6 reasons the brand value bubble is about to burst
The short version: when it comes to brand value, there is too much hot air in the balance sheets that is not guaranteed by any real value – you don’t need to be a banker to understand that this is a dangerous situation.
Many brands are just not worth “off-the-paper” what they think they are worth “on-the-paper”. The commercial brand value on-the-paper, or what is stated on the balance sheets, is much greater than the commercial brand value off-the-paper, or the actual brand value.
And at any given moment this can end in tears when the harsh reality knocks on their doors: it is not the accountant who decides brand value, but the buyer in the market and the consumers in the street.
How to value a brand
Simply put, brand value is the power of the brand to make its target audiences less elastic: both its commercial audiences (eg potential and existing customers) and its corporate audiences (eg analysts, employees).
There are a lot of techniques for valuing a brand, some more creative than others. I adhere to the proven ones, meaning those valuation techniques that are based on the essence of branding: creating inelasticity.
The most important factors are historic cost, economic replacement value, and net present value.
The historic cost is the sum of all the past investments in the brand (media, events, direct marketing...). It gives a good insight into the total investment in the brand to date (if your analytical accounting system is complete), but the downside is that it does not say anything about the impact of the invested amounts. You can spend a lot of money that leads to nothing.
The economic replacement value is the amount you would need to invest to rebuild a brand to date based on the relevant key performance indicators (KPI) you want to have. KPIs such as brand awareness, brand distribution degree, loyalty indicators, storytelling effects (eg NPS) etc. It gives you an indication of the buy versus build value of the brand asset.
The net present value indicates the future value the brand. How much it will increase your sales, profitability, etc.
The ideal brand valuations are combinations of these three valuation blocks, interpreted by expert opinions of both experienced business finance people and brand business experts.
Overrated is overvalued
One of the things I learned very early that applies to brand value just as much as to brands, companies and people in real life: never pretend to be bigger, better or more beautiful than you are.
Some months ago, I talked about brand value at a conference for energy brands in Iceland. As the strategic director of Brandhome I am very much into crunching the numbers when it comes to brand value. Numbers don’t lie, that’s what I like about them.
With this particular conference in mind, I applied my number crunching to European energy brands. It revealed an astonishing truth. Very few energy brands showed a value on-the-paper that more or less matched the true value off-the-paper. The rest didn’t even come close, calculating their value in incredibly high numbers. I could hardly believe what I saw, so I checked and double-checked: some European energy brands are valued at 42 times their actual worth off-the-paper!
Heading for trouble
To calculate the brand value, we looked into the brand extension potential of these energy brands – that is, the possibility that customers would be open to buying other products and services from these brands in the future. This would be one reason for these brands to be so highly valued. The outcome was staggering. No one was really waiting to buy brand extensions from any of these energy brands.
When you think about it, you can only conclude that trouble is just around the corner. It lies in the fact that there is no reason to assume that this phenomenon will not apply to other market sectors, like those of mobile communication providers, insurance companies, financials. Just imagine if the brands of mobile operators, insurers, banks ... were also this massively overrated.
Have a look at the Interbrand Best Global Brands 2017. The top 15 global brands together are worth $1T, which is more than the combined value of all the 85 other brands on the list. Together, the top 100 global brands are worth just under $2T. To make this a bit more tangible: this is more than the GDP of Belgium, Luxembourg and the Netherlands combined.
The question is: are these numbers – in relation to the brands’ current revenues, sectorial evolutions and future potential – truthful? Bearing in mind that the values these brands put on their balance sheets are even higher? Or are we building a brand value bubble, similar to real estate, tech and other bubbles we’ve seen these past 20 years? Time will tell.
True brand value doesn’t come out of a hat
A brand is the reason why you would want to cross the street even if there is a similar product available on your side of the street. A brand is the reason you are happy to pay a little more and even more than a little more, because it offers you a quality other brands can’t or won’t. A brand is the reason you advise others to try it too, because you have nothing but good experiences with it.
This is where the true brand value lies: how it is valued by the market. It is all about the inelasticity of a brand. Is a brand worth it to pay a premium? Will it suffer the moment it asks for a little more? Is it able to develop more premium products to stretch the brand’s reach and enhance its revenue further?
