- Email: [email protected]
Brand Equity and Shareholder Value
Pergamon
European Management Journal Vol. 21, No. 4, pp. 521–527, 2003 2003 Elsevier Ltd. All rights reserved. Printed in Great Britain doi:10.1016/S0263-2373(03)00076-8 0263-2373 $30.00 + 0.00
Brand Equity and Shareholder Value CHARLES PAHUD DE MORTANGES, Maastricht University ALLARD VAN RIEL, Maastricht University It is often assumed that brands represent an asset, as well as a source of current and future earnings and cash flows for a firm. As such, the value of the brand, or brand equity, should manifest itself in the market value of the firm and thus have an impact on shareholder value. Yet, almost no research exists that has empirically investigated this relationship between brand value and shareholder value. In the present study, brand equity is measured for 43 Dutch corporate brands using the Brand Asset Valuator for the years 1993 and 1997. Directional changes within the BAV Power Grid, measuring Brand Strength and Brand Stature, are statistically compared with directional changes in shareholder value between 1993 and 1997. Three different measures for determining shareholder value are used: Total Shareholder Return, Earnings per Share, and the Market-to-Book ratio. Various indications are found that confirm the expected relationships, but a clear need is observed to develop reliable and valid indicators for shareholder value. Some managerial implications, limitations of the study and directions for future research are discussed. 2003 Elsevier Ltd. All rights reserved. Keywords: Brand equity, Shareholder value, Brand asset valuator
Introduction Typically, brands are considered intangible corporate assets. It is often suggested that they possess economic value and create wealth for the company’s shareholders (Aaker, 1996; Doyle, 2001; Kerin and Sethuraman, 1998). However, publications providing empirical evidence for the relationship between brand equity and shareholder value are exceedingly scarce. Still, according to Kerin and Sethuraman (1998), the conceptual arguments for the existence of such a relationship are compelling enough to suggest that this linkage justifies further attention. However, they conclude that: ‘a conclusive linkage between European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
brand value and shareholder value has yet to be established’ (Kerin and Sethuraman, 1998, p. 271). In this paper, we attempt to provide some new evidence for the link between brand equity, measured using the Brand Asset Valuator (BAV) model (Young and Rubicam, 2000), and shareholder value, that was measured using Total Shareholder Return, Earnings Per Share, and the Market-to-Book ratio. To our knowledge, this is the first time that the BAV is used to study the relationship between brand equity and shareholder value, while using three different indicators for shareholder value.
Background Intuitively, one would expect brand equity to influence the market value of a firm (Doyle, 2001). However, little is known about whether investors actually value the effects of brand equity as reflected in the stock price. Finance and marketing are usually viewed as two separate entities within organizations and little attention has been paid to the effect of marketing decisions on the value of a company (Kerin and Sethuraman, 1998). Although this often resulted in separate academic research agendas, a few studies have been carried out on stock market reactions to brand extension announcements, customer service changes and product errors (Lane and Jacobson, 1995; Nayyar, 1995; Pahud de Mortanges and Tourani Rad, 1998). Kerin and Sethuraman (1998) conducted a first empirical study investigating the relationship between brand equity and shareholder value for US-based consumer goods companies. In their study the (mostly finance-based) Interbrand method was employed, using secondary sources (data were extracted from the Financial World). The market-to-book value of the company was used as a single indicator for shareholder value. Using this approach, a positive (albeit weak) relationship between brand equity and shareholder value was found. 521
BRAND EQUITY AND SHAREHOLDER VALUE
The Brand Asset Valuator (BAV) Model Several methods for measuring what a brand may be worth have emerged over the years (Kriegbaum, 1998). Many of these methods are finance-, or accounting-based. There is no clear evidence that marketing-based consumer evaluation models for determining brand equity are superior in comparison to financial models, but the latter appear to be a rather static approach and the managerial implications derived from research based on financial indicators are limited. Also, a narrow focus on financial data is probably more useful for accounting purposes, or when a brand is put up for sale (Murphy, 1989). We believe one of the more versatile and usable consumer-based methods, is the Brand Asset Valuator (BAV) model (cf. Young & Rubicam, 2000). This is an intuitively appealing, dynamic, marketing-based consumer evaluation technique developed by Young & Rubicam Inc. for measuring brand equity (Agres and Dubitsky, 1996). The model dynamically conceptualizes brand equity as driven by two components: customer perceived brand Stature and customer perceived brand Strength. Antecedents of these two components are: the level of Differentiation of the brand, Relevance of this differentiation to the consumer, the resulting Esteem, residing in the mind of the consumer as Knowledge (See Figure 1). The factor Differentiation, or the ‘perceived distinctiveness of the brand to the customer’ (Agres and Dubitsky, 1996, p. 23) precedes all other features. It is often argued that consumer choice and potential margins are driven by Differentiation (e.g. Aaker, 1996; Kapferer, 1994; Keller, 1999). Once a brand is introduced, its Differentiation will define the brand
