Brands vs. Regulations
In 1999, the Canadian journalist Naomi Klein, in her book “No Logos: Taking Aim at the Brand Bullies,” strenuously argued that the world would, should or at least ought to rise up against the giant multinationals who were destroying global culture and pillaging local economies around the world by offering wages so low that workers in the developing world could not afford to purchase the goods they produced. Her analysis, that branding pushed up prices while offering nothing of value, has been both a rallying point for the ideological left and a constant point of debate in business. But is it correct? More importantly, what is the value of a brand and how is it determined?
According to Interbrand, the London consultancy, in an age increasingly dominated by the value of information over the value of goods, a company’s brand can represent upwards of 90% of the book value of a company, after plant and equipment are subtracted. When InterBev, the Belgian beer giant, bought Anheuser Busch for $54 billion this past July, it certainly wasn’t for the copper kettles in the “King of Beers” breweries, or the Clydesdales. It was for the brand, and the huge distribution arm behind it. Indeed, when you examine many American companies and an increasing number of large international firms as well, it is the brand value and its future prospects upon which much of a corporation’s share price is based.
This raises at least three interesting questions for those who follow the mega-cap Dow Jones Industrial Average stocks, or their global equivalents. Will the decline in U.S. and global consumer spending accelerate the decline of global brands? Will cash-rich foreign companies increasingly become acquirers of the shares of U.S. brand rich companies? And finally, wither brands themselves?
Let’s start at the end. In every economic downturn, there is someone who makes the argument that brands are about to lose their allure. In straitened economic times, consumers turn to store brands to save money, leaving the brands they know behind. In reality, though, consumers aren’t deserting brands. They are simply substituting one brand promise – the store’s – for another, the packager. Because their confidence in where they shop is as great as what they shop, this is merely a shift in brand value, not a decline, although it is an economic loss for a brand. But that happens even in the best of times, as consumers shift from mass brands to luxury brands when they have extra money in their pockets, and to store brands when they have less to spend. So, at least in the U.S. and much of the developed world, economic shifts are merely the field upon which nervous brand managers compete, and count for no more than when the shifts take place during boom times.
However, most developed nations are also well-developed, even mature, markets. The real competition is in emerging markets – the BRICs and other rising nations. There, brands have a completely different representational value than in the developed world, and therefore, a wholly different transactional value. A purchase of a McDonald’s hamburger in China is worth more than the same purchase in Peoria not because more Chinese might someday eat more hamburgers – though that doesn’t hurt the bottom line – but because of why the Chinese will eat more hamburgers. They will eat more McDonald’s hamburgers, and not simply chopped meat thrown on a grill, because of what McDonald’s represents: rigorous standards perfectly repeated and strictly enforced. We tend to think of standards and regulation as something that comes from governments, but if you have ever picked up a McDonald’s franchise operator’s handbook, you will quickly discover how wrong that notion is. Every facet of the operation of a McDonald’s store is strictly controlled, with no possibility of deviation, in order to guarantee consistency. The same is true for every Coke bottling plant, and in fact, the manufacturing, storage, transport and delivery of almost every multinational branded item or service.
It turns out that developing nations at every level, from the poorest to those on the verge of joining the developed world, either lack strong regulatory regimes, or are exceptionally lax in enforcement and beset by corruption. When political scientists talk about the rule of law, they are speaking about governments being able to guarantee things such as property rights and equal protection in the courts. But much of the real rule of law is in the body of information contained in and enforced by corporate handbooks. The real value of brands, then, is not the logo, as Naomi Klein believes, but in the willingness of companies to establish and enforce norms for the manufacture and distribution of their goods, to the benefit of their customers. In the developing world, where government can sometimes be a chancy matter, being able to walk into a McDonald’s or a Kentucky Fried Chicken and get what you pay for is no small achievement.
If you understand that one fact, then you understand that large global brands are currently undervalued. It is not the ups and downs of local economies that ought to determine their value, but how well the brand promise is executed, and how high customer satisfaction levels are. Which brings us back to the first and second questions: Will declines in consumer spending have an impact on share values, and will that in turn drive up global M&A? The answer to the first is likely to be yes, since it is on earnings that most analysts measure a company’s prospects. Customer volume might count for something, but as more customers head for the dollar menu, it means a drop in sales and profits, and customer volume does not guarantee that customers won’t desert you once they can afford to go somewhere else.
As for the M&A question, the answer might also be yes, but is more likely to be no. While many global American brands have more than half of their sales abroad, their largest market is still the U.S., with many small markets making up the remainder of sales and profits. Foreign companies who have tried to take over well-known American brands have often found it hard going – beer seems to be a notable exception – and it is often no more difficult to build a new brand in a dynamic market such as the U.S. as to take on an established brand, so there is little point to the exercise.
But in the world beyond American shores, where the battle is strong brands versus weak regulation, vote for strength every time.
