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V O LU M E 2 1 | N U M B E R 4 | FAL L 2 0 0 9

Journal of

In This Issue: Market Efficiency and Risk Management

The Global Financial Crisis and the Efficient Market Hypothesis: 8 Ray Ball, University of Chicago
What Have We Learned?

Contingent Capital vs. Contingent Reverse Convertibles for 17 Christopher L. Culp, Compass Lexecon and
Banks and Insurance Companies University of Chicago

International Insurance Society Roundtable on Risk Management After the Crisis 28 Panelists: Geoffrey Bell, Geoffrey Bell & Company;
Nikolaus von Bomhard, Munich Re; Prem Watsa and
Bijan Khosrowshahi, Fairfax Financial Holdings.
Moderated by Brian Duperreault, MMC

Lessons from the Financial Crisis on Risk and Capital Management: 52 Neil A. Doherty, University of Pennsylvania’s Wharton
The Case of Insurance Companies School of Business, and Joan Lamm-Tennant,
Guy Carpenter & Co. and the Wharton School

The Theory and Practice of Corporate Risk Management 60 Henri Servaes and Ane Tamayo, London Business School,
and Peter Tufano, Harvard Business School

Measuring the Contributions of Brand to Shareholder Value (and How to Maintain or 79 John Gerzema, Ed Lebar, and Anne Rivers,
Increase Them) Young & Rubicam Brands

Creating Value Through Best-In-Class Capital Allocation 89 Marc Zenner, Tomer Berkovitz, and John H.S. Clark,
J.P. Morgan

Using Corporate Inflation Protected Securities to Hedge Interest Rate Risk 97 L. Dwayne Barney and Keith D. Harvey,
Boise State University

The Gain-Loss Spread: A New and Intuitive Measure of Risk 104 Javier Estrada, IESE Business School

Assessing the Value of Growth Option Synergies from Business Combinations 115 Francesco Baldi, LUISS Guido Carli University, and
and Testing for Goodwill Impairment: A Real Options Perspective Lenos Trigeorgis, University of Cyprus
Measuring the Contributions of Brand to Shareholder Value
(and How to Maintain or Increase Them)

by John Gerzema, Ed Lebar, and Anne Rivers,

Young & Rubicam Brands

inancials alone cannot explain why some effect of brand equity on corporate values is reflected in

F companies outperform their competitors.
Macroeconomic factors, the quality of the
management team, expected growth rates, and
current earnings, the remaining two-thirds of a brand’s
contribution to value is attributed to its effect on investors’
the value of the brand can help explain why some companies So that’s the good news about brands and their
break out of the pack. But quantifying the value of such contributions to value. But our research also has a more
intangibles is not an easy task. troubling message: In more recent consumer surveys (during
Since 1993, Young & Rubicam has invested over 2005–2007), we began to find signs of brand erosion even as
$130 million in collecting and interpreting data on the markets were pushing up share prices, presumably with
consumers’ perceptions of some 44,000 product and service the expectation that intangibles like brand would continue
brands in over 50 countries. At the core of Y&R’s research to drive operating earnings in the future. More specifically,
effort is the BrandAsset® Valuator (or “BAV”), a model while Wall Street was bidding up the aggregate value of
that converts the firm’s hoard of data on global consumer branded businesses, our research suggested that consumers’
perceptions and behavior patterns into assessments of brand overall perceptions of brands were becoming less favorable.
strength and value. When combined with the findings of Indeed, we were finding steep declines in consumer ratings of
independent research by academics in marketing and finance all of what we view as the four key classical “attitudes” toward
(using Compustat data on corporate operating and stock- brands: “trust,” “awareness,” “consideration” and “regard.”1
price performance), the BAV’s assessments of brand values This disconnect between brand values and share prices—
can be used to quantify the contributions of brands to both though somewhat reduced by the market decline associated
corporate earnings and market values. with the financial crisis—underscores the reality that the
Another important corporate use of the BAV is to provide perceptions that influence the dollar votes of consumers
insight into what causes brand values to rise and fall—and, in on Main Street can be very different from the financial
some cases, recover. For each of the more than 44,000 brands analysis used by traders and analysts on Wall Street. Even
covered in our database, we have identified (or in many cases with stock values well below their peaks, we believe that the
“developed”) and tracked more than 80 brand metrics, which mismatch between consumer attitudes toward brands and
include indicators of consumer awareness, perceptions and the market values of the companies that produce and own
preferences, and usage. With the help of such metrics, our them continues to be a threat. It raises the possibility that
BAV model breaks down the value of a brand into four many branded businesses are overvalued—and that, when the
major components that we call “Energized Differentiation,” “brand bubble” reflected in their stock prices deflates, their
“Relevance,” “Esteem” and “Knowledge.” And as we suggest valuation multiples and stock prices could fall again.
in the pages that follow, a solid understanding of a brand’s In the meantime, for the leaders of consumer-facing
positioning along each of these four dimensions can be used to corporations, the mismatch between stock prices and
guide companies in maintaining and building their brands. brand values points to a continuing challenge for brand
One of the main findings of the research cited above is management. Building brand value is important for both
that brands contribute to the market value of companies finance professionals trying to increase shareholder value
by increasing not only current earnings, but also the price- and marketers trying to build brand value and increase
to-earnings (P/E) multiples that investors assign to current sales and margin. The aim of our research is to bring these
earnings. Such increases in P/E multiples in turn reflect two groups—finance and marketing—closer together by
investors’ expectations for lower risk, higher growth, or demonstrating the role of marketing strategy and brand
both. And while only about one-third of the total estimated equity in driving shareholder value.