and distinguish it from others. As brands mature and competing brands are introduced, we see that Differentiation often declines. However, even after reaching the maturity phase in the life cycle, a brand can perpetuate its level of Differentiation as a result of good brand management. Creating and maintaining Relevance of the distinct brand to the customer will be the next step. Relevance measures the appreciation of a brand to a customer in terms of the marketing mix. Is it priced right? Is it distributed where consumers can find it? Does it come in the right form? Is it packaged well? Relevance and Differentiation together result in Brand Strength, according to Young & Rubicam a strong indicator for future brand performance and brand health (see Figure 1). It is the aim, and challenge, of every brand in the world to create relevant differentiation for the customer. Esteem is considered a third driver of brand equity. Esteem is defined as the extent to which consumers hold a brand, which is relevant to them, in high regard. Does it live up to consumers’ expectations? How well does it do what it is intended to do? According to Agres and Dubitsky (1996) Esteem is the result of consumer perceptions of quality and popularity. If a brand has established a relevant Differentiation and consumers come to hold it in high Esteem, brand Knowledge is the outcome. Knowledge in the context of this model implies that consumers are both explicitly aware of the brand and understand what the brand stands for. Thus, Knowledge is not simply equal to brand awareness, and is not a consequence of advertising and/or publicity alone. Brand Stature results from Esteem and Knowledge (see Figure 1). Brand Stature indicates brand status and scope — and determines the consumer’s responses to a brand. Brand Strength plotted against Brand Stature produces a grid, which provides managers with diagnostic insight. In the BAV model, this is called a Power Grid (see Figure 2). The Power Grid defines a cycle for brand development and provides a foundation for strategic marketing decisions. By exposing the strengths, or the weaknesses of a brand, it shows which strategic route will lead to a stronger brand position. Furthermore, it helps to identify the roles and potential contributions of each of the elements of the marketing mix. Therefore, the Power Grid is a good summary tool for the information captured in the BAV. The scores on the different items are plotted as percentile ranks among all other brands measured. Especially for corporate brands, a strong relationship should be expected between the position on the grid and the financial health of the company.
Figure 1 Brand Equity Measurement with the Brand Asset Valuator (BAV)
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Thus, the BAV model, where evaluation is based European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
BRAND EQUITY AND SHAREHOLDER VALUE
third measure that can be used as an indicator for shareholder value is Earnings per Share (EPS). EPS is a company’s profit divided by the number of its outstanding shares. If a company earned $2 million in one year, while having 2 million shares of stock outstanding, its EPS would be $1 per share. Wellknown, successful brands are often sold at premium prices with corresponding high profit margins. Higher profit margins could result in higher EPS.
Research Design
Figure 2 The BAV Power Grid (Source Young & Rubicam, 2000)
on the perceptions and opinions of actual (or potential) users of the brand, is more dynamic (one can trace movements within the grid over time) and offers clear managerial implications for marketing strategy. For those reasons, data generated by the BAV model have been used for this study. More specifically, we have tried to link brand movements within the grid with changes in shareholder value on the basis of two different points in time: 1993 and 1997.
Shareholder Value One purpose of marketing is to create and manage market-based assets to deliver shareholder value (Srivastava et al., 1999). Brand equity influences sales growth and operating profit margins and is one of the factors that drive value (Rappaport, 1998). One method of determining shareholder value is by measuring the market-to-book ratio (Day and Fahey, 1988). A firm creates shareholder wealth by ensuring that the warranted market value of the equity capital invested in a firm by its shareholders exceeds the book value of equity (Varaiya et al., 1987). According to these authors a firm creates value when the market-to-book ratio is greater than 1.0, destroys value when market-to-book ratio is less than 1.0, and sustains value if the market-to-book ratio is 1.0. Another method of measuring shareholder value is Total Shareholder Return (TSR). Investors often regard TSR as the single most important measure of corporate performance. Total Shareholder Return = Dividends + Share Price Appreciation. What drives dividends and share price appreciation is surplus cash. A company’s ability to drive up share prices depends on its ability to consistently generate surplus cash well into the future (Rappaport, 1998). A European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
