Economy, Strategy & Finance Briefs

Making Intangibles Tangible: Who is to Blame When Brands are Written Down?

September 11, 2019

Kraft Heinz wrote down $15.4 billion of brand value in April 2019, Coty wrote down $3 billion of brand assets in July 2019, and P&G wrote down $8 billion of Gillette brand assets in August 2019. Tangential blame for the writedowns targeted the brand managers. In the case of Gillette media claimed the poorly conceived "Toxic Masculinity" ad campaign turned off many of their core customers. Kraft Heinz blamed poor marketing after the merger for the loss of market share that caused the problems leading to the Kraft writedown. Poor marketing resulting in a loss of brand equity may indeed be the drivers of brand writedowns, but far more likely are the accountants who see an opportunity to reduce tax exposure lured by a non-cash write off.

What happens when good marketing builds brand equity? Customer loyalty increases, repeat purchasing ensues, and the brands can command an increased price premium. But, nothing happens at all at least not from an accounting/balance sheet perspective in terms of the value of the brand. You see, internally grown brands are not on the balance sheet. Even acquired brands (which are on the balance sheet) are periodically evaluated for impairment, but never for accretion of value. So, this dichotomy creates a dilemma for those marketers responsible for the health and growth of the brand. Many CMOs find it challenging to get the budgets necessary to grow the brand when that growth does not show up on the financials except as an expense. When it comes to being accountable for the fair value of brands, the deck is stacked against those who are responsible for managing brands. Heads I win, tails you lose. In all fairness, the CFO will always be looking for opportunities to reduce expenses and to write off acquired brands at a convenient time. It doesn't make much sense outside of accounting, but there you have it.

This accounting rule also explains why budgeting for marketing, branding, advertising, training, hiring, research, PR, and other forms of intangible assets are so tricky and why CFOs are often seen as the enemy of CMO. The CFO is managing the financial performance of the company following generally accepted accounting principles (GAAP), but that doesn't solve the dilemma for the intangible asset managers.

Without changing the rule of GAAP, there is an alternative way to look at the value created by intangible assets so that CEOs, CFOs, CMOs and others responsible for building intangibles can get on the same page. It is called intangible capital, which is an estimated value of all intangible assets on an ongoing basis. When used as a management tool, this value provides feedback on whether intangible assets are going up or down. It allows the manager to request budgets based the potential ROI for their investments, and it provides a logical way to evaluate the possible return on budget requests.

There is hope that fair value measures for brands will begin to find traction in practice. The Marketing Accountability Standards Board (MASB) recently announced that ISO (International Organization for Standardization) published the ISO 20671 standard for brand evaluation, which calls for companies “to increase entity value as established by improvements in brand strength and brand performance and ultimately indicators of financial results.” Importantly, the standard applies to both internal and external brand valuations, and includes valuations completed by analysts, investors, and lenders. This is an important, and much needed step to get everyone to think about intangible assets as intangible capital.  

For brands to remain at the top of their game and to fulfill the promises that differentiate brands from generics, it is vital that CMOs continuously keep their fingers on the pulse of the consumer. CEOs and CFOs responsible for improving corporate value need to understand that cutting brand budgets in the face of disruptive and mounting competition is a recipe for failure. Building intangible capital models for evaluating the accretive value and potential of brands is a logical way to understand whether the investment requested for marketing is worthwhile.

It is time to rethink brand writedowns and for all managers to see their real value and for brand managers to be held accountable for the growth or decline of the value they create. Then the entire team will be working toward the same set of goals. Miscues will be written down, and financial growth celebrated. It just makes sense.