18 Apr. 2019 | Comments (0)
There is tremendous economic power in brands. I first became aware of this many years ago on one of my earliest assignments as a fledging Big Four consultant. While working for a major cosmetics manufacturer, I became aware of the manufacturing costs (very low) and gross margins (very high) of their products. Even after the huge amounts they spent on print and TV advertising (this was pre-Internet) and retail merchandising support, they were a “monster margins machine”—with stock price performance to match.
How did my client perform this value-creating magic? Branding—built by brilliant advertising and PR over many years that made them into a household name and a go-to product that American women wanted and were willing to pay for. “Brand equity” is the name we give to the economic power to create loyal customers and to charge higher prices.
However, since it is not formally recognized by GAAP accounting rules, brand equity is tough to quantify precisely. According to experts at the consulting firm Sonecon, intellectual capital—of which brands are usually a key element—makes up an average 44.2 percent of enterprise market value (2009 data). In some industries, it’s much more than that.
Value at risk
Wherever there is great economic power, there is also what bankers call “value at risk.” For the same economic reasoning that causes people to rob banks because “that’s where the money is,” brands—especially leadings ones—are targets for economic attacks. I became aware of the potential damage of this through my work investigating the proliferation of counterfeit versions of high-value products in the consumer packaged goods and pharmaceutical industries.
Branding carries economic risks that are, on the one hand, similar to other corporate risks—theft, fire, weather-related damage, etc.—but different in that they attack the value of intangible assets, like brands.
I enriched my understanding by discussing this with brand experts like Jay Gronlund of Pathfinder Group, Patrick Marrinan of MSA, and David Abrahams of Brand Mediation and author of the pioneering 2008 study Brand Risk. I also conversed regularly with corporate security experts like Tom Kneir, then of Abbott Labs, and Rich Widup, then of Pfizer.
Brand risk has changed dramatically because branding itself has changed dramatically. Traditional media are “top-down”—you craft your message and deliver it in a coordinated and consistent way through a stable variety of channels—the marketing mix. You can control the reach and frequency of exposure and, ultimately, the brand image created.
That has all changed with digital and social media (DSM), which as of 2016 accounts for a dollar volume of advertising equal to print and traditional electronic advertising. With DSM, the flow is peer-to-peer through channels that are inherently less predictable than traditional ones.
The two sides of risk
As a financial construct, risk is a two-sided coin. There is an upside (opportunity) and a downside (threat). Social media outlets like YouTube, Facebook, Twitter, and Instagram plus “traditional digital” outlets like banner ads represent a huge value upside for advertisers—huge reach at relatively low cost. But there is a downside that is impossible to ignore—the active, deliberate attempt to erode brand value that I’ll call Brand Hacking.
Brand hacking is not just “something that happens”—it’s an intentional attack. It can involve producing counterfeits—which are now said to make up 10 percent of global shipments in some especially vulnerable categories.
Even worse, it can become part of an information warfare campaign targeting your brand or company. Activist consumers may use the internet to quickly and effectively organize boycotts of your product. Activist investors have been known to “distort and short”—that is, to short-sell a large stock position, then trash the company online so that its stock tanks for long enough that the shorts reap huge profits.
The technologies of mis- and dis-information are being perfected as you read this. Adobe, for example, is testing software (Cloak) that enables complete removal of an object—a person, for example—from a video.
Given these recent and rapid developments, I was curious to see how aggressively organizations are responding to these trends that put ever-larger chunks of their brand equity at risk. The results break new ground in this field. If you are already being affected by Brand Equity Risk (BER), as so many organizations are, you’ll want to know how other organizations are reacting.
If you are not yet affected by BER, it’s almost certain you will be. Please read my research note and feel free to contact me with your comments and questions. The time to prepare is before you’re in a crisis.