Back in 2008, Havas came out with quite upsetting research news: most consumers wouldn’t care if 74% of the brands disappeared. In their Meaningful Brands Survey for 2017, Havas reported that 75% of the consumers expect brands to make a significant contribution to their lives, but only 40% believe brands are doing so.
So, in general the market doesn’t think that highly of brands and certainly not as highly as brands think of themselves. Knowing that, would you still value your brand unrealistically high? Would you risk your life as a brand and a company just because of a too optimistic assumption?
Here are 6 reasons why
Judging by the staggering amount of inflated brand value worldwide, we should not be surprised to see a lot of bubbles about to burst.
1. Today’s FAANGs can kill off “traditionals” anytime
Insurance, banking, energy, telco, mobility, to name a few: What happens if Amazon starts selling insurance policies or Google enters the energy market? Don’t think they can’t, because they can – and probably faster, cheaper and more efficiently than traditional brands and companies.
They have the reach, they have the audience, they have the clients. Even worse, from the perspective of traditional brands, is the fact that people would even prefer it if something like Apple Energy were introduced. Brandhome conducted research into the retail energy market of Belgium and the Netherlands and it turned out that 59% of consumers would certainly consider switching to brands like Samsung, Apple or Google if they offered energy.
So, all they have to do, really, is decide to jump in. And then see what your traditional energy brand is worth. The same goes for your bank or your insurance company. You’ll be priced and pushed out of the market so fast you won’t know what hit you. Your turnover will suffer, your profit will suffer, your stock prize will suffer, your cash flow will suffer, your loan repayments will suffer and, in the end, the whole brand and everything in and around it will suffer.
There may be many traditional brands that feel they can compete with the new technology driven contenders, but in fact they lack the inelasticity needed to keep their customers from crossing the street. And since, for the same reason, they can’t do anything about the price of their services, they will fight a losing battle from the word go in Apple’s boardroom to start iEnergy.
2. Clients are not as loyal as brands think
It is true that client databases can run into millions of names, but is that a reason to overvalue the brand on the balance sheet? Because when push comes to shove, and your brand elasticity isn’t what you think it is, will those clients still be there when you need them most? What can you possibly do to keep them from leaving?
The same goes for the steady flow of sales of the brand’s top product – Who says it will stay that way forever, even if you do everything right in terms of marketing expenditure, communication and sales? This world is just too unpredictable and apt to change faster than ever. One day you have a successful taxi company, the next day there is Uber and you’re up the creek without a paddle.
Close your eyes and think about the millions of new, young, talented, technologically and digitally schooled and skilled people that are busy pushing their ideas into start-ups. All those clever new ideas, brilliant apps and new ways of thinking about how to break the mold of traditional production, logistics, marketing and distribution, just waiting to fill the needs of the customers that you think will never leave you.
But they will, without any remorse, without batting an eyelid, no question about it. Consumers go where their interest is best served, be it by price, be it because of a better proposition. Loyalty is only skin deep in this day and age.
3. The brand ends up as a re-branded write-off
Companies looking to take over other companies and their brands will think twice about paying the overvalued price represented by the numbers on the balance sheet. Good will only goes as far as a potential buyer thinks it is worth.
Any sound potential buyer of brands or companies will know beforehand what it will do with the new acquisition. It may be incorporated and rebranded after the sale, which immediately sinks its assumed value. Many brands and companies have probably never even considered this scenario. On the balance sheet they seem to think in terms of shoebox logic: I fit my shoes, my shoes fit the shoebox, so I fit in the shoebox. It is simply a wrong-headed assumption to think that brand 1 + brand 2 equals 2 or even 3 times the value of both brands together.
Otherwise, the brand or company is stripped after the sale, the organization overhauled or minimised, production outsourced to cheaper parts of the world – with all the quality issues that entails. Or spending gets reduced on anything from innovation to product-design to marketing communication. A company may merge only to see its original 86-year-old brand name glued to another one or lost forever in a rebranding operation. The buyers may even have the wicked intention of buying your brand only to let it die, just to have one less competitor.
