Current economic conditions are trying but they are not unique.

Current economic conditions are trying but they are not unique. Recessions have occurred before, and experience offers some valuable lessons for enhancing as well as protecting your brand says Tom Blackett

Brands are potentially the most resilient assets a company can own. Such assets have in the past sustained companies in adversity. All the evidence suggests that, if well managed, they can continue to do so, now and in the future.

The triple whammy
Among the myriad of effects that arise during a recession, there are three very clear issues influencing business performance.

  • Investors become obsessively risk-averse. They begin to behave as a herd and are quick to criticise companies' performance, resulting in lower valuations of goodwill and plummeting share prices.
  • The labour market is quickly and easily depressed, causing employees to regard the organisations they work for with a more critical eye.
  • Falling consumer confidence leads to contracting demand, heralding either lower prices or sales, but in either case, it would seem, falling profits.

    Bucking the trend
    Not all companies fare badly because of these issues when times get tough. In fact, history reveals many positive examples of companies which have profited during economic downturns. Revlon and Phillip Morris both gained market share during the recession of the 1970s, while Taco Bell and Pizza Hut stole share from McDonald's in the 1990-1991 recession.

    During the early 1990s Nike tripled its marketing spend, resulting in profits nine times higher coming out of the recession than going in. This had the effect of destroying Reebok's competitive threat and building the platform for Nike's global dominance.

    According to a 1998 PIMS study, companies that increased marketing spend during the last recession achieved an average return on capital employed of 4.3%, compared to 0.6% for those that maintained marketing spend and - 0.8% for those that cut.

    Efficiency rather than expenditure
    The primary lesson is not necessarily one of maintaining or increasing marketing investment, but of achieving superior results through more effective brand management. Brands are valuable because they represent a relationship of trust. Traditionally this has been defined in the context of the customer, where brands stimulate demand and help secure future earnings through increased loyalty.

    Nowadays the same argument is just as relevant for employees and investors, and there is evidence that effective brand management results in financial benefits to the owner far beyond the customer relationship. This is equally – if not more – relevant during an economic downturn. Effective brand performance is therefore not just a function of marketing spend, but involves managing the brand to create value for all stakeholders, both external and internal.

    Source of strategic value
    Brand development reaches far beyond traditional forms of consumer advertising. However, most still confuse the discipline of branding with advertising communications. This interpretation ignores the reality that:

  • brands are strategic assets rather than purely symbolic
  • effective branding is a matter of profit, not just market share
  • efficient branding is a matter of sustained investment rather than cost.
    Through their ability to influence consumers, investors and employees, brands are powerful strategic tools – and this is particularly so in a downturn. In 2001, brand value accounted for 33% of the market capitalisation of the companies in Interbrand's top 100 Most Valuable Brands ranking; in the midst of recession, this figure has grown to 38%. The proof is in the performance.Delivering better returns
    In 2000, Watson Wyatt conducted a study that showed that organisations where employees had strong confidence and trust in the leadership delivered shareholder returns 40% higher than companies where trust indicators were low. Not only is this trust valuable in itself, but also it reinforces the brand to external stakeholders, through employees who trust their company and whose personal values are aligned with those of the organisation.

    Therefore, not only is the brand asset comparatively more important during a recession but the return on brand investment is also higher. Strong brands also benefit investors; as figure 1 shows, companies with strong brands have historically outperformed the market, both in and out of recession.

    Moreover, academic research from Harvard University and the University of South Carolina into the companies in Interbrand's Most Valuable Brands ranking has shown that brands offer higher returns to investors for less risk.

    Resilience and continuity
    In its 4 April 2002 edition, the Wall Street Journal published data from the Federal Reserve Board illustrating the long decline in the importance of tangible assets. Back in 1955 it calculated that tangibles composed some 77% of all assets of non-financial businesses; by 2002 this had fallen to approximately 53%.

    This illustrates the importance in wealth creation nowadays of intangible assets – importantly brands. Recessions force companies to focus on how to create value through concentrating investment activity on those assets with the highest potential return. And if these assets are brands, then recessions can be a necessary evil. It is no coincidence that a quarter of the world's 50 most valuable brands predate 1900, sure confirmation of the resilience they have acquired. See figure 2.

    But herein lies the problem. Despite the growing appreciation of branding as a source of competitive strength, very few companies know exactly how much of their company value resides in this asset. The key to maximising the return from this vital asset lies in understanding how valuable it is, how this value is created and consequently how its value can be managed for improvement. A recession presents a more acute opportunity to uncover sources of value that, once identified and managed, will benefit the company exponentially when the economy recovers.

    Protecting your brand
    Here are some recommendations for ensuring that your brands deliver maximum value when times are tough.

  • Check your brand architecture. 'Brand architecture' is a term used for the visual relationship (on packaging, in advertising etc) between the brand name and the master brand. Many companies operate dual branding systems where the master brand (for example Nestles) is used to endorse the product brand (for example Milky Bar). Nestle is a past master in ensuring that just the right visual 'weight' is applied on packaging to maintain strong and clear brand visibility. This aids recognition and facilitates purchase, and is something that manufacturers must look to if they are to compete effectively on crowded supermarket shelves. It is equally important for consumers to understand the link between sub-brands and product names of common origin, so that a 'halo' of goodwill is created through a satisfactory experience which extends across the range and prompts further purchasing.

  • Ensure that employees – especially those who deal directly with customers – are aligned with the company's brand. They need to understand the special nature of the business they represent and the role they must play in delivering a customer experience which is in line with their expectations and encourages them to come back for more. This also has great motivational benefits. Numerous surveys show the relationship between high employee satisfaction and the delivery of a service that customers really appreciate.

  • Manage your brand portfolio. Do not be afraid to clear out the dead wood. Companies with multi-brand portfolios should understand the value creating (and value destroying) contribution of advertising and marketing activities. Lord Leverhulme is credited with saying "I know that half my advertising is wasted, but I don't know which half". Brand valuation techniques can help companies form a much clearer picture of the relationship between brand investment and brand value creation. At a time when every penny of investment has to show a payback, this sort of information is vital - if only to placate investors.

  • Ensure that your trade mark registrations are up to date, that they cover the classes of goods of current and future interest to you, and that any brand licensing agreements you may have entered into give you complete control over your trade marks. Trade mark registration is not expensive and is an indispensable requirement of brand ownership.

  • Keep up the research and development. A recent PIMS study showed that there is a healthy positive correlation between the amount spent on R&D and the value added created. This is especially so in branded businesses, where each extra Euro spent on R&D was calculated to create 2.5 Euros extra in value added. Companies which continue to invest in R&D during downturns will find themselves in a stronger position to compete when markets recover.

    Tom Blackett is group deputy chairman, Interbrand.E-mail: tom.blackett@interbrand.com

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