Brands are like money and should be managed that way. Andy Farr Director of Brand Investment...

Brands are like money and should be managed that way.

Andy FarrDirector of Brand Investment PlanningMillward Brown Group

Imagine you were investing in stocks - which of these recent actions would attract you to a company?

Increased price promotion

Signed long term sponsorship deal with the NFL

Relocated customer service call centres abroad

Increased R&D investment

Introduced more rigorous quality control systems

Started using cheaper ingredients

Launched market beating new innovation

Cut back communications spending


Signed long term sponsorship deal with the NFL

Relocated customer service call centres abroad


Introduced more rigorous quality control systems

Started using cheaper ingredients

Launched market beating new innovation


Investing 101What is a company’s share price based on?

Average share price = 18 x last years earnings.

With no growth it would take 18 years to earn its share price!

Average share price = 18 x last years earnings.

With no growth it would take 18 years to earn its share price!

What is it that underpins future profit growth?

…..demand for the company’s goods and services.

FUTURE profit

growth

So share price is based on expectation of:

What underpins demand?

Meeting the evolving needsof the consumer = R&D

Meeting the evolving needsof the consumer = R&D

“Product/Service” delivery that exceeds consumer

expectations

= Quality

“Product/Service” delivery that exceeds consumer

expectations

= Quality

Awareness and desirefor the company’s brands = Brand Building

Awareness and desirefor the company’s brands = Brand Building

Are you more or less likely to invest?


Using cheaper ingredients

Market beating new innovation


Moved customer service call centres abroad

Long term sponsorship deal with the NFL

More rigorous quality control systems



Using cheaper ingredients

Market beating new innovation


Moved customer service call centres abroad

Long term sponsorship deal with the NFL

More rigorous quality control systems


Profits Now

Profits in the future

Advertising does not pay for itself in the short term.

Category #Brands Media Dollars $ml Sales/M$ %Margin Payback

Non-CPG 20 $547ml $2.24 39% $0.87

CPG 25 $229ml $1.18 46% $0.54

MMA dataMMA data

“…establishing a value for increased awareness and positive image on its own is much like establishing the value of half of a $100 bill…

…Unless you can get the matching half it has no value”

James D Lenskold, “marketing ROI”, McGraw Hill 2003

“…establishing a value for increased awareness and positive image on its own is much like establishing the value of half of a $100 bill…

…Unless you can get the matching half it has no value”

James D Lenskold, “marketing ROI”, McGraw Hill 2003

BUT we don’t value what we can’t measure

How can we put a value on “brand building”?

Need to have an investment mindset:Need to have an investment mindset:

Future profits are what matters

Risk has a price - it requires a return

Discounted Cash Flow

++

Combines forecast of future profits

Assessment of risks associated with profits


Net Operating Profit After Tax = CASH

BASE 1 2 3 4 5

Operating profit 200 204 208 212 216 221

Marketing Investment 135 138 140 143 146 149Overheads 10 10 10 11 11 11

EBIT 55 56 57 58 60 61

Adjustments (Tax) 17 17 17 18 18 18

NOPAT 39 39 40 41 42 43

Year

BASE 1 2 3 4 5

Market size ($m) 2000 2040 2081 2122 2165 2208

Growth Rate % 2% 2% 2% 2% 2% 2%

Current Market Share % 20% 20% 20% 20% 20% 20%

Net revenue Sales ($m) 400 408 416 424 433 442

Cost of sales ($m) 200 204 208 212 216 221

Operating margin 50% 50% 50% 50% 50% 50%Operating profit 200 204 208 212 216 221

Year

BASE

Operating profit 200

Marketing Investment 135Overheads 10

EBIT 55

Adjustments (Tax) 17

NOPAT 39

Year

BASE

Market size ($m) 2000

Growth Rate % 2%

Current Market Share % 20%

Net revenue Sales ($m) 400

Cost of sales ($m) 200

Operating margin 50%

Operating profit 200

Year

Forecast future profits

5 Years

Now we need to “discount” these profits.

Money today is worth more than the promise of

money tomorrow

Which would you rather have?

Money today is worth more than the promise of

money tomorrow

Which would you rather have?

Now 5 years timeOR

Why might you not get the profits in 5 years time?

1. Geography - currency, recessions

2. Sector - less growth, legislation

3. Brand - loss of share or margin due to competition

1. Geography - currency, recessions

2. Sector - less growth, legislation

3. Brand - loss of share or margin due to competition

Think like a bank manager -

Bigger risk = higher interest rate..

= higher discount rate

How much should we discount?

Risk Risk free ratefree rate

Risk Risk free ratefree rate

Market Market PremiumPremiumMarket Market

PremiumPremiumSpecific Specific

risk factorrisk factor

ββetaeta

Specific Specific risk factorrisk factor

ββetaeta

Discount Rate = 4% Discount Rate = 4% + { 6% X + { 6% X } } 1 = 10% 1 = 10% ??

