To reduce tax exposure, corporate finance and accounting organizations will occasionally consider making a noncash writeoff to an underperforming brand. Yet some writedowns permanently damage the brand and the outlook for long-term value appreciation.
Unfortunately, accounting rules may cloud a full appreciation of the extent of such damage.
Among the more high-profile recent writeoffs, Kraft Heinz wrote down $15.4 billion of brand value in April 2019, blaming poor marketing following the 2015 merger of the two iconic brands for a loss of market share.
Procter & Gamble wrote down $8 billion of Gillette brand assets in August 2019. The media claimed the poorly conceived “Toxic Masculinity” ad campaign turned off many of the brand’s core customers.
Inept marketing that results in a loss of brand equity can indeed drive brand write-downs. But how can it make sense to do a writedown without fully understanding the consequences for the brand?
Under GAAP rules, acquired brands are periodically evaluated for impairment, but never for accretion of value. Internally grown brands don’t show up on the balance sheet at all. This dichotomy creates a dilemma for investors who are monitoring the performance of a business. If the value of a brand isn’t reflected on the balance sheet, where does it exist?
To a great extent, the value is reflected in the actual price of the stock and the premium investors are willing to pay for it. Financial analysts spend great effort evaluating companies’ management plans, goals, budgets, capacity, distribution, sales force, reputation, culture, marketing, and investment. But all too often these observations are qualitative, subjective, and biased.
(In an effort to create a more consistent valuation approach, the CoreBrand Index® was developed three decades ago. It’s the result of a quantitative research survey that takes an entirely different approach to evaluating a company’s performance and future potential. See more about the index at the end of this article.)
Accountants may be quick to defend current valuation methods backed up by the Financial Accounting Standards Board. However, those methods make it challenging to obtain meaningful insights into intangible assets.
While this process is necessary during an M&A event, it’s far too rigid to serve as a continuous business function.
Admittedly, the rules of accounting are not likely to change in the foreseeable future, and, to be clear, it is not the purpose of this article to recommend or advocate for changes to GAAP.
However, the lack of reporting of intangible assets has become less tenable as intangible assets have grown enormously relative to hard assets in recent decades.
Consulting firm Ocean Tomo has identified the changing values of intangible assets as a percentage of the total market cap of the S&P 500. In 1975, only 17% of market value was attributed to intangibles. In 2015, intangibles represented 84% of total market value, represented as market value less book value.
Regardless whether you believe those exact percentages, there is no denying the dramatic changes attributable to the growing role of intangible assets. In the future, investors will pay a lot more attention to these assets and will demand that corporations measure, value, and manage them.
In May 2019, the International Organization for Standardization (ISO) published a new standard for brand evaluation, ISO 20671. It calls for companies “to increase entity value as established by improvements in brand strength and brand performance and ultimately indicators of financial results.”
But many chief marketing officers find it challenging to get budgets from CFOs that are sufficient for growing brands, given that such growth doesn’t show up on the financials except as an expense. When it comes to being accountable for the fair value of brands, the deck is stacked against those who are responsible for managing them.
It is understood that CFOs will always be looking for opportunities to reduce expenses and to write off acquired goodwill at a convenient time. But the accounting rules don’t much sense outside of accounting, which explains why CFOs and CMOs are often at odds over budget issues when instead they should be working with the same set of guidelines.
Viewing budget items like training, hiring, research, and public relations as expenses rather than investments is also problematic for intangibles assets because such items don’t always generate ROI in the budgeted year.
The CFO manages the company’s financial performance following GAAP, but that doesn’t solve the dilemma for intangible asset managers who are contributing to the company’s overall market value without any ability to prove the ROI.
For brands to remain at the top of their game and to fulfill the promises that differentiate brands from generics, it is vital that CMOs continuously keep their fingers on the pulse of the consumer.
CEOs and CFOs responsible for building corporate value need to understand that cutting brand budgets in the face of disruptive and mounting competition is a recipe for failure.
Building intangible capital models for evaluating the accretive value and potential of brands is a logical way to understand whether the investment requested for marketing is worthwhile.
It is time for CFOs to rethink brand writedowns. Improving the value of intangible assets is the responsibility of not just brand managers, but the entire corporate team.
Dr. James R. Gregory is chairman of Tenet Partners, which performs the calculations and analytics for the CoreBrand Index®, and is on the index committee of the EQM Brand Value Index. He is also a senior fellow at The Conference Board and has written five books on corporate brand measurement and strategy.
About the CoreBrand Index®
The market research survey behind the CoreBrand Index® is conducted continuously, all year long, among 800 companies across 50 industries. It surveys 8,000 impartial observers (both business leaders and high profile consumers).
Conducted since 1990, this quantitative approach produces a “Brand Power Score” that is used in calculating “Brand Value,” which is a measure of a brand’s power as opposed to its stock price.
This metric is also used in the underlying methodology of the EQM Brand Value Index, which is investable through the Brand Value ETF (Ticker: BVAL).
The premise behind BVAL is to identify the right time to invest in undervalued companies with strong brands.