The original dataset contained evaluations of approximately 1100 brands obtained through questionnaires from 1500 Dutch consumers in 1993 and in 1997 respectively. From these initial 1100 brands only 43 corporate brands (see Figure 3 for the different industry sectors) were included in the analysis. This was the result of the strict criteria set for usefulness for this study, namely: ❖ Owner of the brand had to be a Dutch public company listed on the Amsterdam Stock Exchange in the year 1993 as well as in 1997. ❖ Owner of the brand had to be the same in 1993 as in 1997. ❖ The brand had to generate at least 10 per cent of total company revenue1. Data from the BAV model for 1993 and for 1997 were used to obtain information about developments over time with respect to brand equity. Information about the developments in the three chosen indicators of shareholder value were obtained from DataStream. Financial and Brand Equity indices were then cross-tabulated, to determine whether an increase or decrease in a firm’s brand equity corresponded with a change in financial indicators. Brand Strength and Brand Stature, as well as the resultant Brand Value were used as indicators of brand equity. TSR, EPS and Market-to-Book Value (MTBV) are measures by which shareholders can determine whether the value of their holdings in a company has increased, remained unchanged, or have decreased. TSR, EPS and MTBV were obtained from DataStream. The DataStream Return Index provided the indicator for TSR, as it incorporates stock price appreciation and dividends
Findings In Fig. 4, the directional changes for 43 Dutch brands have been plotted, using the BAV model. The dots represent the relative positions on the Grid for 1993 and the squares the positions for 1997. By connecting them an overview of the movements is obtained, over a four-year time period, of the brands within the 523
BRAND EQUITY AND SHAREHOLDER VALUE
Figure 3 The Different Industrial Sectors of the Sample
Figure 4 Directional Changes for 43 Dutch Brands: 1993 and 1997
Brand Strength – Brand Stature grid. This shows that the BAV can be a useful tool to monitor the effects of managerial decisions relating to brand management in terms of movements within the Power Grid over time. These movements were then associated with changes in shareholder value, in order to relate them to the creation of value for the companies. To investigate the relationship between the development of brand equity over time and the development of shareholder 524
value, chi-square contingency tables were used. This method is suited for investigating the (in-) dependence of variables in cross-classifications. First, the differences between 1993 and 1997 in the three BAV indicators and the shareholder value indicators were calculated for each company. Second, companies were clustered into the four cells of the contingency tables: showing a simultaneous increase/increase, increase/decrease, decrease/decrease and decrease/increase in the BAV indicators and shareholder value respectively. The relative numbers of European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
BRAND EQUITY AND SHAREHOLDER VALUE
Table 1
Contingency Table Stock Return Index/BAV Measures Brand Strength
TSR Down
Up
Total
χ2 p
Count % within R % within B % of Total Count % within R % within B % of Total Count % within R % within B % of Total
Brand Stature
Down
Up
Total
Down
2 66.7 10 4.7 18 45 90 41.9 20 46.5 100 46.5 0.5 0.47
1 33.3 4.4 2.3 22 55 95.7 51.2 23 53.5 100 53.5
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
3 100 13.0 7.0 20 50 87.0 46.5 23 53.5 100 53.5 2.80 0.09∗
cases in each of the cells provided insight into the strength of the relationship, expressed in the chisquare values. The findings are represented in Tables 1–3. Table 1 presents Chi-square contingencies, relating directional changes in the TSR Index and the BAV indicators. For example, in 51.2 per cent of the cases we see an increase in Brand Strength matched by an increase in the TSR. The probability that an increase in Brand Strength coincides with an increase in the TSR Index is 5.7 per cent higher than that a decrease in Brand Strength will result in an increase in the Return Index. The direction of the relationship is thus confirmed, though not significant. For Brand Stature, this probability is 13.0 per cent higher. The corresponding chi-square value is significant (α = 0.10). This confirms the expected dependency between Brand Stature and TSR. Indications for the existence of the expected relationships between Brand Equity and TSR values are absent in our data. Table 2
Down
Up
Total
χ2 P
Up
Total
Down
Up
Total
0 0 0 0 20 50 100 46.5 20 46.5 100 46.5
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
2 66.7 9.1 4.7 20 50 90.9 46.5 22 51.2 100 51.2 0.31 0.58
1 33.3 4.8 2.3 20 50 95.2 46.5 21 48.8 100 48.8
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
In Table 2 the chi-square contingency table relating directional changes in EPS and the BAV indicators is presented. The table shows that no significant relationship between changes in brand value and EPS could be found. In Table 3 the chi-square contingency table relating directional changes in MTBV and the BAV indicators is presented. From this table it becomes clear that the relationship between brand equity and shareholder value is most pronounced when using the MTBV as an indicator of shareholder return. Two significant relationships are found in our data: between Brand Strength and MTBV, and between Brand Equity and MTBV.
