• by Karlene Lukovitz , October 13, 2008

So maybe you were thinking (hoping) that there isn't much more that could possibly go wrong with the business climate? Apparently, the "Brand Bubble" hasn't hit your radar screen yet.

Most worldwide brands are now so overvalued by the financial markets in comparison with their worth in the minds of consumers that if this bubble bursts, it could erase large portions of intangible value in firms and send a shock wave through the global economy, according to a data-based analysis detailed in a new book, The Brand Bubble.

After analyzing 15 years of brand and financial data from Young & Rubicam Group's BrandAsset Valuator (BAV), the world's largest study of consumer attitudes and perceptions of brands, the authors--Y&R chief insights officer John Gerzema and Ed Lebar, an economist who oversees BAV consulting across Y&R's worldwide accounts and business lines--concluded that this hidden bubble represents $4 trillion in S&P market capitalization alone. That's twice the size of the subprime mortgage market.

Future cash flows expected on the basis of brand value have become the dominant force driving total business value. The problem: the data show that investors are irrationally overvaluing brands and therefore dramatically overestimating those future cash flows, report the authors.

Essentially, the earnings potential being imputed to thousands of brands far outstrips their value to the consumer. "Wall Street is long on brands; consumers are short on brands," sums up Gerzema.

"When future earnings are in question, it's more than a brand problem; it's a business problem," and one that will "jolt business and investors alike" if not corrected, Gerzema warns.

How did the bubble form? Over the last five decades, assessments of company worth have become increasingly driven by intangible value--namely, a company's inventiveness and intellectual capabilities--and less driven by hard-asset valuations.

The authors, working with Millward Brown, determined that 30% of the enterprise value of the average S&P 500 company is now based on brand value, versus just 5% in 1978. That 30% "is probably conservative," Gerzema told Marketing Daily. Meanwhile, Brand Finance has estimated that nearly two-thirds of worldwide GDP, or about $19.5 trillion, is based on assumed brand value/intangible assets.

Why are brand values being overvalued? Companies and investors alike continue to view metrics such as brand trust and awareness as the "backbone" of how brands are built, but this is "dead wrong," says Gerzema. In reality, traditional business models and marketing strategies have not only stopped working, but can actually hasten the declining value of brands. Once-reliable marketing strategies have become irrelevant as they have lost traction with consumers, who have "fallen out of love" with leading brands, he says.

However, Gerzema and Lebar also believe that the dire brand-explosion scenario is avoidable if companies embrace the reality that what does work in building brand value in today's world is "an insatiable appetite for creativity and change"--or what they term "energized differentiation" (ED).

The book offers a five-stage model for assessing a brand's current energy/innovation levels and throwing these into high gear to achieve differentiation and the true consumer mindshare that translates to outstanding financial performance.

To illustrate these stages, the book employs case studies of the small--and dwindling--number of companies that have grasped and leveraged the power of ED. A seven-year analysis of financials showed that these companies outperformed the S&P 500 by nearly 30%, but also that the number of such "stellar" brands dropped by 36% during that time frame, Gerzema reports.

ED-driven brands include revitalized ones such as Xerox, Lego, Puma, Adidas, Nike, Dove and Burger King, as well as relatively newer brands such as Google and Whole Foods, he notes.

He also points to the success of emerging brands such as the Pinkberry upscale frozen desserts chain and two Japanese-originated high-design, low-cost retail chains now quickly establishing footholds in the U.S., Uniqlo and Muji. These, he says, respectively represent innovative, next-level takes on the core concepts behind Gap and Target.

Not surprisingly, the research also underscores that the ED-driven brands that reap the benefits of passionate loyalty and word-of-mouth are also those that excel at using social media to build brand-based communities, Gerzema stresses.

"This is absolutely core," he says. "With the democratization of information, consumers can either form around a brand and praise it, or blog it to death. There's no place to hide. Truly successful brands understand how to be part of the dialogue, rather than trying to control it. They understand the vital needs to be transparent and co-create their brands with consumers."