Brands suffer consumer promiscuity

Click to follow
Brand fever, the disease that encourages companies to pay far higher prices for companies than the stock market thought proper, is in remission these days. Ever since the Nestle bid for Rowntree in 1988, at twice its pre-bid market value, companies and professional investors alike have sought to judge the real value of brands - and accountants to work out how they should cope with them in company accounts.

They should all be given a jolt by the next edition of Financial World, a US magazine which each year calculates the world value of brands. The actual calculations are complex, but the principle behind them - developed by the London-based consultancy, Interbrand Group - is not.

You take the worldwide sales of a product, say Coca-Cola, you calculate the gross profit on it, you work out how much larger (or, alas, sometimes smaller) it is than the profit on a similar volume of a similar unbranded product, you knock off taxes and finally you multiply the excess profit by a number, usually between nine and 20, to put a capital value on this income stream. That last bit is pretty arbitrary, but Interbrand bases multiples on its assessment of the general strength of the brand.

Coca-Cola, the top-rated brand in the world with a value of nearly dollars 36bn ( pounds 24bn) - up from second position and dollars 33.4bn last year - is helped to that status by being given the highest multiple. Number two is last year's leader, Marlboro, then at dollars 39bn, now at dollars 33bn, followed by Nescafe (dollars 12bn), Kodak (dollars 10bn) and Microsoft (also dollars 10bn). But for brand-watchers the most striking thing is the downgrading of IBM, which goes from number three last year to having negative value this.

In fact this collapse of the value of the IBM name demonstrates how fragile the whole value of brand names has become. If you can suddenly wipe billions off the value of a brand in a matter of months, it calls into question whether the brand was really ever worth the sum you thought it was. The plight of IBM as a business has been clear for some years, so it is odd that there should be such a sudden fall.

To say that is not necessarily to criticise the method of valuation, which is logical and rational. It is to say that consumers have become much more promiscuous in their choice. Some very long-established brands are so embedded in our psyche that they will presumably last a long while. Kit-Kat and Mars Bars are more than 60 years old and Cadbury's Dairy Milk is nearer 100. But it is possible to see that even those two top numbers on the Financial World dial, Coca-Cola and Marlboro, are vulnerable.

The introduction by Sainsbury of a high-quality own-branded cola has bitten sharply into sales of Coke. Now that is only sales in Sainsbury stores, and it is only in Britain that Sainsbury is such a strong brand name in its own right that it can challenge Coke. So in world terms there may be little damage. The experience, nevertheless, should be a warning against over-valuing any brand.

As for Marlboro, the downgrading of the brand's value during the past year stems from the price cuts that it has had to make in response to inroads from cheaper cigarettes.

The issue this raises is whether the present trend towards unbranded or 'own-branded' products is merely a modest reversal of what seemed an equally established trend in the other direction, or whether consumer choice has become so fickle that brands will cease to matter altogether.

If it is the former, there is plenty of evidence to suggest that when people buy own-label they are doing so not because they are hunting for the cheapest price, but because the guarantee of quality implicit in a Sainsbury or Marks and Spencer label is as good as any manufacturer's, and better than most. But it is possible that we are becoming so experimental in our shopping that the value of any brand could disappear overnight.

Remember that the idea of brands was developed in the last century as a guarantee of quality. At that time generic food products were frequently adulterated, and the combination of a brand and good packaging gave a guarantee that could not be obtained elsewhere. But now regulation on quality is much tighter, and there is much more technical information about product performance.

Here in Britain the 750,000 subscribers to Which? magazine will have learnt from a recent issue that top-branded washing powders perform no better, and frequently worse, than much cheaper supermarket powders.

It is just possible that the whole idea of brands has had a natural life of 100 or so years, and in the future we will not need them so much. Real quality will out.