Conclusion The above shows that it is indeed possible to obtain indications of changes in brand equity and demon-
Contingency Table Earnings per Share/BAV Measures Brand Strength
EPS
Brand Equity
Down Count 4 % within R 57.1 % within B 20 % of Total 9.3 Count 16 % within R 44.4 % within B 80 % of Total 37.2 Count 20 % within R 46.5 % within B 100 % of Total 46.5 0.38 0.54
Brand Stature
Brand Equity
Up
Total
Down
Up
Total
Down
Up
Total
3 42.9 13.0 7.0 20 55.6 87.0 46.5 23 53.5 100 53.5
7 100 16.3 16.3 36 100 83.7 83.7 43 100 100 100
5 71.4 21,7 11.6 18 50 78.3 41.9 23 53.5 100 54.5 1.08 0.30
2 28.6 10 4.7 18 50 90 41.9 20 46.5 100 46.5
7 100 16.3 16.3 36 100 83.7 83.7 43 100 100 100
4 57.1 18.2 9.3 18 50 81.8 41.9 22 51.2 100 51.2 0.12 0.73
3 42.9 14.3 7.0 18 50 85.7 41.9 21 48.8 100 48.8
7 100 16.3 16.3 36 100 83.7 83.7 43 100 100 100
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Table 3
Contingency Table Market to Book Value/BAV Measures Brand Strength
MTBV Down
Up
Total
χ2 P
Down Count 0 % within R 0 % within B 0 % of Total 0 Count 20 % within R 50 % within B 100 % of Total 46.5 Count 20 % within R 46.5 % within B 100 % of Total 46.5 2.80 0.09∗
Brand Stature
Up
Total
Down
Up
Total
Down
3 100 13.0 7.0 20 50 87.0 46.5 23 53.5 100 53.5
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
1 33.3 4.4 2.3 22 55 95.7 51.2 23 53.5 100 53.5 0.53 0.47
2 66.7 10 4.7 18 45 90 41.9 20 46.5 100 46.5
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
0 0 0 0 22 55 100 51.2 22 51.2 100 51.2 3.38 0.07∗
strate that the performance (in terms of ‘Strength’ and ‘Stature’) of a brand may have significant impact on the value of a firm. These findings are consistent with the premise that the purpose of marketing is not only to create value for the company’s customers, but that this has to result in creating value for its owners (i.e. the shareholders) as well. A reliable instrument should make it possible to hold marketers in general, and brand managers in particular, accountable for the financial implications of their strategies, especially in terms of shareholder value. Focusing more closely on monitoring brand equity and shareholder value in a frequent and consistent manner will forge a much-desired closer cooperation between marketing and finance professionals within a firm. A number of limitations are associated with this study. First, the relationships we found do not appear to occur consistently and seem to depend strongly on the measures employed to determine shareholder value. This points at the need to develop a valid and reliable measurement instrument for the various dimensions of the shareholder value construct. Second, the relationships we found are relatively weak and asymmetrical. This is in the first place due to limitations with respect to the size and heterogeneity our sample. The criteria used to select the participating companies resulted in a rather unbalanced sample, including a relatively large share of companies that had increased their value in the 1993–1997 period. This is partially due to the fact that changes in value were not corrected for changes in overall stock exchange performance, or industry specific performance indices. More research will therefore be needed to investigate the hypothesized relationships in various industry sectors. This study was also limited to investigating a relationship between the direction of the change in brand equity and the corresponding directional change in shareholder value, and not the magnitude of those changes. In order to determine the effects of invest526
Brand Equity Up
Total
3 100 14.3 7.0 18 45 85.7 41.9 21 48.8 100 48.8
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
ments in marketing strategies more precisely, further research efforts should be devoted to the investigation of correlations between the changes.
Acknowledgements The authors gratefully acknowledge the support from Young & Rubicam Inc. who kindly provided us with data from the BAV, and the contribution of Rene´ van der Velden, who undertook analyses for this study as part of his postgraduate thesis.
Note 1. Insufficient contribution of a brand to total firm revenue excluded many brands. For example, Unilever brands (160 at the time) had to be excluded from our sample for this reason. This explains our focus on corporate brands, or on product brands that are similar to the company name (e.g. Philips, Heineken).
References Aaker, D.A. (1996) Building Strong Brands. Free Press, New York. Agres, S.J. and Dubitsky, T.M. (1996) Changing needs for brands. Journal of Advertising Research 1, 21–30. Day, G. and Fahey, L. (1988) Valuing marketing strategies. Journal of Marketing July, 45–57. Doyle, P. (2001) Building value-based branding strategies. Journal of Strategic Marketing 4, 255–268. Kapferer, J.-N. (1994) Strategic Brand Management: New Approaches to Creating and Evaluating Brand Equity. Free Press, New York. Keller, K.L. (1999) Managing brands for the long run: brand reinforcement and revitalization strategies. California Management Review 3, 102–124. Kerin, R.A. and Sethuraman, R. (1998) Exploring the brand value — shareholder value nexus for consumer goods companies. Journal of the Academy of Marketing Science 4, 260–273. Kriegbaum, C. (1998) Valuation of brands — a critical com-
European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
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parison of different methods. Dresdner Beitra¨ge zur Betriebswirtschaftslehre, 1–26. Lane, V. and Jacobson, R. (1995) Stock market reactions to brand extension announcements: The effects of brand attitude and familiarity. Journal of Marketing January, 63–77. Murphy, J. (1989) Brand Valuation. Hutchinson, London. Nayyar, P.R. (1995) Stock market reactions to customer service changes. Strategic Management Journal, 39–53. Pahud de Mortanges, C. and Tourani Rad, A. (1998) Marketing strategy and market value: an event study analysis. European Management Journal 3, 365–372. Rappaport, A. (1998) Creating Shareholder Value: A Guide for Managers and Investors (2nd edn). The Free Press, New York.
Srivastava, R.K., Shervani, T.A. and Fahey, L. (1999) Marketing, business processes, and shareholder value: an organizationally embedded view of marketing activities and the discipline of marketing. Journal of Marketing 4, 168–180. Varaiya, N., Kerin, R.A. and Weeks, D. (1987) The relationship between growth, profitability, and firm value. Strategic Management Journal Sept-Oct, 487–497. Young and Rubicam (2000) BAV Brand Asset Valuator white paper. Retrieved from the Internet: http://www.yr.com/knowledge/YR-BAV—white— paper.pdf, accessed: December 2001.
