The Value of a Powerful Brand in a Financial Crisis
Assistant Professor Sanal Mazvancheryl wanted to find out. In a modern economy, where a significant portion of a company’s market value derives from intangible assets—including its brand—were companies with strong brands afforded any protection during the crisis?
An overwhelming majority of US companies were negatively affected by the financial crisis, as buying slumped and value dropped sharply for physical assets such as land, buildings, and equipment.
But the marketing researcher was less interested in the causes of the crisis than in its varying effects on companies. He was focused on whether a firm’s brand value related to its financial performance during the market meltdown—and how that value was calculated.
“[The crisis] was a shock to the system,” Mazvancheryl said. “And while there was plenty of research on how brand value can have a positive effect on financial performance over time, no one had looked into the question of whether companies with strong brands can do better when everything’s going down the tubes.”
It was an intriguing question for Mazvancheryl, who began his professional career in brand management and advertising, working on Fortune 500 accounts for large, multinational agencies. As he pursued an academic career, his research centered on how marketing actions influence firm performance.
In other words, how are a firm’s profits and stock action affected by factors such as customer satisfaction, brand equity, and brand loyalty?
Researchers cannot begin to answer questions like this without reliable measures of a company’s brand attributes and strength. There are two main approaches to developing such a measure. One is to look at brand equity at the consumer level—through survey-based measures of customer loyalty and brand image, for example. A leading source of this kind of data is Harris Interactive’s EquiTrend study, which ranks brands based on an annual survey of 38,000 US consumers.
Another approach uses financial measures to determine the dollar value of a brand. The top commercial practitioner of this type of research is the London-based consulting firm Interbrand. In its latest ranking of the top 100 global brands, for example, Coca-Cola is in the No. 1 spot with an estimated brand value of nearly $78 billion.
Over the years, academic researchers have used many such measures to establish various connections and positive correlations between marketing and financial indicators. But there was still no published research on how well “high-equity” brands perform in a crisis relative to their name recognition.
Most people would expect that firms with higher-equity brands, like Coca-Cola, are more likely to escape the worst effects of a crisis. Among the reasons:
- High-equity brands should be able to sustain a higher level of sales relative to their peers, and therefore keep more revenues coming in; and
- The stocks of firms with higher-equity brands should offer some protection for investors because they are viewed as safer investments.
But there was nothing in the research to confirm or deny this. For Mazvancheryl and his colleagues, Claudiu Dimofte and Johny Johansson, the financial crisis of 2008 offered a perfect opportunity to put their hypotheses to the test.
“In our research, we are always looking for opportunities to place marketing front and center as a factor in financial performance, and here was a chance to do that in a way that could potentially reinforce the case that brand equity matters,” Mazvancheryl said.
The research also was a chance to compare and contrast the two dominant approaches to measuring brand strength. Using both the EquiTrend and Interbrand data, Mazvancheryl and his colleagues set out to see if there were notable differences in what the two measures said about the relative performance of major brands during the crisis.
The researchers analyzed the stock market performance of 50 of the Interbrand Top 100 global brands from September 1 to December 31, 2008, a period when the S&P 500 declined in value by more than 30 percent.
Those top brands were compared to overall market performance. And, contrary to expectations, brands with high Interbrand scores did not perform any better than the broader market as share values tanked. In fact, the high-scoring Interbrand firms performed slightly worse than the broader market, even controlling for factors such as firm size, varying industry-by-industry performance, and more.
Had Mazvancheryl and his colleagues stopped there, the resulting paper might have proved a disheartening read for those in the marketing profession who regularly advocate the importance of building strong brands for good times and bad. But the consumer-based EquiTrend data produced markedly different results.
Among the same 50 brands, high EquiTrend measures resulted in lower volatility and better stock performance. “Brand equity as measured by EquiTrend helped lower riskiness and also helped limit overall losses in the Fall 2008 crisis,” the researchers concluded.
One company, the cereal maker Kellogg’s, shows how the two measures can deliver starkly different assessments of brand strength. Kellogg’s had a low Interbrand value when compared to many of the other 50 brands, but its EquiTrend value was relatively high. And Kellogg’s stock loss during the four-month period? Just shy of 21 percent, well short of the decline in the broader market.
Mazvancheryl suspects that EquiTrend proved a better predictor of firm performance during the crisis because the data are based on consumer loyalty and allegiance.
“The assumption is that firms scoring highly on EquiTrend have a sustainable edge in the marketplace. Customers know and trust these brands,” he said. What’s more, Mazvancheryl suggested that this competitive edge might grow even bigger in difficult times as consumers stick to the tried-and-true.
In contrast, the rankings and measures from Interbrand are based on financial projections and specific assumptions about a company’s future growth. When an economic crisis comes along, all of that goes out the window: financially-based assumptions no longer hold.
Mazvancheryl is careful to say that his research isn’t meant to suggest that one gauge of brand strength is more worthy than another; rather, they have different potential uses. Interbrand, he noted, can provide a good picture of brand strength and the contribution of a brand to a company’s overall value. But his research suggests it is not nearly as effective as EquiTrend when it comes to identifying firms whose brands might help them weather a storm.
What lessons businesses should take from this research? Mazvancheryl said trying to predict the next crisis and its causes can be a futile exercise. “These events can be hard to predict and they are very often outside a company’s control,” he said.
The more important question, he noted, is how can firms protect themselves when the next crisis comes along. The work of Mazvancheryl and his colleagues seems to suggest an answer: Build trust in your brand.