Comment on this view

View a PDF version of this article (41KB)

The beginning of brand valuation
A decade after Rank Hovis McDougal, brand valuation has become an integral part of the brand management and strategy landscape. Today, corporate mergers and acquisitions are a regular feature across almost every market sector; and the constant focus on delivering ‘shareholder value’ means that companies are increasingly recognising the importance of brand guardianship and management as key commercial success factors.

No longer are businesses acquired simply for their tangible assets. Instead, significant premiums are paid for a company’s intangible assets, such as its brands, copyrights, patents and customer loyalty, which in the modern age have inherent commercial value in their own right. The growing prominence of private equity houses as major brand acquirers themselves is arguably symptomatic of this long-term trend in thinking.

The core brand valuation model works on the premise that brands, when well managed, affect the way that consumers behave in the market and that the brand owner derives an economic benefit as a result. It also asks the question: how much more valuable is the business because it owns certain brands?

It is therefore a marketing measure that reflects the security and growth prospects of the brand and a financial measure that reflects the earnings potential of the brand. For brand owners, brand managers, shareholders (and the wider business / investment community), a means to objectively assess the financial value of brands has been a welcome development.

A changing brand environment
The world in which brands operate now is arguably quite different to what it was when the original RHM valuation was done - and indeed even before that. The emergence of branding itself coincided to a great extent with the economic prosperity and social comfort afforded by the modern fossil fuel age. As consumers, we have inhabited a genuinely unique period in history.

But we live now in an age when climate change is unquestionably the most serious threat facing humanity and the real implications and effects of our carbon-intensive lifestyles are now being recognised. We are, in the words of leading environmental campaigner and commentator George Monbiot, living in ‘the brief historical interlude between ecological constraint and ecological catastrophe’. 

You don’t have to be a committed ‘green’ to recognise that climate change will have huge consequences for future patterns of (brand) consumption. And how we perceive brands for the truly ‘sustainable’ value they deliver will be very different going forward.

Climate change moves centre stage
For a long time, climate change wasn’t a significant consumer issue. Like the internet, it was hard to imagine what it was and what impact it could have before it entered the mainstream. When it did arrive, it was a bit overwhelming and scary. It threatened existing industries and business models, and challenged how we saw ourselves. Now that it’s here, it’s hard to imagine life without it. It is going to be around for a long while to come and will change things in ways we can’t yet imagine – think personal carbon allowances and rationing, for example. 

In its own way, the recent Stern Report was a landmark event. Previously regarded as a specialist topic for meteorologists, environmentalists, niche political parties and CSR professionals, climate change has become a mainstream issue receiving massive media exposure across all major channels, as well as high-level political attention – although we shouldn’t perhaps expect our leaders to do very much based on past experience.

Nevertheless, while there was little in the report that was truly original, it brought the issue right to the heart of the political and economic agenda. It has now become in public perception the subject of rational rather than emotional debate. Most people now know about climate change and carbon emissions, even if they might be a bit vague on the detail of what it means for them.

Awareness and understanding of climate change is at one level part of a wider consumer focus around ‘sustainability’, which also incorporates the demand for ethical production and greater corporate social responsibility.

Placing sustainability at the heart of the brand
What the holiday market has demonstrated is the importance of placing sustainability at the very heart of the organisation’s brand, rather than as an expedient label. These companies (like Responsible Travel) are able to incorporate eco-friendly aspects - such as community development and pollution-free activity - and establish a longer-term approach to profit and development. At the same time, these factors are finding growing favour with consumers who are looking for quality and are increasingly sophisticated and wiser to the negative impacts of mass tourism.

‘Green' has moved from niche money-costing point of principle to mainstream money-making marketing advantage. But while 60% of consumers now believe industry / companies are at fault for causing environmental damage or climate change (Henley World 2006 survey), only 10 per cent saw impact on the environment as the key factor when deciding which product or service to buy.
Environmental concerns may currently be part of a number of purchasing decision criteria, but people do believe that by shopping ethically they are making a difference. Seeing ourselves as consumers first and environmentalists second may well change before too long.

Climate change doesn’t just involve the ‘usual suspects’
For commercial organisations, climate change is not just an issue for those sectors or companies that are traditionally linked with the issue, such as oil and gas. Increasingly, climate change will potentially impact businesses in three key ways: regulatory risk (where for example a company may be subject to emissions regulation and buildings compliance); physical risk (such as the impact on property and insurance costs); and business risk (including the impact of climate change exposure to brand value and reputation).

Research undertaken for the Carbon Trust in 2005 indicated that the impact of climate change would potentially vary according to the particular sector. Not surprisingly, airlines, along with the food and drink sector were found to have the highest intangible value at risk (50% and 10% of market value, respectively).

But even though the figures for the other sectors examined (oil and gas, retail, banking and telecommunications) were around 2%, this would still represent several billions in share value in the UK alone. Other reputational elements at risk would include a company’s reputation amongst its business customers, staff, suppliers, shareholders and regulators.

If brand value is at risk from climate change, there would seem to be an opportunity for real differentiation against competitors that goes well beyond the ‘cosmetic’. Some organisations are already actively shaping their future strategy around the issue. 

Brand ‘leaders’ are already starting to emerge
In the short-medium term, non-green brands will probably survive, notwithstanding social pressures on business. But a tipping point is being reached, when individuals and major organisations are beginning to make sweeping changes.