1. This is the main thesis of our recently published book, John Gerzema and Ed
Lebar, The Brand Bubble (Jossey-Bass, 2008).

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 79
Figure 1 BrandAsset Valuator Model

The brand’s point
of difference RELEVANCE
Relates to margins How appropriate
and cultural currency the brand is to you
Relates to consideration ESTEEM
and trial How you regard
the brand KNOWLEDGE
Relates to perceptions
An intimate
of quality and loyalty
understanding of the brand
Relates to awareness and
consumer experience


Leading Indicator Current Indicator
Future Growth Value Current Operating Value

The Four Pillars of Brand Value and building consumer respect and, eventually, some degree
The BrandAsset® Valuator model measures the overall health of loyalty. By contrast, in cases where Esteem is greater than
of a brand by assessing four of its distinctive components, or Knowledge, the brand generally has an opportunity to expand
“pillars”: market share by increasing consumer awareness.
• Energized Differentiation
• Relevance Brand Metrics Help Explain Stock-Price Performance
• Esteem; and There is an old adage that says, “The value of something that’s
• Knowledge truly innovative can’t be measured.” With the help of our
Each of the four contributes in a different way to building BAV, researchers have provided persuasive evidence that a
brand and sales. Energized Differentiation is a composite strong brand can raise a company’s market value by increasing
measure of five brand attributes tracked by the BAV: not only its current revenues and profits, but also analysts’ and
“uniqueness,” “offering,” “pricing power,” “innovation” and investors’ expectations for future profits.
“dynamism. ” Relevance aims to capture the appropriateness To measure how brands affect both the current and future
of a brand to consumers and is strongly related to market financial performance of their enterprises, we have combined
penetration. Both of these pillars, Energized Differentiation our 16 years of BAV data on a large sample of multinational
and Relevance, have proved to be leading indicators of a “mono-brands” with data on corporate earnings and stock
brand’s direction and momentum. And when combined into prices from Standard & Poor’s Compustat database at the
a single category that we call Brand Strength (as shown in University of Chicago’s Center for Research in Security
Figure 1), the two pillars provide a forward-looking measure Prices. Mono-brands are companies like Intel, McDonald’s,
of brand value. and Microsoft that stake their entire name on a single “power”
By contrast, the third and fourth pillars, Esteem and brand and derive more than 80% of their annual revenue
Knowledge, are current indicators that together determine from that brand.
Brand Stature. A brand’s Esteem is evaluated using measures With the help of marketing professors Robert Jacobson of
of respect, perceived quality and reliability, and is generally the University of Washington and Natalie Mizik of Columbia
viewed as a prerequisite for building loyalty. Knowledge is the Business School, we analyzed a large number of consumer
culmination and consequence of brand building and reflects variables for such companies with the aim of identifying
a consumer’s depth of experience with the brand. the brand attributes that are most successful in explaining
In Figure 2, we try to suggest how our four-pillars unanticipated increases in stock prices. By “unanticipated,”
framework can be used to assess a brand’s health and to we mean those stock price changes that cannot be explained
diagnose possible problems and solutions. For example, the by simultaneous changes in corporate fundamentals such as
prescription for brands that score higher on Knowledge than sales and operating returns on capital.
Esteem typically involve efforts to persuade consumers to One outcome of this joint effort was a regression model
take a fresh look, with the aim of differentiating the brand that, using our BAV data, links increases in brand asset values