In 1999, the Canadian journalist Naomi Klein, in her book “No Logos: Taking Aim at the Brand Bullies,” strenuously argued that the world would, should or at least ought to rise up against the giant multinationals who were destroying global culture and pillaging local economies around the world by offering wages so low that workers in the developing world could not afford to purchase the goods they produced. Her analysis, that branding pushed up prices while offering nothing of value, has been both a rallying point for the ideological left and a constant point of debate in business. But is it correct? More importantly, what is the value of a brand and how is it determined?
According to Interbrand, the London consultancy, in an age increasingly dominated by the value of information over the value of goods, a company’s brand can represent upwards of 90% of the book value of a company, after plant and equipment are subtracted. When InterBev, the Belgian beer giant, bought Anheuser Busch for $54 billion this past July, it certainly wasn’t for the copper kettles in the “King of Beers” breweries, or the Clydesdales. It was for the brand, and the huge distribution arm behind it. Indeed, when you examine many American companies and an increasing number of large international firms as well, it is the brand value and its future prospects upon which much of a corporation’s share price is based.
This raises at least three interesting questions for those who follow the mega-cap Dow Jones Industrial Average stocks, or their global equivalents. Will the decline in U.S. and global consumer spending accelerate the decline of global brands? Will cash-rich foreign companies increasingly become acquirers of the shares of U.S. brand rich companies? And finally, wither brands themselves?
Let’s start at the end. In every economic downturn, there is someone who makes the argument that brands are about to lose their allure. In straitened economic times, consumers turn to store brands to save money, leaving the brands they know behind. In reality, though, consumers aren’t deserting brands. They are simply substituting one brand promise – the store’s – for another, the packager. Because their confidence in where they shop is as great as what they shop, this is merely a shift in brand value, not a decline, although it is an economic loss for a brand. But that happens even in the best of times, as consumers shift from mass brands to luxury brands when they have extra money in their pockets, and to store brands when they have less to spend. So, at least in the U.S. and much of the developed world, economic shifts are merely the field upon which nervous brand managers compete, and count for no more than when the shifts take place during boom times.
However, most developed nations are also well-developed, even mature, markets. The real competition is in emerging markets – the BRICs and other rising nations. There, brands have a completely different representational value than in the developed world, and therefore, a wholly different transactional value. A purchase of a McDonald’s hamburger in China is worth more than the same purchase in Peoria not because more Chinese might someday eat more hamburgers – though that doesn’t hurt the bottom line – but because of why the Chinese will eat more hamburgers. They will eat more McDonald’s hamburgers, and not simply chopped meat thrown on a grill, because of what McDonald’s represents: rigorous standards perfectly repeated and strictly enforced. We tend to think of standards and regulation as something that comes from governments, but if you have ever picked up a McDonald’s franchise operator’s handbook, you will quickly discover how wrong that notion is. Every facet of the operation of a McDonald’s store is strictly controlled, with no possibility of deviation, in order to guarantee consistency. The same is true for every Coke bottling plant, and in fact, the manufacturing, storage, transport and delivery of almost every multinational branded item or service.
It turns out that developing nations at every level, from the poorest to those on the verge of joining the developed world, either lack strong regulatory regimes, or are exceptionally lax in enforcement and beset by corruption. When political scientists talk about the rule of law, they are speaking about governments being able to guarantee things such as property rights and equal protection in the courts. But much of the real rule of law is in the body of information contained in and enforced by corporate handbooks. The real value of brands, then, is not the logo, as Naomi Klein believes, but in the willingness of companies to establish and enforce norms for the manufacture and distribution of their goods, to the benefit of their customers. In the developing world, where government can sometimes be a chancy matter, being able to walk into a McDonald’s or a Kentucky Fried Chicken and get what you pay for is no small achievement.
If you understand that one fact, then you understand that large global brands are currently undervalued. It is not the ups and downs of local economies that ought to determine their value, but how well the brand promise is executed, and how high customer satisfaction levels are. Which brings us back to the first and second questions: Will declines in consumer spending have an impact on share values, and will that in turn drive up global M&A? The answer to the first is likely to be yes, since it is on earnings that most analysts measure a company’s prospects. Customer volume might count for something, but as more customers head for the dollar menu, it means a drop in sales and profits, and customer volume does not guarantee that customers won’t desert you once they can afford to go somewhere else.
As for the M&A question, the answer might also be yes, but is more likely to be no. While many global American brands have more than half of their sales abroad, their largest market is still the U.S., with many small markets making up the remainder of sales and profits. Foreign companies who have tried to take over well-known American brands have often found it hard going – beer seems to be a notable exception – and it is often no more difficult to build a new brand in a dynamic market such as the U.S. as to take on an established brand, so there is little point to the exercise.
But in the world beyond American shores, where the battle is strong brands versus weak regulation, vote for strength every time.
