
and Affecting Brand Equity.
Valuation - What is a brand worth?
Perhaps the most visible proof of a relationship between
the brand and stock equity is found in the markets where
companies that manage brands are bought and sold. One 1995
study showed that "the average market value of all American-based
publicly traded companies was 70% greater than their replacement
cost (e.g., their tangible net asset value.)" 1
Indeed, when entire companies are on the block, buyers often
pay much more than the appraised value of tangible assets.
"In 1989, Philip Morris paid $12.9 billion for Kraft, six
times its net asset value. According to Philip Morris CEO
Hamish Maxwell, his company needed a portfolio of brands
that had strong brand loyalty [i.e., customer relationships]
that could be leveraged to enable the tobacco company to
diversify [i.e., financial relationships], especially in
the retail food industry [i.e., trade relationships]." In
other words, Philip Morris was willing to pay billions for
a set of relationships and the anticipated support such
relationships would provide. 2
Other CEOs agree. Chevron's Lew Winters reports that accountants
are inclined to price the intangible brand asset at four
to six times the annual profit realized from the sale of
the product bearing the brand name to be acquired. 3
A 2003 study of 220 companies found the following factors
directly impact stock price:
Cash flow, earnings & dividends 30%
Stock price growth 20%
Expected cash growth 20%
Financial strength 6%
Average size 6%
Corporate brand image 5%
Other factors* 13%
*(including mergers, new products, market trends, management
changes, etc.) 4
Reinforcing this is a 2000 Cap Gemini Ernst & Young report,
which concluded "brand power can account for 5 to 7 percent
of the change in a company's stock price." 5
CEOs tend to be even more generous with their appraisal.
A 2004 survey distributed to 1,500 participants (including
1,000 chief executive officers) at the 34th annual meeting
of the World Economic Forum in Davos, Switzerland, found
59% of respondents estimated that corporate brand or reputation
represents 40% of a company's market capitalization. 77%
of those polled said they believe that it has become more
important over the last two years. 6
Linkage - Marketing's connection to the stock market
But one demands a tighter correlation between brand equity
and stock equity. Brand specialist David Aaker studied the
association between stock price movements and changes in
brand equity (as measured by the Techtel survey of 1,500
purchase decision makers), controlling for the effects of
other variables in stock returns. His analysis showed that
building or damaging brand equity would, on average, affect
stock return. "Every 1 percent increase in brand equity
is associated with a roughly 1 percent increase in stock
return." 7 In comparison, he found that "a 1
percent increase in earnings - known to drive stock return
- is associated with a 1.5 percent increase in stock return."
8 Aaker explains this correlation as "consistent
with the fact that investors realize that a brand is an
asset that can lead to higher future-term earnings." 9
To illustrate, Aaker refers to IBM, which "suffered a negative
stock return of 37 percent in the fourth quarter of 1992
after its brand equity decreased 45 percent but experienced
a positive stock return of 35 percent in the fourth quarter
of 1993 when its brand equity increased by 46 percent."10
IBM realized a further stock price increase with the successful
introduction of the "energizer" ThinkPadŽ sub-brand. 11
Beyond that one example, a larger Aaker study with brand
specialist Robert Jacobson examined "the stock return and
yearly brand equity changes (as measured by EquiTrend's
perceived quality rating of brand equity) for 34 companies
during the years of 1989 to 1992. They also compared the
accompanying changes in current-term return on investment
(ROI). They found that, as expected, stock market return
was positively related to ROI. Interestingly, they also
uncovered a strong positive relationship between brand equity
and stock return. Firms who experienced the largest gains
in brand equity saw their stock return average 30 percent.
Conversely, those firms with the largest losses in brand
equity saw stock return average a negative 10 percent."
12
Corporate Branding conducted a study that found "a composite
of companies with brands deemed superior by business leaders
grew 402 percent in the 1990s, while the Dow Jones Industrial
Average rose 308 percent." Furthermore, "in the 1997 market
collapse, companies with strong brands - like GE and Microsoft
- recouped nearly all their losses by the second day. The
20 companies in the Fortune 1000 deemed to have the strongest
brands gained in value; while the 20 weakest brands lost
on average $ 1 billion." 14
Brand Components - What drives equity?