There are so many scenarios you can think of that will lead to one certainty: you’ll never get what you expect for an overvalued brand. It’s the market that decides what your true worth is. It’s the potential buyer that will have a good hard look at that value on the balance sheet, at the heavy loans that may well have been handed to you by banks that didn’t look past that overvalued number, at the price elasticity, at the concrete annual profit you are actually making in relation to the supposed brand value.
If and when an offer is on the table and it is much nearer the true and lower value than the inflated brand value on paper, this will not go unnoticed. The market will watch and take an interest, the banks will start raising their eyebrows, shareholders will vote with their feet and so on and so forth. One way or another, it will not paint a pretty picture and it won’t be something any company or brand would want to experience.
4. The brand may never do as well again
A brand may have a great run for several years, with revenues showing a steady line upwards, things rolling along just fine. But it rarely lasts. The steady chief executive moves on or retires and the replacement, keen to make his mark, starts shaking things up only to see them start unraveling. Or out of the blue, a bright new product needs to be taken off the shelves worldwide or recalled because of safety issues. Or a deviation from the advertising strategy, brought on by a change of agency, goes spectacularly pear-shaped as it misses the mark with the brand’s previously loyal customer base. Or another Enron or Lehman Brothers pops up.
There are no guarantees in life, not for us as people and not for brands and companies. There is just too much going on today that can change the world overnight. The days when we had time to build a brand step by step, carefully growing its image and reputation, those days are gone.
Today, you can think you’re on top of the world and in that state of mind overvalue your brand, but you just don’t know what’s around the corner that can throw a spanner in the works. When that happens, you’ll be sorry you had that great big loan against inflated brand value. You’ll be sorry that all of sudden the financial squeeze is on. You’ll be sorry that you’ll have to cut back on pretty much everything instead of being able to invest yourself out of trouble. And with a bit of bad luck the only place your brand is still looking successful is on that paper, but no longer in the marketplace.
5. The brand is the new fiscal instrument
I am sure you’ve heard of BEPS: base erosion and profit shifting. To quote Wikipedia: “BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations”. I call it a good try at dealing with fiscal hypocrisy. Countries are falling over one another to ensure they have the best “deals” for brands that route their royalties through the most advantageous country.
Following these tax gaps, brand owners have an interest in increasing their brand value on their balance sheets as much as possible. It backs the amounts of royalties and other intercompany remunerations that can be charged for the use of the brand and its knowhow. This is another important driver behind the inflation of brand value on the balance sheets that is often forgotten.
6. It is just insane
Overvaluing brands on paper means riding the wave of insanity. Whatever the motivation behind it, it is a crazy thing to do. The numbers just don’t add up, the truth will at one point come out, the risks are incredible. Overvaluing brands and companies on paper is a train wreck in the making.
Somehow the whole essence of a brand seems to be forgotten. People buy something to eat, to drink, to wear, to drive, to stay warm and they can take their pick from a host of products designed to help them do so. They don’t buy a brand for the product – they buy a product with a name on it that they feel ensures its quality. That is how it started, with brands. That’s what made brands brands.
In today’s Western, modern and highly regulated markets, there is hardly any need for “quality insurance” anymore. I mean: yes, you might accidentally buy a pack of milk that is off, but in that case, you would be really unlucky. And show me a place in Europe where you can buy a bottle of bad mineral water or a new car with faulty brakes. Again, you would be one unlucky guy or gal if you did.
Look at the Lidls and Aldis of the world, filling the shelves with brand names no one ever has heard of, complete fantasy brands that are there for a week only to be replaced by other fancy brands the week after. And Lidl and Aldi are doing spectacularly well, attracting customers from all income levels.
The multiples that are being paid for brands now – because some buyers still do – are simply ridiculous. They are just not worth it. Their value is hugely asymmetrical in relation to their function. It is a development that needs pondering, not just because it is potentially harmful to the brands themselves, but because of the mayhem it could cause on a larger scale, with dire consequences for the world economy as a whole.
Erik Saelens is founder & executive strategic director of Belgium's Brandhome group