Financial Analysts’ Perspective: Brand Strength vs. Leadership Quality
In the world of finance, there has long been a debate about the true value of marketing and brand building. How do financial analysts perceive the impact of brand strength on a company’s success? Is it seen as a crucial factor in determining the company’s performance, or is it overshadowed by other aspects such as leadership quality or reported profit? Recent research conducted by the IPA (Institute of Practitioners in Advertising) and Brand Finance sheds light on the views of over 200 financial analysts working for investment banks and asset managers. Let’s explore their perspectives and delve into the significance of brand strength in the eyes of these analysts.
The Power of Brand: A Key Factor for Financial Analysts
The research reveals a notable finding: financial analysts consider the strength of a business’s brand and marketing efforts to be more important than leadership quality or reported profit. When asked about the factors they deem “very important” in their evaluation of publicly listed companies, a staggering 79% of respondents cited the strength of brand/marketing as a crucial element. This result positions brand strength at the top of the list, surpassing other key factors such as leadership quality (76%), technological innovation (72%), and reported profit (71%). Clearly, brand strength plays a significant role in how financial analysts judge companies.
Perception of Marketing Spend: Investment vs. Cost
While financial analysts recognize the importance of brand strength, their views on marketing spend are more nuanced. Surprisingly, over half (52%) of the surveyed investors perceive cutting marketing spend as a “positive cost-saving measure.” This perception suggests that some financial analysts may view marketing spend as an area where companies can reduce costs without significant long-term consequences. However, it is worth noting that around a third (36%) consider it a “short-term fix with long-term negative consequences.” This divergence in opinions highlights the need for marketing leaders to demonstrate the connection between maintaining marketing budgets and long-term business growth, especially during challenging times.
Marketing Spend as an Investment: The Analysts’ Perspective
Despite the perception that marketing budgets can be sacrificed to save costs, a significant portion of financial analysts view advertising and promotional spend as an investment rather than a mere operating cost. When it comes to advertising, just over a third (37%) of analysts see it as an investment, while nearly a quarter (24%) perceive it as an operating cost. Interestingly, the majority of analysts (48%) view promotion as a combination of both cost and investment. However, a larger proportion (28%) of analysts see promotion as an investment, compared to those who view it solely as an operating cost (23%).
Accounting for Marketing Spend: Capitalization vs. Expense
The research findings also shed light on financial analysts’ desire for changes in how marketing spend is accounted for on companies’ balance sheets. A significant proportion (56%) of analysts believe that marketing spend should be capitalized, with an additional third (33%) advocating for capitalization in specific cases. Capitalization involves recording a cost on a balance sheet to delay the full recognition of the expense. Generally, an item is capitalized when it is considered an asset rather than an expense. This is a common practice for technology research and development spend in many companies. The IPA research suggests that financial analysts recognize the value of marketing spend as an investment that can yield long-term benefits for businesses.
Pricing Power and the Role of Marketing
In addition to assessing marketing spend, financial analysts also analyze the impact of advertising and promotional activities on a company’s organic growth. While not all analysts are convinced that these activities drive organic growth (46% believe so), it is important to note that those who do analyze advertising and promotional spend are more likely to view it as an investment that can contribute to organic growth. Interestingly, financial analysts express a lack of belief in a strong brand’s ability to drive pricing power. Only slightly over half (54%) of analysts believe that brand and advertising communications can benefit sales prices, while a mere 8% consider it the most impactful factor in pricing. Instead, analysts tend to attribute pricing benefits to factors such as sales volume (71%), profit margin (77%), and market share (66%).
Case Studies: Brands Retaining Volume Despite Price Increases
While some financial analysts may question the direct link between brand strength and pricing power, real-world examples demonstrate the impact brands can have on a company’s ability to increase prices. Inflationary periods present challenges for businesses, but strong brands have managed to retain volume despite price increases. Major companies, such as Unilever, have credited the power of their brands for their ability to gain market share even when prices have been raised. Unilever CEO Alan Jope highlighted the relationship between brand strength and market share growth in an inflationary period. Heineken CEO Dolf van den Brink also emphasized the power of the company’s marketing investment, stating, “Brand power today is pricing power tomorrow.”
Marketers’ Priorities: Profit Growth and the Language of Effectiveness
While financial analysts recognize the significance of brand strength and marketing, it seems that marketers themselves may not always prioritize profit growth as their primary task. A survey conducted by Marketing Week, supported by Kantar, revealed that less than a fifth (19.7%) of brand-side marketers believe growing profit is the main objective of marketing. This finding places profit growth as the least prioritized task among the eight different jobs evaluated in the survey. The divergence between financial analysts’ focus on brand and marketers’ prioritization suggests that marketers could benefit from aligning their objectives more closely with the financial perspective.
Conclusion: Building the Case for Marketing as a Long-Term Investment
The research conducted by the IPA and Brand Finance provides valuable insights into the perspectives of financial analysts regarding brand strength and marketing spend. While financial analysts recognize the importance of brand strength and its impact on a company’s success, their views on marketing spend vary. Marketers must work diligently to build a compelling case for maintaining marketing budgets, especially during challenging times when cost-cutting measures may seem appealing. By providing relevant data and evidence, marketers can engage with financial analysts in their language and demonstrate the long-term value of marketing as an investment. As the research indicates, investors are increasingly interested in and place importance on investment in brands. It is crucial for brand owners to seize this opportunity and effectively communicate the strategic value of marketing for long-term business growth and success.