80 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
Figure 2 BrandAsset Valuator Model – Diagnosing Brands

The brand has captured attention and High levels reinforce that the brand is The brand’s uniqueness has faded and
interest and can build relevance and relevant and energized. It is a leader, price or convenience become a dominant
penetration. This often reflects a new, commanding high margins as well as volume. reason to buy. The brand faces
noteworthy, niche or luxury brand. commoditization. This opposite condition
This condition also suggests the brand indicates the brand is overloaded with
has more creativity than functionality. rational meaning and low on creativity.

Strength DE >R DE R DE >R
Examples: 100 Examples: 100 Examples:
iPhone Apple Applebee’s
80 80 80
Mini Disney Exxon
60 60 60
Red Bull Google Hanes
40 40 40
Gucci IKEA Midas
20 Wii 20 Nike 20 American Airlines
0 Zip Car 0 0 USPS

The brand is liked but not well-known. The brand is both well-known and The brand is better known than liked.
Consumers are curious, and there’s a well-regarded. It has become too familiar, and consumers
desire to find out more. The difference in are likely looking for better options.
the two pillars measures the real love The quantitative difference in these two
for the brand. pillars measures the distaste for the brand.
E >K E K E < K
Brand 100 Examples: 100 Examples: 100 Examples:
Stature Trader Joe’s Home Depot Spam
80 80 80
Coach VISA Slim-Fast
60 60 60
Product Red Coca-Cola TV Guide
40 40 40
Google Earth McDonald’s Yellow Pages
20 LG 20 Colgate 20 Budget
0 0 Ford 0 Rent-a-Car

to (1) increases in current and future earnings, and (2) current by reducing investors’ assessments of a company’s risk or
stock returns.2 Using this model, professors Jacobson and raising its expectations for future growth. For example, if
Mizik produced compelling evidence that changes in brand an increase in a company’s perceived brand value not only
asset values affect stock market returns in two ways—one increases current earnings to $1.10, but also causes investors
“direct” and the other “indirect.” The indirect effect is on to raise the P/E multiple from 10 to 12, there is said to
current earnings. All else equal, companies whose brand be a “direct” effect of brand on value of $2.20 per share
assets increase in value during a given period are likely to ($1.10 x (12 – 10).
experience higher-than-expected earnings during that period. Using BAV and Compustat data for the period
And to the extent the higher current earnings attributable to 2000–2006, a more recent study by Jacobson and Mizik
branding also increase investors’ expectations of the firm’s supports, first of all, our earlier statement that the
future earnings and cash flows, the increase in brand asset explanatory power of valuation models can be increased
values results “indirectly” in an increase in the company’s by including information about brand values along with
market valuation. To illustrate, if brand-building alone is (unexpected) sales and earnings.3 And as we stated at the
assumed to increase a company’s EPS from $1.00 to $1.10 beginning of this article, since only one-third of the effect of
in a given year, and the stock has a P/E of 10, then brand is brand assets on financial performance appears to be reflected
assumed to have an “indirect” incremental effect on company in current earnings, two-thirds of the financial impact of
value of $1 per share (or $0.10 x 10). brand assets on stock returns is information about future
At the same time, Jacobson and Mizik suggest that performance. But perhaps even more telling, it was the
effective branding can increase a company’s value “directly,” forward-looking Brand Strength metrics—the indicators
or independently of any effect on current sales or earnings, of Relevance and, to an even greater extent, Energized

