Building a strong brand today is incredibly difficult. One of the reasons this is true is that investors rarely consider the power of a brand when making investment decisions.
In theory investors should focus intently on branding. One of the things we know from research is that a good brand can add enormous value to a product or service. In fact, a strong brand can turn a commoditisd, undifferentiated product into something unique and special. For instance, as soon as you put the brand of Tiffany on a diamond, the value of the diamond shoots up. It is no longer just a diamond, it is a Tiffany diamond. Similarly, as soon as the McKinsey brand touches a consulting project, the value of the project leaps. It is now a McKinsey study, and if it is a McKinsey study people will likely assume that it is rigorous and thoughtful and valuable.
The reverse is also true; a weak brand erodes value. When a brand associated with low quality touches a product, expectations sink. For instance, in the United States, putting the Walmart brand name on a product changes perceptions dramatically. A Walmart branded diamond isnít really special at all.
Any investor, then, should care deeply about a companyís brands. Companies that are building powerful brands should see their stock price increase, while companies that are not investing in branding should see their stock price fall, all else being equal.
Unfortunately, the reality is very different; brands have little direct connection to a companyís stock price. The most important factor driving a companyís stock performance is results, particularly earnings and cash flow. A company that delivers financial results that beat investors expectations will almost always see a significant jump in stock price, and a company that delivers weak financial results will usually see a stock price decline.
The challenge is that branding has little impact on short term profits. Brands are long term assets; they build over time and they erode over time. But there are moments where the perceptions of a brand change quickly; the BP brand, for example, has taken an enormous hit over the past several months. In general, however, brands change slowly.
As a result, a company building a strong brand wonít see the results right away. Improving product quality or customer service, for example, will rarely result in a huge short term profit jump. Investing in a marketing campaign to build a brand wonít impact sales right away. In fact, a company investing in branding will often see weaker financial results in the short term, with a falling stock price.
The reverse is also true; companies that harvest their brands often see profits increase in the short run. A cost savings programme that damages product quality will often lead to short term profits while damaging the brand. Moving production to a low cost country will deliver cost savings and profits today, but the long term impact on the brand could well be negative. A deep price cut will often drive sales while damaging brand equity. Toyota, for example, drove enormous growth in recent years but apparently at the expense of quality and safety. This resulted in good financial results and a weaker brand.
One of the reasons brands are not reflected in stock price is that it is very hard to determine the precise value of a brand. In fact, it is almost impossible to say what a brand is worth at any point in time. This means that it is hard to determine if a company is building its brands. Profits are very apparent. Brand health is not.
A manager looking to deliver strong short term results will rarely invest in brand building. Instead, the focus will be on short term promotions, cost reduction efforts and quick hit new products.
Of course, this disconnect presents an opportunity. Savvy investors who are able to identify companies committed to brand building will be generously rewarded over time. While short term stock performance may be weak, in the long run results will definitely rebound as the value of the brand becomes clear.
Great brand builders certainly understand that brands are built over time. Investors who understand this will invest in managers with integrity and a belief in branding. In the long run, a powerful brand a delivers lasting profits and strong investment returns.