CHARLES PAHUD DE MORTANGES, Faculty of Economics and Business Administration, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands. E-mail: [email protected]
ALLARD C.R. VAN RIEL, Faculty of Economics and Business Administration, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands. E-mail: [email protected]
Charles Pahud de Mortanges is Associate Professor of Marketing at Maastricht University. His research interests are in brand management and valuation, and global marketing strategies.
Allard C.R. van Riel is Assistant Professor of Logistics and Marketing in the Department of Marketing at Maastricht University. His research focuses on decision-making in high-tech service innovation.
European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
527
European Management Journal Vol. 21, No. 4, pp. 521–527, 2003 2003 Elsevier Ltd. All rights reserved. Printed in Great Britain doi:10.1016/S0263-2373(03)00076-8 0263-2373 $30.00 + 0.00
Brand Equity and Shareholder Value CHARLES PAHUD DE MORTANGES, Maastricht University ALLARD VAN RIEL, Maastricht University It is often assumed that brands represent an asset, as well as a source of current and future earnings and cash flows for a firm. As such, the value of the brand, or brand equity, should manifest itself in the market value of the firm and thus have an impact on shareholder value. Yet, almost no research exists that has empirically investigated this relationship between brand value and shareholder value. In the present study, brand equity is measured for 43 Dutch corporate brands using the Brand Asset Valuator for the years 1993 and 1997. Directional changes within the BAV Power Grid, measuring Brand Strength and Brand Stature, are statistically compared with directional changes in shareholder value between 1993 and 1997. Three different measures for determining shareholder value are used: Total Shareholder Return, Earnings per Share, and the Market-to-Book ratio. Various indications are found that confirm the expected relationships, but a clear need is observed to develop reliable and valid indicators for shareholder value. Some managerial implications, limitations of the study and directions for future research are discussed. 2003 Elsevier Ltd. All rights reserved. Keywords: Brand equity, Shareholder value, Brand asset valuator
Introduction Typically, brands are considered intangible corporate assets. It is often suggested that they possess economic value and create wealth for the company’s shareholders (Aaker, 1996; Doyle, 2001; Kerin and Sethuraman, 1998). However, publications providing empirical evidence for the relationship between brand equity and shareholder value are exceedingly scarce. Still, according to Kerin and Sethuraman (1998), the conceptual arguments for the existence of such a relationship are compelling enough to suggest that this linkage justifies further attention. However, they conclude that: ‘a conclusive linkage between European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
brand value and shareholder value has yet to be established’ (Kerin and Sethuraman, 1998, p. 271). In this paper, we attempt to provide some new evidence for the link between brand equity, measured using the Brand Asset Valuator (BAV) model (Young and Rubicam, 2000), and shareholder value, that was measured using Total Shareholder Return, Earnings Per Share, and the Market-to-Book ratio. To our knowledge, this is the first time that the BAV is used to study the relationship between brand equity and shareholder value, while using three different indicators for shareholder value.
Background Intuitively, one would expect brand equity to influence the market value of a firm (Doyle, 2001). However, little is known about whether investors actually value the effects of brand equity as reflected in the stock price. Finance and marketing are usually viewed as two separate entities within organizations and little attention has been paid to the effect of marketing decisions on the value of a company (Kerin and Sethuraman, 1998). Although this often resulted in separate academic research agendas, a few studies have been carried out on stock market reactions to brand extension announcements, customer service changes and product errors (Lane and Jacobson, 1995; Nayyar, 1995; Pahud de Mortanges and Tourani Rad, 1998). Kerin and Sethuraman (1998) conducted a first empirical study investigating the relationship between brand equity and shareholder value for US-based consumer goods companies. In their study the (mostly finance-based) Interbrand method was employed, using secondary sources (data were extracted from the Financial World). The market-to-book value of the company was used as a single indicator for shareholder value. Using this approach, a positive (albeit weak) relationship between brand equity and shareholder value was found. 521
BRAND EQUITY AND SHAREHOLDER VALUE