2. Natalie Mizik and Robert Jacobson, “How Brand Attributes Drive Financial Perfor- of each of its major brand components (which vary depending on category). Each of
mance,” (2005), MSI Reports, Vol. 3, 21–39. these three variables proved to have significant explanatory power, suggesting that the
3. See Natalie Mizik and Robert Jacobson, “The Financial Value Impact of Perceptual brand asset measures provided “incremental” information over and above the informa-
Brand Attributes,” Journal of Marketing Research, Vol. XLV (February 2008), 15–32. tion provided by unexpected sales and returns. More specifically, their three-factor re-
Jacobson and Mizik attempt to isolate the effects of brand on a company’s value by re- gression model explained 65% of the variance in stock returns, with the financial vari-
gressing its current-year stock on three main variables: the “unexpected” parts of both ables metrics accounting for 77% of the “explained” variance, and the brand metrics
the company’s current-year (1) sales (2) return on assets, and (3) changes in measures accounting for the other 23%.

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 81
Differentiation—that had the strongest correlation with but high potential and pricing power, these brands have
stock returns. Specifically, the brands that were the top Energized Differentiation and Relevance but only a small
gainers in Energized Differentiation enjoyed an increase of audience.
4.8% in the average risk-adjusted stock return one year after • The Leadership/Mass Market Quadrant: These
the brand improvement, and the top ten losers experienced brands have high earnings and margin power, and the greatest
a decline of 4.3% in the following year.4 potential to create future value. They’ve built both Brand
The bottom line, then, is that changes in stock prices Strength and Stature. But when they slip below the diagonal,
and corporate values reflect not only financial performance, their Stature exceeds their Strength, which is often a sign of
but changes in brand metrics as well. And as this research diminishing pricing power and future growth potential.
also shows, the explanatory power of brands (and brand • The Erosion Quadrant: These brands are likely
components) varies widely among different industries. To cite becoming Commodities. Or they may be companies that do
one example—the case of financial services companies—64% not rely on their brands as a driver of their growth, such as
percent of the variance in stock returns is explained by a low-cost providers that create sales velocity at low margins.
regression that contains only current financial variables like Consumers may know these brands well but find them less
sales and earnings. But when brand metrics are included in the distinctive or relevant.
model, the explanatory power of the model increases to 71%. To provide some sense of how such brand differences
In the case of telecommunication companies, introduction translate into value, the ratio of intangible value to sales for
of the brand metrics variable provides an additional 19% Leadership brands is nearly twice that for Niche brands, and
of explanatory power—and in the case of casual dining more than double the ratios for Commodity brands.
companies, the incremental explanatory power is 18%. Although this may not be clear from Figure 3, there is
On the basis of these and similar findings across a range continuous movement of brands among the four quadrants.
of other sectors, we conclude that brand indicators provide And the BAV is a flexible and fluid model that allows us to
information about stock returns that cannot be found in a identify clear patterns of growth, health, decay, or recovery
company’s financial statements.5 over time. By plotting such brand PowerGrids at repeated
intervals, we can track the evolution of a brand, identifying
Putting the Metrics to Work the changes in relative value it experiences during its lifecycle
It may come as little surprise to most senior executives that and designing different strategies for producing revenue and
corporate branding efforts show up in stock prices. But how profit during different brand phases.
can this knowledge be used by companies and their brand As a general rule, Niche brands with more Strength
managers to increase shareholder value? than Stature encourage trial by consumers without creating
One goal of corporate marketing is to create “leadership loyalty, and so are generally run with the aim of maximizing
brands” that aim to maximize brand value and, ultimately, near-term return on capital. But for those brands that
shareholder value. Our research suggests that the value of develop into Leadership brands, managers are more likely
a brand is maximized when two conditions are met: (1) to succeed in achieving higher sales growth, margins,
our measures of Brand Strength (which, again, combines and EBITDA—along with the higher growth and higher
Energized Differentiation and Relevance) and Brand Stature valuation multiples. When their brands begin to decline into
(Esteem and Knowledge) are both at their peaks; and (2) Commodities, companies tend to increase dividends while
Brand Strength is greater than Brand Stature. giving more thought to customer retention and possible
To help illustrate this relationship, Figure 3 shows a transactions.
“PowerGrid” that positions a large number of well-known These rules of thumb point to the importance of matching
brands along the two dimensions of Brand Strength and brand and business development strategies. For example, if
Brand Stature. The figure places each brand in one of four you have a Leadership brand, make sure you provide enough
“quadrants,” with the upper right reserved for Leadership investment to allow the brand to expand; don’t starve it of
brands. Starting at the lower left and moving clockwise, we capital. But in the case of Commodity brands, harvesting
have: is likely to be the value-maximizing strategy. The biggest
• The New and Unfocused Quadrant: These brands mistake in such cases is to pour too much capital investment
have little strength or stature, with low scores in all pillars. into a saturated marketplace. When too many companies do
Many are new to the market. Others are poorly defined, this, the result is a brand bubble.
middling brands that have lost their way. After tracking the movements of over 2,500 brands on
• The Niche/Momentum Quadrant: With low earnings the PowerGrid from 2001 to 2008, we concluded that most

