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Wednesday, October 5, 2022

Do brands really matter to shareholders?


While a strong brand in a company’s portfolio not only guarantees an excellent return on its share, it also helps in minimising the investment risk. However logical this might sound, the fact is that a majority of shareholders globally are still faced with a dilemma on how much of a brand is too much and how less is too less
MANISH PANDEY | New Delhi, November 18, 2013 14:26
Tags : Google | McDonald’s | Walmart | brands |

It was the late 1970s when magazines, tabloids and dailies across the globe – as if acting conspiratorially – bombarded the world with articles peddling the importance of brands. Brands were suddenly looked upon as a sure shot way, by companies, to get through the growing competition and rampant product proliferation. These intangible assets all at once achieved fame and were purported to be the lethal weapons that could bring unrivaled powers to a firm’s arsenal. Many, in fact, lived up to what was being expected out of them. For instance, brands such as Google, McDonald’s, Walmart, et al, have today virtually become the synonyms for their respective industries, thanks to their brand strength and to investments that went in to create such brands.


But, despite their glory run that continues till date, it’s quite interesting, if not ironic, to note there have been critics (for instance, Canadian author Naomi Klein’s No Logo and American investigative journalist Eric Schlosser’s Fast Food Nation) that have challenged the sensibility of brand orientation on several occasions. They have not only questioned the mighty existence of brands, but at times have argued upon that the concept of brands is just another marketing gimmick and nothing else. Be that as it may, do brands now really matter to shareholders, the owners of corporations?


“A brand is arguably the single most important intangible asset that has great potential in terms of opportunity growth for any company. But as far as investors are concerned, they only consider brands when it comes to choose between two companies that are equal in size and provide equal returns. Else brands really don’t matter to them,” says Dr. Alok Bharadwaj, Executive Vice President at Canon India. Research, though, doesn’t support that line of thought. While a strong brand in a company’s portfolio not only guarantees an excellent return on its share, it also helps in minimising the investment risk. The presence of brands has been seen to definitely enhance investors’ confidence on the company, which in turn stimulates and encourages further investment. A research done by the London based brand consultancy FutureBrand (part of the Interpublic Group) in 2003 on FTSE (FTSE calculates over 120,000 end of day and real-time indices covering more than 80 countries and all major asset classes) proved that companies with strongly branded portfolios consistently outperform their weakly branded counterparts. Even Brand Finance’s Global Intangible Finance Tracker across 53 national stock markets covering more than 37,000 companies shows that brands add to a third of the world’s wealth. Unni Krishnan, Managing Director, Brand Finance India communicates a similar view to us. As per him, strong brands impact both the demand and supply curves to add value to the business, which in turn significantly adds to the shareholders wealth.


A study conducted by Interbrand also shows that a strong corporate brand could add 5-7% to a company’s stock price in a bull market, and mitigate losses in a down market. Debashish Mitra, Former Director Sales and Marketing at Mercedes-Benz India gives us a similar view when he talks to the magazine, “Investing in a firm from just financials point-of-view is nothing but looking for short-to-mid term gains. It’s always the brand that is the long term asset for a company and subsequently for an investor.” His industry colleague, Sandeep Singh, Deputy Managing Director, Toyota Kiloskar agrees with him and feels that brand reputation and market returns go hand-in-hand. According to him, if there is a hit on the brand, a company could lose grip on the market and vice-versa. He recalls when Toyota posted a loss a few years ago, its share prices too went down at the bourses. But it was brand Toyota that quickly managed to regain the lost investor sentiment.


At the same time, a research done by Corporate Branding Partnership LLC, a UK-based consulting firm, during the two-day stock market crash in the US in October 1997, revealed that while companies with strong brands regained their losses in just two days, companies with weaker brands failed to recover. Thomas J. Madden (from University of South Carolina), Frank Fehle (from Barclays Global Investors) and Susan Fournier (from Boston University) did a similar study (Brands Matter: An Empirical Demonstration of the Creation of Shareholder Value through Branding) in 2006 and found that if one had invested $1,000 in August 1994 in the 111 strong-brand companies (as per the Interbrand World’s Most Valuable Brands), this investment would have more than quadrupled into $4,525 by December 2000. The same $1,000 investment in the overall stock market would have turned into $3,195 by end of the year 2000. “Therefore, when making investment decisions, it would be completely irrational for shareholders to ignore what has an effect on the value of their investments,” Prof. Hubert Gatignon, Faculty of Marketing at INSEAD, tells the magazine.


Certainly, a company which has strong brands in its product portfolio is usually more resistant to economic stress and as such can provide a more reliable and stable forecasting, both in terms of revenues and profits. Given this, brands are increasingly treated as any other asset producing demonstrable results for shareholders. In fact, one of the main pillars of a company or an organisation is its brand value. Most investors while doing valuation keep it in mind. Because the higher the brand value, potentially higher is chance to book profits. It becomes even more critical in a wired world, when, one wrong report in the social media, and your brand’s value might plummet along with your profits.


Although there are critics who feel that the brand strength does not protect an investor when market tastes change, when competitors develop more effective business models, or when disruptive new technology displaces a product, the truth of the matter is that the same holds true for any other factor too that affects shareholders’ wealth. So do brands really matter to shareholders? The concluding answer is that in the new-age stock trading scenario, where market information is discounted within a few milliseconds, a brand’s existence or non-existence might not matter in the extremely short term. But it surely does over the long term, both directly and indirectly, as the brand plays a more expansive role as time passes. 

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Issue Dated: Feb 5, 2017