The Brand Asset Valuator (BAV) Model Several methods for measuring what a brand may be worth have emerged over the years (Kriegbaum, 1998). Many of these methods are finance-, or accounting-based. There is no clear evidence that marketing-based consumer evaluation models for determining brand equity are superior in comparison to financial models, but the latter appear to be a rather static approach and the managerial implications derived from research based on financial indicators are limited. Also, a narrow focus on financial data is probably more useful for accounting purposes, or when a brand is put up for sale (Murphy, 1989). We believe one of the more versatile and usable consumer-based methods, is the Brand Asset Valuator (BAV) model (cf. Young & Rubicam, 2000). This is an intuitively appealing, dynamic, marketing-based consumer evaluation technique developed by Young & Rubicam Inc. for measuring brand equity (Agres and Dubitsky, 1996). The model dynamically conceptualizes brand equity as driven by two components: customer perceived brand Stature and customer perceived brand Strength. Antecedents of these two components are: the level of Differentiation of the brand, Relevance of this differentiation to the consumer, the resulting Esteem, residing in the mind of the consumer as Knowledge (See Figure 1). The factor Differentiation, or the ‘perceived distinctiveness of the brand to the customer’ (Agres and Dubitsky, 1996, p. 23) precedes all other features. It is often argued that consumer choice and potential margins are driven by Differentiation (e.g. Aaker, 1996; Kapferer, 1994; Keller, 1999). Once a brand is introduced, its Differentiation will define the brand
and distinguish it from others. As brands mature and competing brands are introduced, we see that Differentiation often declines. However, even after reaching the maturity phase in the life cycle, a brand can perpetuate its level of Differentiation as a result of good brand management. Creating and maintaining Relevance of the distinct brand to the customer will be the next step. Relevance measures the appreciation of a brand to a customer in terms of the marketing mix. Is it priced right? Is it distributed where consumers can find it? Does it come in the right form? Is it packaged well? Relevance and Differentiation together result in Brand Strength, according to Young & Rubicam a strong indicator for future brand performance and brand health (see Figure 1). It is the aim, and challenge, of every brand in the world to create relevant differentiation for the customer. Esteem is considered a third driver of brand equity. Esteem is defined as the extent to which consumers hold a brand, which is relevant to them, in high regard. Does it live up to consumers’ expectations? How well does it do what it is intended to do? According to Agres and Dubitsky (1996) Esteem is the result of consumer perceptions of quality and popularity. If a brand has established a relevant Differentiation and consumers come to hold it in high Esteem, brand Knowledge is the outcome. Knowledge in the context of this model implies that consumers are both explicitly aware of the brand and understand what the brand stands for. Thus, Knowledge is not simply equal to brand awareness, and is not a consequence of advertising and/or publicity alone. Brand Stature results from Esteem and Knowledge (see Figure 1). Brand Stature indicates brand status and scope — and determines the consumer’s responses to a brand. Brand Strength plotted against Brand Stature produces a grid, which provides managers with diagnostic insight. In the BAV model, this is called a Power Grid (see Figure 2). The Power Grid defines a cycle for brand development and provides a foundation for strategic marketing decisions. By exposing the strengths, or the weaknesses of a brand, it shows which strategic route will lead to a stronger brand position. Furthermore, it helps to identify the roles and potential contributions of each of the elements of the marketing mix. Therefore, the Power Grid is a good summary tool for the information captured in the BAV. The scores on the different items are plotted as percentile ranks among all other brands measured. Especially for corporate brands, a strong relationship should be expected between the position on the grid and the financial health of the company.
Figure 1 Brand Equity Measurement with the Brand Asset Valuator (BAV)
522
Thus, the BAV model, where evaluation is based European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
BRAND EQUITY AND SHAREHOLDER VALUE
third measure that can be used as an indicator for shareholder value is Earnings per Share (EPS). EPS is a company’s profit divided by the number of its outstanding shares. If a company earned $2 million in one year, while having 2 million shares of stock outstanding, its EPS would be $1 per share. Wellknown, successful brands are often sold at premium prices with corresponding high profit margins. Higher profit margins could result in higher EPS.
Research Design
Figure 2 The BAV Power Grid (Source Young & Rubicam, 2000)
on the perceptions and opinions of actual (or potential) users of the brand, is more dynamic (one can trace movements within the grid over time) and offers clear managerial implications for marketing strategy. For those reasons, data generated by the BAV model have been used for this study. More specifically, we have tried to link brand movements within the grid with changes in shareholder value on the basis of two different points in time: 1993 and 1997.