4. See Natalie Mizik and Robert Jacobson, “Talk About Brand Strategy,” Harvard 5. See Natalie Mizik and Robert Jacobson, “Valuing Branded Businesses,” Journal of
Business Review, (October 2005) 1. Marketing Research, Vol. 75 (November 2009) 137-153.

82 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
Figure 3 BrandAsset Valuator PowerGrid

BrandAsset Consulting: 2009 First Half USA All Adults

Cirque du Leadership Coca-Cola

Soleil Dyson Trader Joe’s Pepsi-Cola
Sundance Barq’s Root Beer Starbucks
Jones Soda Toyota
Channel Snapple
David TiVo
Nutella Chevrolet
Ralph Lauren
Pom Simply Orange Tide
iMac Dole
Naked Juice Dunkin’ Donuts
Orangina Oakley Gucci
Mass Market
DifferentiationE /Relevance)

Amy’s Joe Boxer

Niche YMCA
Brand Strength

Nespresso Greenpeace Thomas’ English

Nature’s Own Muffins
Jamba Juice Chef Boyardee
FUBU Boss/Hugo Ray-Ban Barbie
Method Polo Sport
Wonder Bread
Devon Energy Lee
Boss Buick
Yoplait Henkel Ronzoni

Nouriche Schweppes Palmolive

Mont Blanc
Voss American Girl
Route 66
No Nonsense Sun -Maid
New, Unknown or J. Crew
Unfocused Fanta Equal
Miller Coors Commodity or
Oxfam Balance Bar Eroded
Diners Club

Brand Stature
(Esteem /Knowledge)

brands experienced little change in Brand Strength in just fight for existence in a hostile terrain of promotion and
one year. On average, in one year, fewer than one in ten discounting.
brands show any positive movement—in fact, over 80% of The big question, of course, is what’s behind this
brands were essentially motionless. Even after five years, 74% malaise. Why have consumers lost trust in, and respect
of brands showed no development. And that’s why the BAV for, brands? The issues are complex, with a wide range of
“brandscape,” as pictured in Figure 4, looks like a parking lot: factors dragging down brand perceptions among consumers.
little movement, with the few brands that do move twice as Nevertheless, as we argue in our recent book,6 the main
likely to fall as to go up. In the Niche quadrant, for example, problem can be summarized by three fundamental causes
10% of brands moved into the Leadership quadrant, while that are working together to diminish consumer desire for
20% became Unfocused. brands. Although none of these phenomena is entirely new,
they’ve never before operated at the same time or with such
Increase Firm Value from the Brand Out intensity. These developments are taking a far greater toll
In 2008, as noted earlier, we found growing signs of a on brands than anyone had previously thought possible,
brand “bubble.” When we used our BAV to identify the particularly set against the dramatic changes of a new digital
best-performing brands (in terms of Brand Strength without landscape.
sacrificing Stature), we found a steadily shrinking number The first major problem is excess capacity. The world
of brands accounting for a disproportionate share of the is overflowing with brands, and consumers are having a
value being created. Consumers are reserving their devotion difficult time assessing the differences among them. The
and dollars for the truly special brands, leaving the rest to average supermarket today holds 30,000 different brands,

6. The Brand Bubble (Jossey-Bass, 2008), cited earlier.

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 83
Figure 4 Brands are Stuck in a Parking Lot

BrandAsset Consulting: 2001–2008 Full Year USA All Adults


Niche Leadership 7.8%

DifferentiationE /Relevance)

Mass market
Brand Strength



8.5% 13.7%

86.9% 78.6%

New, Unknown or Commodity or Eroded


Brand Stature
(Esteem /Knowledge)