If brands can help or hurt stock equity, then one wants
to identify the components of a brand. The same study of
220 companies cited above also identified that corporate
brand image could be quantified with the following components:
Advertising spending 30%
Size of company 23%
Low dividend 10%
Earnings volatility 7%
Stock price growth 8%
Other factors* 22%
*(including [other marketing components such as] events
and publicity, industry affiliation, product categories,
message quality, etc.)15
As far as individual brands, Aaker's qualitative analysis
identified five major influences that can build or damage
brand equity: Major new products, Product problems, Changes
in top management, Competitor actions and Legal actions.16
Affecting Brand Equity - Driving positive change
Finally, one seeks ways to actively protect and grow brand
equity, with the goal of increasing stock equity. While
investing in a strong, consistent, positive, unique and
relevant brand identity is of primary importance, there
are specific actions that can boost both brand and stock
equity. For example, a name change or repositioning is newsworthy
enough for consumers and the market to take notice. When
Sun Microsystems repositioned itself as a maker of computers
and business servers under the name Sun Ultra Enterprise
Servers, analysts issued "buy" recommendations and Morgan
Stanley predicted the stock would climb to $70. In two weeks
the stock rose from $47 to $67, making headlines in the
Wall Street Journal.17 While this is an extreme
example, nevertheless, it is a valid one.
Brand extensions are also newsworthy and, when introduced
under conditions of high brand awareness and positive brand
attitude, have been known to increase stock price by as
much as 9%.18 A third example is promotion of
advertising, where a preceding announcement of advertising
slogans and ad changes, on average, brought a 15% increase
in market capitalization.19
Conclusion - Ammunition for the struggle
While not definitive, the above review of secondary information
does strongly imply that investing in brand equity does
have a positive effect on stock equity. Certainly, the above
resources should assist readers when confronted by individuals
who state unequivocally that an investment in the brand
is not a good investment for shareholders.
| 1. |
Tom Duncan, Driving Brand Value, pg. 4. |
| 2. |
Ibid. |
| 3. |
Kevin Lane Keller, Strategic Brand Management. Building,
Measuring and Managing Brand Equity., pg. 361. |
| 4. |
Ad Value, Leslie Butterfield, ed., Butterworth Heinemann,
Oxford, 2003, "How advertising impacts on share price,"
James Gregory, pgs. 17-25. |
| 5. |
"Name Brand Calculus or Imaginary Numbers?" US Banker,
Volume 113, Number 6, Page 26, June 2003. |
| 6. |
"CEOs say reputation ranks over stock price," T.K.
Maloy, UPI Deputy Business Editor, January 22, 2004
and "CEOs: Corporate Brand Image Outweighs Financial
Performance," Financial Times, February 10, 2004. |
| 7. |
David A. Aaker, "Want to give your stock a boost?
Then win over the public with a stellar brand strategy."
Business 2.0, September, 2000. |
| 8. |
Ibid. |
| 9. |
Ibid. |
| 10. |
Ibid. |
| 11. |
David A. Aaker, Speech to Berkeley Alumni, Santa Monica,
CA, April 20, 2004. |
| 12. |
Kevin Lane Keller, Strategic Brand Management. Building,
Measuring and Managing Brand Equity., pg. 361. |
| 13. |
"Communicating Your Brand," IR Guide, Number 9, Investor
Relations, October 2000. |
| 14. |
Ibid. |
| 15. |
Ad Value, Leslie Butterfield, ed., Butterworth Heinemann,
Oxford, 2003, "How advertising impacts on share price,"
James Gregory, pgs. 17-25. |
| 16. |
David A. Aaker, "Want to give your stock a boost?
Then win over the public with a stellar brand strategy."
Business 2.0, September, 2000. |
| 17. |
Chuck Pettis, author of TechnoBrands and president
of Brand-Solutions, Inc. |
| 18. |
Ibid. |
| 19. |
Ibid. |
|
|
|
Creative Strategies blog
sitemap
Home