Shareholder Value One purpose of marketing is to create and manage market-based assets to deliver shareholder value (Srivastava et al., 1999). Brand equity influences sales growth and operating profit margins and is one of the factors that drive value (Rappaport, 1998). One method of determining shareholder value is by measuring the market-to-book ratio (Day and Fahey, 1988). A firm creates shareholder wealth by ensuring that the warranted market value of the equity capital invested in a firm by its shareholders exceeds the book value of equity (Varaiya et al., 1987). According to these authors a firm creates value when the market-to-book ratio is greater than 1.0, destroys value when market-to-book ratio is less than 1.0, and sustains value if the market-to-book ratio is 1.0. Another method of measuring shareholder value is Total Shareholder Return (TSR). Investors often regard TSR as the single most important measure of corporate performance. Total Shareholder Return = Dividends + Share Price Appreciation. What drives dividends and share price appreciation is surplus cash. A company’s ability to drive up share prices depends on its ability to consistently generate surplus cash well into the future (Rappaport, 1998). A European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
The original dataset contained evaluations of approximately 1100 brands obtained through questionnaires from 1500 Dutch consumers in 1993 and in 1997 respectively. From these initial 1100 brands only 43 corporate brands (see Figure 3 for the different industry sectors) were included in the analysis. This was the result of the strict criteria set for usefulness for this study, namely: ❖ Owner of the brand had to be a Dutch public company listed on the Amsterdam Stock Exchange in the year 1993 as well as in 1997. ❖ Owner of the brand had to be the same in 1993 as in 1997. ❖ The brand had to generate at least 10 per cent of total company revenue1. Data from the BAV model for 1993 and for 1997 were used to obtain information about developments over time with respect to brand equity. Information about the developments in the three chosen indicators of shareholder value were obtained from DataStream. Financial and Brand Equity indices were then cross-tabulated, to determine whether an increase or decrease in a firm’s brand equity corresponded with a change in financial indicators. Brand Strength and Brand Stature, as well as the resultant Brand Value were used as indicators of brand equity. TSR, EPS and Market-to-Book Value (MTBV) are measures by which shareholders can determine whether the value of their holdings in a company has increased, remained unchanged, or have decreased. TSR, EPS and MTBV were obtained from DataStream. The DataStream Return Index provided the indicator for TSR, as it incorporates stock price appreciation and dividends
Findings In Fig. 4, the directional changes for 43 Dutch brands have been plotted, using the BAV model. The dots represent the relative positions on the Grid for 1993 and the squares the positions for 1997. By connecting them an overview of the movements is obtained, over a four-year time period, of the brands within the 523
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Figure 3 The Different Industrial Sectors of the Sample
Figure 4 Directional Changes for 43 Dutch Brands: 1993 and 1997
Brand Strength – Brand Stature grid. This shows that the BAV can be a useful tool to monitor the effects of managerial decisions relating to brand management in terms of movements within the Power Grid over time. These movements were then associated with changes in shareholder value, in order to relate them to the creation of value for the companies. To investigate the relationship between the development of brand equity over time and the development of shareholder 524
value, chi-square contingency tables were used. This method is suited for investigating the (in-) dependence of variables in cross-classifications. First, the differences between 1993 and 1997 in the three BAV indicators and the shareholder value indicators were calculated for each company. Second, companies were clustered into the four cells of the contingency tables: showing a simultaneous increase/increase, increase/decrease, decrease/decrease and decrease/increase in the BAV indicators and shareholder value respectively. The relative numbers of European Management Journal Vol. 21, No. 4, pp. 521–527, August 2003
BRAND EQUITY AND SHAREHOLDER VALUE
Table 1
Contingency Table Stock Return Index/BAV Measures Brand Strength
TSR Down
Up
Total
χ2 p
Count % within R % within B % of Total Count % within R % within B % of Total Count % within R % within B % of Total
Brand Stature
Down
Up
Total
Down
2 66.7 10 4.7 18 45 90 41.9 20 46.5 100 46.5 0.5 0.47
1 33.3 4.4 2.3 22 55 95.7 51.2 23 53.5 100 53.5
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
3 100 13.0 7.0 20 50 87.0 46.5 23 53.5 100 53.5 2.80 0.09∗
cases in each of the cells provided insight into the strength of the relationship, expressed in the chisquare values. The findings are represented in Tables 1–3. Table 1 presents Chi-square contingencies, relating directional changes in the TSR Index and the BAV indicators. For example, in 51.2 per cent of the cases we see an increase in Brand Strength matched by an increase in the TSR. The probability that an increase in Brand Strength coincides with an increase in the TSR Index is 5.7 per cent higher than that a decrease in Brand Strength will result in an increase in the Return Index. The direction of the relationship is thus confirmed, though not significant. For Brand Stature, this probability is 13.0 per cent higher. The corresponding chi-square value is significant (α = 0.10). This confirms the expected dependency between Brand Stature and TSR. Indications for the existence of the expected relationships between Brand Equity and TSR values are absent in our data. Table 2
Down
Up
Total
χ2 P
Up
Total
Down
Up
Total
0 0 0 0 20 50 100 46.5 20 46.5 100 46.5
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
2 66.7 9.1 4.7 20 50 90.9 46.5 22 51.2 100 51.2 0.31 0.58
1 33.3 4.8 2.3 20 50 95.2 46.5 21 48.8 100 48.8
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
In Table 2 the chi-square contingency table relating directional changes in EPS and the BAV indicators is presented. The table shows that no significant relationship between changes in brand value and EPS could be found. In Table 3 the chi-square contingency table relating directional changes in MTBV and the BAV indicators is presented. From this table it becomes clear that the relationship between brand equity and shareholder value is most pronounced when using the MTBV as an indicator of shareholder return. Two significant relationships are found in our data: between Brand Strength and MTBV, and between Brand Equity and MTBV.