The CEO of GE, America's biggest corporation, has effectively staked his company's future on its ability to "define the cutting edge in cleaner power and environmental technology." Under its ‘Ecomagination’ strapline, GE has promised by 2010 to double its research spending on cleaner technologies to $1.5 billion annually and double its sales of environment-friendly products to $20 billion annually. Meanwhile, GE will also reduce its emission of greenhouse gases by 1 percent by 2012. Without this action, emissions would have increased 40 percent. GE’s actions carry a lot of weight. Not only is it the largest company in the US with a market capitalisation of $381 billion, it is also the most widely-held stock in the world. Its CEO, Jeffery Immelt, represents arguably a new breed that emphasises a company's obligations to a range of stakeholders and interests including the global environment.

Consumer and business agendas are converging
Within the marketing and business community, the kind of brand evaluation framework first used with Rank Hovis McDougal still has an important role to play. But what of the ordinary consumer? How are they supposed to arrive at an informed and meaningful brand ‘value’ judgement in a carbon-constrained future?

At the same time, pressure from within the commercial sector for more accountability and openness is evident in the rise in non-financial reporting schemes, which are allowing more transparency and monitoring of production - a prerequisite for ethical production. Together, these two parallel movements are beginning to create the conditions for a major revision in eco-friendly patterns of consumption. What we are consequently seeing is a convergence between environmental and commercial agendas.

The green revolution is partly defensive. In an era of corporate scandals symbolised by the Enron debacle, CEOs understand that their brands are precious equity. To maintain trust in a brand, it isn't enough anymore to make good products. Consumers trust companies that are responsible citizens; they mistrust companies that appear selfish or wasteful. Even the global energy companies, once symbols of corporate arrogance, have begun to change.

Implications for consumer-oriented brand ‘valuation’
In terms of more transparent consumer-oriented evaluation, an evolutionary scenario can be imagined that encompasses three broad phases.

In the first phase, the web plays a significant role in facilitating word of mouth opinion and formal / informal evaluation. Dedicated sites may emerge that move the debate out of the environmental ‘periphery’ and start to put more pressure on companies and brands to operate in a sustainable way. The shift from geographic communities to multiple social and online communities, combined with multimedia communication, means peer not expert opinion counts today.

The second phase sees brands / organisations responding to growing consumer pressures with their own attempts at green accreditation and evaluation, working in many cases with key pressure groups, but seeking to develop some consistent template that allows consumers to begin making more informed decisions.

With governments typically soft-pedalling around the whole area of climate change at the present time, we are seeing the effective ‘privatisation’ of environmental policy. Informal networks are emerging that link influential NGOs, giant corporations and governments that want to solve social problems. These networks develop new rules that become industry standards.

One example of such ‘self-enforcing’ guidelines is an environmental benchmark for financial institutions known as the Equator Principles. Participating companies agree not to lend money for a project unless the borrower completes a detailed ‘environmental assessment’ that explains how it will meet criteria for sustainable development and other social goals. These principles have now been adopted by nearly all the major global financial institutions, including Citigroup, Bank of America, HSBC and JP Morgan Chase.

Longer term, some kind of transparent and simple to understand evaluation ‘mark’ may be developed with clear governmental backing that incorporates some combination of expert industry opinion, climate change science, financial analysis and consumer [lobbying] representation. This mark may reflect a set of discrete criteria that together constitute an overall grading assessment, with the detailed (and regularly updated) supporting evidence provided on a central register.

In conclusion
The development of a robust valuation framework has been an important milestone in the evolution of corporate branding and its acceptance across the wider business and financial community as a formal discipline that is capable of creating tangible (and even exponential) commercial value.

But the emergence of global warming as a mainstream consumer issue now adds a whole new dimension to the equation. It has major implications for current and future brand value – both in terms of its physical effects and also how organisations are seen to be responding to it.

Applying some selective ‘greenwash’ across existing business practices will become untenable in the face of increasing consumer awareness, understanding and experience of climate change. Empty public relations and inflated claims will come back to haunt many brands as consumers look ever harder at how brands operate.

And what about ‘guilt by association’? If Exxon, for example, is seen as one of the worst corporate offenders for its attempts to block positive action climate change, what impact might its association with Tesco have on the latter’s brand image and reputation? It therefore may not just be a brand’s own actions that are closely scrutinized, but the company it keeps.

On a more positive note, if brand value is at risk from climate change, there is an opportunity for brands to really differentiate themselves. But this will mean adopting a much more forward-looking mindset that takes account of the risks, the issues and the longer-term opportunities, whilst also recognising the response times that may be involved. Balancing this with the seemingly incessant short-term demands of shareholders will be an interesting challenge, to say the least.

Finally, what of the consumer? What will they be looking for?
Current brand valuation models mean nothing to them, nor indeed should they. This doesn’t mean that ‘ignorance’ is an option, nor are they likely to simply place their trust in the claims of competing brands.

Realistically, they will expect to see a consistent means of deciding where their brand trust and loyalty should be placed in the new carbon-constrained world. One which is clear, simple to understand and which strikes an appropriate and sustainable balance between ethics, lifestyle, practicality and affordability.

View a PDF version of this article (41KB)

Moot Point?

Our Views