Percent of brands that gained Percent of brands that lost

Equity in 1 Year Equity in 1 Year

up threefold since 30 years ago. Globalization and increased to move companies back into alignment with Wall Street’s
competition compound the number of new brands launched valuations and the expectations that are driving them? How
every day. According to a Datamonitor report, 58,375 new can we predict the future brand leaders? Our BAV model
products were introduced worldwide in 2006, more than helps marketers focus on each component of the brand and
double the number in 2002. focus on building their brand for today and tomorrow.
The second major problem is lack of creativity. In a
world with Hulu, Yelp, YouTube and Twitter, consumers are Brand Rx: Energy
continuously exposed to and able to share creative content. Let’s start by understanding how certain brand superstars—
The result of this democratization of creativity is that it has Apple, Nike, Virgin and Google—continue to capture the
raised the consumer’s “creativity quotient ” Consumers expect hearts, minds, and dollars of consumers. How are they
more big ideas from brands, and they expect to get them creating such wondrous relationships with consumers?
faster. Answer: They inspire us with creativity, excitement, and
The final major problem with brands is loss of trust. Our innovation. They’re not just different; they’re always working
data shows that the amount of trust consumers place in a at redefining their Differentiation, inventing new ways to
brand today is a fraction of what it was ten years ago. In 1997, keep Differentiation vibrant. And thus our notion of brand
more than half of all brands enjoyed high levels of consumer “Energy” was born.
trust. By 2008, consumers voted just over one-fifth of brands Since the early 1980s, Professor Jacobson has been
as “trustworthy.” finding evidence that analysts and investors pay attention
So, how can brands build sustainable long-term value to a company’s marketing and brand measures when forming

84 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
their expectations for corporate profits.7 Backing up this also provide a sense of “uniqueness,” a point of difference
finding, the study also reported that changes in brand that consumers don’t feel they can get elsewhere. Today’s
attitudes can be useful in predicting future sales, earnings, consumers are captivated by a certain property in successful
and stock prices. brands—a quality that reflects a more spirited, dynamic, and
More recently, in our collaborative work with professors creative experience. This goes far in explaining our earlier
Jacobson and Mizik over the past decade, we began observation that consumers are concentrating their passion
to notice that consumers were focusing their enthusiasm and purchasing power on an increasingly smaller portfolio
and purchasing power on an ever-smaller portfolio of of special brands—brands with Energized Differentiation
brands. We also began to compare brand attributes with that keep evolving. As already noted, we’re now able to
market performance, seeking to identify which combination demonstrate the economic value of creativity in brands
of variables best explained the changes in stock price and explain how brands can break out to affect the future
that could not be explained by fundamentals like sales financial performance of their firms. Brands with Energized
and earnings. What we found is that some brands were Differentiation have connected better with consumers,
constantly creating attitude change that was in turn commanding greater usage, consideration, loyalty, and
driving their financial numbers. They were creating brand pricing power.
Energy, if you will. Our research also shows that a renewed focus on Energized
Brands that currently have lots of Energy: Google, Differentiation can reinvigorate even well-established brands.
Disney, Sirius XM, iPhone, Microsoft, Wii from Nintendo, In fact, it almost seems that consumers have short-term
Microsoft, Pixar, Bluetooth, BlackBerry, iPod, Toyota memory—they are willing to discard past impressions and
Prius. Analyzing our BAV data, we found that a brand with see even a very familiar brand in new ways. We see this in
Energy: so-called “Lazarus” brands like Puma, Adidas, Converse,
1. Has velocity and direction: The brand radiates Gucci, Coach, Burberry, Marks & Spencers, Izod, and
the sense that there’s more to it, which captures people’s Cadillac. And then there’s Dove, which has lately elevated
imagination. It hints at that next something. itself from its simple product attribute focus (“one quarter
2. Constantly reinvents itself: It is adventurous and cleansing cream”) to engagement in a cultural conversation
full of ideas, and brings innovation and surprise to the with consumers about reframing societal perceptions of
marketplace. beauty. Dove proves that the most ordinary objects can again
3. Engages consumers: It is distinctive and authentic, feel extraordinary.
often with deep values and a point of view on the world Apart from consumer perceptions, we have also observed
beyond profit-making. that brands with higher levels of Energized Differentiation
4. Attracts without chasing: With its magnetism, and Relevance create more shareholder value. In 2001,
it draws people in without pandering or persuading. It we started a hypothetical fund called “BEX Top 50”
galvanizes consumers to join in. hat has allowed us to track whether the stock market reflects
5. Moves culture: The brand often becomes a catalyst changes in consumer attitudes in our BAV data. We started
for change, a spark that fuels movements, mantras, social by investing a hypothetical $10,000 in each of the 50 brands
networks, and communities. that posted the largest gains in Brand Strength at the
It is not essential that consumers have all five of these end of 2001, and have since adjusted the companies in the
perceptions; one can be enough. But the more Energy a fund every six months to stay current. When we compared
brand has, the more powerful it becomes. its returns to those of the S&P 500 through the midpoint
The data show that Energy is not a function of brand of 2009, we found we had outperformed the broad index
maturity—in fact, many established brands have as much in 11 of the 16 periods. (For a plotting of the results, see
energy as younger, flashier ones. Both McDonald’s and Figure 5.)
WalMart, for example, are highly energized. Energy plays a
particularly powerful role in commoditized industries where The Power of Irresistible Brands
brands usually struggle to build attributes like loyalty. In the In sum, we now know that the brands that are thriving even
airline sector, for example, the highest-energy brands include in today’s difficult markets, and that will succeed in the
Southwest, JetBlue, and Virgin Atlantic. future, have a more powerful form of differentiation than
other brands. They are brands with Energy, brands that
Energized Differentiation offer consumers a palpable sense of movement. Brands with
But it’s not enough for brands just to have energy. They must Energized Differentiation drive future corporate financial