Conclusion The above shows that it is indeed possible to obtain indications of changes in brand equity and demon-
Contingency Table Earnings per Share/BAV Measures Brand Strength
EPS
Brand Equity
Down Count 4 % within R 57.1 % within B 20 % of Total 9.3 Count 16 % within R 44.4 % within B 80 % of Total 37.2 Count 20 % within R 46.5 % within B 100 % of Total 46.5 0.38 0.54
Brand Stature
Brand Equity
Up
Total
Down
Up
Total
Down
Up
Total
3 42.9 13.0 7.0 20 55.6 87.0 46.5 23 53.5 100 53.5
7 100 16.3 16.3 36 100 83.7 83.7 43 100 100 100
5 71.4 21,7 11.6 18 50 78.3 41.9 23 53.5 100 54.5 1.08 0.30
2 28.6 10 4.7 18 50 90 41.9 20 46.5 100 46.5
7 100 16.3 16.3 36 100 83.7 83.7 43 100 100 100
4 57.1 18.2 9.3 18 50 81.8 41.9 22 51.2 100 51.2 0.12 0.73
3 42.9 14.3 7.0 18 50 85.7 41.9 21 48.8 100 48.8
7 100 16.3 16.3 36 100 83.7 83.7 43 100 100 100
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Table 3
Contingency Table Market to Book Value/BAV Measures Brand Strength
MTBV Down
Up
Total
χ2 P
Down Count 0 % within R 0 % within B 0 % of Total 0 Count 20 % within R 50 % within B 100 % of Total 46.5 Count 20 % within R 46.5 % within B 100 % of Total 46.5 2.80 0.09∗
Brand Stature
Up
Total
Down
Up
Total
Down
3 100 13.0 7.0 20 50 87.0 46.5 23 53.5 100 53.5
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
1 33.3 4.4 2.3 22 55 95.7 51.2 23 53.5 100 53.5 0.53 0.47
2 66.7 10 4.7 18 45 90 41.9 20 46.5 100 46.5
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
0 0 0 0 22 55 100 51.2 22 51.2 100 51.2 3.38 0.07∗
strate that the performance (in terms of ‘Strength’ and ‘Stature’) of a brand may have significant impact on the value of a firm. These findings are consistent with the premise that the purpose of marketing is not only to create value for the company’s customers, but that this has to result in creating value for its owners (i.e. the shareholders) as well. A reliable instrument should make it possible to hold marketers in general, and brand managers in particular, accountable for the financial implications of their strategies, especially in terms of shareholder value. Focusing more closely on monitoring brand equity and shareholder value in a frequent and consistent manner will forge a much-desired closer cooperation between marketing and finance professionals within a firm. A number of limitations are associated with this study. First, the relationships we found do not appear to occur consistently and seem to depend strongly on the measures employed to determine shareholder value. This points at the need to develop a valid and reliable measurement instrument for the various dimensions of the shareholder value construct. Second, the relationships we found are relatively weak and asymmetrical. This is in the first place due to limitations with respect to the size and heterogeneity our sample. The criteria used to select the participating companies resulted in a rather unbalanced sample, including a relatively large share of companies that had increased their value in the 1993–1997 period. This is partially due to the fact that changes in value were not corrected for changes in overall stock exchange performance, or industry specific performance indices. More research will therefore be needed to investigate the hypothesized relationships in various industry sectors. This study was also limited to investigating a relationship between the direction of the change in brand equity and the corresponding directional change in shareholder value, and not the magnitude of those changes. In order to determine the effects of invest526
Brand Equity Up
Total
3 100 14.3 7.0 18 45 85.7 41.9 21 48.8 100 48.8
3 100 7.0 7.0 40 100 93.0 93.0 43 100 100 100
ments in marketing strategies more precisely, further research efforts should be devoted to the investigation of correlations between the changes.
Acknowledgements The authors gratefully acknowledge the support from Young & Rubicam Inc. who kindly provided us with data from the BAV, and the contribution of Rene´ van der Velden, who undertook analyses for this study as part of his postgraduate thesis.
Note 1. Insufficient contribution of a brand to total firm revenue excluded many brands. For example, Unilever brands (160 at the time) had to be excluded from our sample for this reason. This explains our focus on corporate brands, or on product brands that are similar to the company name (e.g. Philips, Heineken).
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Srivastava, R.K., Shervani, T.A. and Fahey, L. (1999) Marketing, business processes, and shareholder value: an organizationally embedded view of marketing activities and the discipline of marketing. Journal of Marketing 4, 168–180. Varaiya, N., Kerin, R.A. and Weeks, D. (1987) The relationship between growth, profitability, and firm value. Strategic Management Journal Sept-Oct, 487–497. Young and Rubicam (2000) BAV Brand Asset Valuator white paper. Retrieved from the Internet: http://www.yr.com/knowledge/YR-BAV—white— paper.pdf, accessed: December 2001.
CHARLES PAHUD DE MORTANGES, Faculty of Economics and Business Administration, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands. E-mail: [email protected]
ALLARD C.R. VAN RIEL, Faculty of Economics and Business Administration, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands. E-mail: [email protected]
Charles Pahud de Mortanges is Associate Professor of Marketing at Maastricht University. His research interests are in brand management and valuation, and global marketing strategies.
Allard C.R. van Riel is Assistant Professor of Logistics and Marketing in the Department of Marketing at Maastricht University. His research focuses on decision-making in high-tech service innovation.
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