In my experience, marketers show great enthusiasm – in many cases too much enthusiasm – in asserting the scale of the contribution of brands and brand strategy to value creation.
The goal of this article is to share the information that can help marketers make a compelling argument about the types of context in which marketing investment will generate material and sustainable business value.
Intangible Assets are Becoming More Important…
As has been widely noted in the business press, intangible assets represent a greater proportion of business value than 25 years ago. Consider that in 1990 the three largest sectors in the S&P 500 were Industrials, Consumer Discretionary and Energy – three industries that rely heavily on physical assets. Today the three largest sectors of the S&P 500 are Technology, Financials and Healthcare – all of which rely primarily on intellectual property.
My analysis of the 13,000 largest publicly-traded companies in the world shows that physical assets accounted for only 36% of their value in 2017. For the largest 2,000 companies listed in the US, this number was 26%, reflecting the skew of the US economy towards sectors that rely on intangible assets.
As the chart illustrates, the proportion of total enterprise value (TEV) represented by tangible assets varies significantly by industry:
… But Brand is Only One Slice of the Intangible Pie
Within the industries that have the majority of their business value represented by intangible assets, the first thing that marketers need to consider is how much of this intangible value is represented by brands as opposed to other forms of intangible asset.
My analysis of 3,700+ mergers over the 10 years reveals that there are three primary forms of intangible asset – intellectual property, contracts and brands. IP assets (such as patents) account for a sizeable proportion of the value of Technology and Healthcare companies; while contracts (such a drilling rights, supply contracts, landing rights) are the dominant form of intangible asset in industries such as Energy and Transportation; while brands (in the form of copyrights and trademarks) are the intangible assets that matter most in consumer-facing industries such as Media, Food & Beverage, and Consumer Durables/Staples.
The second thing for marketers to note is that brands are concentrated in a relatively small number of industry sectors. My analysis of the lists of brand value published by Brand Finance, Forbes, Interbrand and Millward Brown each year shows that more than 50% come from just 5 of the 24 industry sectors (as defined by GICS – the Global Industry Classification Standard). Measured by the number of brands, these five sectors are Software, Automobiles, Food & Beverage, Banks, and Communications. Measured by brand value, Technology Hardware replaces Banks on the top 5 list.
Combining these three strands of analysis into intangible value, mergers and brand value generates the following “cheat sheet” for marketers about the relative importance of both tangible assets and brands across a range of industries:
One lesson that marketers should derive from the above table is that brand is not a primary driver of business value in a number of economically significant industries. The three largest industries globally as measured by revenue are Capital Goods, Energy, and Materials (aggregate global revenues of $5.7 trillion, $4.6 trillion and $3.9 trillion respectively) – and these are industries in which branding plays at best a secondary role.
Interbrand acknowledges this concentration of brands in specific industries. In its 2018 Best Global Brands Report, Interbrand notes that 59 of the 100 brands on the list comes from only five industry sectors – Automotive, Technology, Financial Services, Luxury, and Fast-Moving Consumer Goods (Interbrand uses a different industry categorization from GICS).
This concentration of brand value in certain industries means that marketers need to be cautious about making assertions about the universal significance of brands.
The statement that “our brand is our most important asset” is probably correct for the 195 publicly-traded companies whose brands feature on the Interbrand, Forbes, Millward Brown and Brand Finance lists (our analysis shows that for these companies, brand value represented an average of 19.3% of their enterprise value based on data for 2015 to 2018). However, these companies are a skewed sample and marketers need to acknowledge that brands may play a relatively minor role in other very sizeable industries.
“A Review Of The World’s Most Valuable Brands” – Jonathan Knowles
“Brand Equity Models: A Survey” – Jonathan Knowles
Jonathan Knowles is an acknowledged authority on the role of brands in business strategy (known as “marketing finance”) – specifically on the topics of customer value creation, brand strategy during mergers, marketing accountability, and the analysis of intangible value. He is the Founder and CEO of Type 2 Consulting, and has a background in Finance (Bank of England), Strategy Consulting (Marakon Associates), Creative Brand Strategy (Wolff Olins), Brand Equity Measurement (Stern Stewart/Y&R’s BrandEconomics) and Brand Valuation (Brand Finance). His articles have appeared in Harvard Business Review, Sloan Management Review, the Wall Street Journal and other publications.