7. See David Aaker and Robert Jacobson “The Financial Information Content of Per-
ceived Quality,” Journal of Marketing Research, (1994), 31 (May), 191–201.

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 85
Figure 5 Brand Strength Fund Up 12% vs. S&P 500 Down 20%

BEX Top 50 weighted Index
S&P 500











01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09
c- n- c- n- c- n- c- n- c- n- c- n- c- n- c- n-
De Ju De Ju De Ju De Ju De Ju De Ju De Ju De Ju

Data: BrandAsset Consulting: USA All Adults 2001–2009, Bloomberg

performance more than traditional brands that dominated We see similar challenges confronting brands in the “mass
the market for decades. market” area of the Leadership quadrant. During normal or
One revealing exercise is to plot high-energy brands non-recessionary periods, our research shows that 82% of
against their category averages. Not surprisingly, some the brands remain in the same space from one year to the
brands have so much Energy that, as can be seen in Figure next, with 10% of brands declining and the remaining 8%
6, they transcend their categories and redefine their own building brand strength. In contrast, during the last recession,
market. The brand movements illustrated in this figure reflect we saw 71% of brands occupying the same space after a year,
achievements that can be summarized in terms of multiples while 14% declined to Commodity status and 13% raised
of their category averages. To name a few, their status.
• Dove has 1.6X the pricing power; As these last findings suggest, the current environment
• Geico has 2.8X the momentum; may well be a great opportunity for many of the “Big Old
• Google has 2X the behavioral commitment; Brands” that have been languishing in the mass market
• iPod has 2.5X the emotional commitment; space for years. These Leadership brands need to follow
• Subway has 2.4X the usage and preference; strategies similar to those pursued by Niche brands, but
• Target has 2.3X the emotional commitment; with one addition: Leverage their established reputations
• W Hotels has 1.4X the category pricing power; and to renew and extend consumer interest. For example,
• Whole Foods has 2X the category pricing power. Johnson & Johnson’s Aveeno brand has scored high marks in
During the recent economic downturn, brands have both Energized Differentiation and Relevance. Now is
undergone even more of a shakeout. In a recession, brands are the time for Aveeno to leverage that strength and capture
more likely to move, but with increased risk of deterioration. market share.
Our research shows that brands were both gaining and This all suggests it is an important time to continue
falling at faster rates in the last quarter of 2008 and first to build your brand. A more recent study by Professors
quarter of 2009 than in the corresponding quarters in the Mizik and Jacobson shows that corporate investments in
three preceding years. Moreover, brands in the Niche and marketing and R&D during recessions can have significant
Leadership quadrants have become statistically more volatile, long-term payoffs. The study reported that, during the period
with the result that the probability that brands will drop 1989–2005, companies with operating income that continued
from either category has increased significantly. During the to invest during a downturn had excess stock returns over the
current recession, Niche brands were almost twice as likely next five years that were four times the returns of companies
to fall (to the “Unfocused” category) as they were during the that simply cut costs. And even companies with net operating
previous seven years. losses that managed to invest in their future saw excess stock