Dis

cou

nte

d V

alu

e

0

20

40

60

80

100

1 2 3 4 5 6 + + + + + + + + + + + + + +

91% Yr 183% Yr 2

75% Yr 368% Yr 4

62% Yr 5

%

BASE 1 2 3 4 5

NOPAT 39 39 40 41 42 43

DISCOUNT Rate 10.0% 10.0% 10.0% 10.0% 10.0%

Discount factor 91% 83% 75% 68% 62%

Discounted Cash Flow 36 33 31 28 26

Terminal value 264

NPV ($m) 418

Year


Net Present Value $m

Three things to think about when assessing risks.

1. Geography

2. Sector

3. Brand

1. Geography

2. Sector

3. Brand

Sector RiskStock Market

8.5%8.5%

15%15%

How do strong brands impact on risk?

Strong brands are more secure.

Investment in media reduces risk.

Strong brands are more secure.

Investment in media reduces risk.

Voltage™:

The differential consumer equity a brand possesses, relative to its size

Voltage™:

The differential consumer equity a brand possesses, relative to its size

R2 = 0.71

0%

100%

-10 0 10

Voltage™

Do

wn

sid

e(%

bra

nd

s l

os

ing

sh

are

)

Strong brands are less likely to decline

343 brands grouped on the basis of Voltage™

Strong brands are more likely to grow.

R2 = 0.64

0%

100%

-10 0 10

Voltage™

Up

sid

e (%

bra

nd

s g

ain

ing

sh

are)

343 brands grouped on the basis of Voltage™

BRAND Risk Multiplier

Strong brands are more valuable

$418ml

Average

NPV based on brand strength $600ml

Strong

$335ml

Weak

The accumulated value of PAST “brand” building

How can we use this thinking?

1. Measure how much value is being created year on year by the team managing the brand.

2. Use this thinking as an aid to investment decisions across and within a portfolio of brands.

1. Measure how much value is being created year on year by the team managing the brand.

2. Use this thinking as an aid to investment decisions across and within a portfolio of brands.

Brand investment planning tool.What will happen to the What will happen to the category?category?

What will happen to the What will happen to the category?category?

Can we maintain Can we maintain share?share?

Can we maintain Can we maintain share?share?

What will happen to What will happen to margins?margins?

What will happen to What will happen to margins?margins?

How does the planned How does the planned investment impact risk?investment impact risk?How does the planned How does the planned investment impact risk?investment impact risk?

How risky is the forecast?How risky is the forecast?How risky is the forecast?How risky is the forecast?

These questions can be answered using a mix of existing knowledge, judgement and empirical analysis.

DCF Forecast

Advertising Investment reduces risk

R2 = 0.74

0%

50%

100%

-30% 0% 30%

%

losi

ng

sh

are

354 brands grouped on the basis of relative ad spend.

Media Pressure(Share of Voice - Share of Market)

“Better to be approximately right

than precisely wrong”

“Better to be approximately right

than precisely wrong”

Why we will never get it precisely right…

Competitors - they are out to get you Consumers - unpredictable and irrational Creativity - the most variable variable in the

marketing mix

Competitors - they are out to get you Consumers - unpredictable and irrational Creativity - the most variable variable in the

marketing mix

But we can: Use the knowledge we do have to generate

reasonable assumptions Build these into DCF framework Conduct sensitivity analysis to maximise total

shareholder return across the portfolio

But we can: Use the knowledge we do have to generate

reasonable assumptions Build these into DCF framework Conduct sensitivity analysis to maximise total

shareholder return across the portfolio

Media sensitivity analysisAverage Brand Strength

0

20

40

60

80

100

50 70 90 110 130 150

Annual Media Spend $m

Ch

an

ge

in N

PV

$m

Media sensitivity analysisDiffering levels of brand strength

0

20

40

60

80

100

120

50 70 90 110 130 150

WeakWeak

Annual Media Spend $m

Ch

ang

e in

NP

V $

m StrongStrong

Budget setting example

Change in NPV ($ml)

Weak Average

Increase in spend from $50 - $60ml per annum

Change in NPV ($ml)

Weak Average

Increase in spend from $50 - $60ml per annum +16ml + 22ml+16ml + 22ml

Budget setting example

Change in NPV ($ml)

Weak Average


Increase in spend $80 - $90ml per annum

Change in NPV ($ml)

Weak Average


Increase in spend $80 - $90ml per annum

+16ml + 22ml

+5ml +8ml

+16ml + 22ml

+5ml +8ml

Key thought…

When managing your brands think like an investor

That means: Think about profit, not volume.

Treat marketing as an investment

Look across the portfolio to see where investment can generate the greatest total return

Think long, not short term.

Learn to love the finance guys

Keep it simple.

When managing your brands think like an investor

That means: Think about profit, not volume.

Treat marketing as an investment

Look across the portfolio to see where investment can generate the greatest total return

Think long, not short term.

Learn to love the finance guys

Keep it simple.

Brands are like money and should be managed that way. Andy Farr Director of Brand Investment...

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