86 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
Figure 6 Brands with Energy Break Out of Their Category

BrandAsset Consulting: 2008 Full Year USA All Adults

iPod Google


Consumer Electronics
DifferentiationE/ Relevance)

Fast Food
W Hotels
Brand Strength

Retailers Soaps
Internet Search





returns that were twice as high as those companies that did • Prove your brand is an enduring advocate.
not invest.8 • Make it easy for consumers to take care of themselves.
To help companies make efficient brand-building • Couple chic with wallet-friendliness and lasting
investments, we looked at the components of those changes quality.
for both the Niche and Leadership brands. We found that • Offer accessible and guilt-free indulgences.
while Energized Differentiation is still the most important • Help consumers make the most of today and be more
component, both Relevance and Esteem have become more optimistic about tomorrow.
important in driving change during a recession. How should Not all strategies will be appropriate for all categories or
companies address this challenge? brands. As an example, financial services companies that have
In the current environment, winning brands will deliver seen consumers lose trust and confidence in their brands need
on fundamental needs while also satisfying higher-level to work on proving they are durable but still innovative. The
wants. By focusing on basic needs, companies will be able most promising strategies in such cases are those designed
to build current sales. Relevance measures how well that to accomplish the following: Prove your brand has enduring
brand addresses basic needs: Is the product durable? A good value by showing the brand is authentic, durable, trustworthy,
value? Do I get my money’s worth? Higher-level desires are and straightforward, but also progressive, intelligent, and
addressed through Energized Differentiation: Is the brand a leader.
innovative? Does the consumer feel stylish or glamorous? Is Brands must continue to invest in Energized
this brand a leader or progressive in some way? Differentiation while also building Relevance and Esteem
Six strategies can help carry brands though a recession to move toward a Leadership position. If a brand shows high
and capitalize on newly arising opportunities: Relevance, and still demonstrates Energized Differentiation,
• Build on lasting value with new service or trends. it will be well-positioned to come out of the recession. Not
8. Natalie Mizik and Robert Jacobson, “Marketing Strategies Across Economic Condi-
tions,” Columbia University Working Paper, 2009.

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 87
Figure 7 Brands are More Mobile in the Recession

BrandAsset Consulting: 2001–2009 USA All Adults



Niche Leadership

56% 71%
DifferentiationE /Relevance)

Mass Market
Brand Strength

36.3% 14.3%

New, Unknown or Commodity or Eroded


Brand Stature
(Esteem /Knowledge)

Percent of brands that gained Percent of brands that lost

Equity in Recession Period Equity in Recession Period

only does it address needs that will result in current sales, but
its Energized Differentiation will help drive future value by john gerzema is Chief Insights Officer for the Young & Rubicam Group.
meeting higher-level desires. One of the early founders of account planning in American advertising,
John has guided brand strategies for global businesses to creative acclaim.
What Can Marketers Do? Before joining Y&R, John ran Fallon’s international network.
Managers should focus on building an irresistible brand and
infusing it with energy. Since brands, like businesses, are ed lebar is CEO of Brand Asset Consulting, a division of Y&R, and
in permanent flux, brand managers must view their job as one of the early architects of the BrandAsset® Valuator. Ed is a 35-year
one of constant reshaping and renewal. They must listen veteran of Young & Rubicam and a former professor of the City College
carefully to the market, and continuously modify, personalize, of New York.
share, and improve upon their offerings. Especially in
today’s economic environment, the benefits consumers anne rivers is SVP, Director of Brand Strategy, at BrandAsset®
are looking for in brands are changing. By being keenly Consulting. Anne was an investment banker at Bear Stearns as well as
aware of these shifts in consumer perception and values, director of marketing, development and corporate finance at several retail
marketers can help their brands survive, prosper, and drive and consumer product companies.
shareholder value.

88 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
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