Why the brand bubble could be about to burst
With over 20 years’ experience assessing the value of intangible assets worldwide, Brand Finance’s David Haigh warns that slow growth and an international crisis could mean that brands are on the brink of a global crash
AUTHOR
DAVID HAIGH
PICTURE
R.CLASSEN
Brand Finance’s Global Intangible Finance Tracker study has been tracking the value of intangible assets belonging to publicly traded companies continuously for 20 years. In this time, the absolute value of companies on the stock markets has progressively grown – as has the absolute value of intangible assets owned by them.
At the end of 2018 the cumulative value of all quoted companies worldwide came to approximately $100 trillion, of which $52 trillion was represented by tangible assets and $48 trillion by intangible assets. We estimate that at least $10 trillion to $15 trillion of this latter amount pertained to brands. As such, we believe that brands represent the single most valuable intangible asset class of all – valued even higher than patents, which have a finite life of no more than 20 years, whereas a strong brand can exist indefinitely.
The only significant declines in these huge cumulative values occurred in 2001-2002, when the dot- com bubble burst and the Nasdaq hi-tech index crashed by 77%, and again in 2008-2009, when the financial bubble burst and the Dow Jones index dropped by over 50% before rebounding.
Experts often say that about once a decade there is a major downturn in the world economy, a recession and a drastic reduction in share and asset values. If this is true, then we are overdue for another major reversal.
Indeed, there were a few warning signs during 2019 that the asset bubble might be about to burst again. Several high-profile branded initial public offerings (IPOs) floundered, including WeWork, Slack, Lyft, Uber and Peloton, while Aston Martin – a much-vaunted UK IPO, which was heavily sold on its strong brand story and 007 endorsement – crashed by 75% on the London stock market.
Meanwhile, Chinese companies and brands have been growing rapidly for many years and some have suggested that they are due for a retrenchment.
As a whole 2019 was another year of solid growth in global share values; the Dow Jones index rose 30% and the Nasdaq index rose 35%. But 2020 seems to be an entirely different ball game.
VIDEO EMBED EXAMPLE
This ranking video compares the Top 15 Best Global Brands since 2000. It compares the brand value calculated by Interbrand & Brandirectory.
Brand Finance Global 500 2020 – the world’s most valuable brands
The Brand Finance Global 500 2020 ranking of the world’s most valuable brands reflects continued growth during 2019, although cumulatively the increase from January 2019 to January 2020 was only 2% – to a high of $1.4 trillion. The value date for all 2020 brand valuations is 1 January 2020, based on data gathered and analysed between September and December 2019, including equity analysts’ forecasts of revenues and profits in 2020 and subsequent years. The fact that brands were flat in 2019 while shares were up may have been a gentle warning of things to come.
Our 1 January 2020 brand valuations are very much grounded on expectations and forecasts during the last quarter of 2019. But things seem to have moved very fast since then.
Straws in the wind during 2019 appear to have suddenly bent under the blast of coronavirus. In the last week of February 2020, global stock markets slumped by nearly 15%. It is unclear at this stage whether markets will recover, but based on the experiences of 2001-2002 and 2008-2009, the bear run seems likely to continue. If the previous crashes are anything to go by, share prices could drop by 30% to 50% in 2020. Given the erratic behaviour of some investors, it is possible that values will drop too far before a rebound occurs.
One feature of the previous two crashes was that brand values tended to be less volatile than share prices. The reason for this is that our brand valuations are based on realistic revenue forecasts, which are often relatively stable, a wide range of objective data and our expert valuation analysis. Meanwhile, share prices are often driven by little more than emotion, including – sometimes – panic.
During the last crash, the ratio of our brand value to market-driven enterprise value rocketed in some cases. This was because brand valuations were determined from rational first principles, based on data, while share prices were being driven by irrational fears. For example, in the 2008-2009 crash, some banks displayed brand value-to- enterprise value ratios as high as 50%-60% where before the crash the equivalent ratio had been 10%-20%.
We seem to be entering a similar period of anomalous values. So, let us consider how we rationally judged the value of major global brands at the end of 2019 before the current crisis hit.
Amazon broke the $200 billion barrier
Defending its position as the world’s most valuable brand for the third consecutive year, Amazon broke the $200 billion brand value barrier – over $60 billion more than Google and $80 billion more than Apple.
The world’s largest online marketplace has branched out into cloud computing, AI, consumer electronics, digital streaming and logistics, and is looking to enter other industries as well. With a diverse product and service portfolio, and thanks to continued investment in fast-growing sectors and innovative technologies, Amazon is not only the leader of today, it also seems primed to remain in that position tomorrow.
Nevertheless, most of the company’s revenue still comes from retail, and challenges to the growth of its core operations may result in brand-value stagnation in the future. In November 2019 Nike announced that it would no longer be selling its merchandise on the platform, in order to develop its own direct sales channels. Amazon may have to contend with other big brands following Nike’s lead, which would undermine its reputation as the ‘everything store’. Another potential sticking point is the future of Amazon’s international business. From environmentalist opposition in Europe to backlash from local retailers in India and the saturation of China’s e-commerce market by Alibaba and its subsidiaries, achieving global growth that matches its US growth to date may prove difficult.
Digital can’t buy success
Forty-four retail brands featured in this year’s rankings alongside Amazon, with a combined value of nearly $800 billion, making the sector the third most valuable behind technology and banking. As the novelty of operating in the digital space fizzles out, some online retailers such as eBay have started to lose brand value, while brick-and- mortar chains, which have learnt to adapt to the changing marketplace, are making gains.
But is the brand bubble bursting?
Despite many success stories, there are also clear signs of a slowdown. The combined value of the Brand Finance Global 500 has increased by less than 2% year on year and while 244 brands have increased their brand value, another 212 are down – including 95 by 10% or more. Those that once enjoyed long-term success are now having to adjust to a world that is more unpredictable than ever, while many tech brands are suffering after failing to meet the bullish expectations of investors.
Telecoms calls for help
A call to the help desk may be in order for the telecoms industry, as the majority of brands (four out of five) saw their brand value decline in 2019, despite strong investments. Over the past five years, the combined value of telecoms brands in the Brand Finance Global 500 has stagnated – sitting at $558.4 billion in 2020, compared with $567.7 billion in 2015 – while all other major sectors have recorded significant increases. Big telcos are being squeezed from all sides, as over the-top (OTT) messaging apps such as WhatsApp are affecting voice and SMS revenue and challenger brands are offering comparable data services at below-market rates, leading to fierce price competition and decreasing margins.
Saudi Aramco strikes oil
With a brand value of $46.8 billion, Saudi Aramco is the most valuable of the 44 new entrants in the ranking. The publication of the Saudi Arabian oil and gas company’s financials at the time of its IPO enabled its brand to be included in the Brand Finance’s annual study for the first time. Placed 24th globally, Saudi Aramco also claims the title of the most valuable brand in the Middle East and Africa region.
The IPO proved to be hugely successful for the brand, as Saudi Aramco raised S$25.6 billion – making it the largest ever IPO to date. Even after recent attacks on two of its oil processing sites, it is now the world’s most valuable listed company, comfortably ahead of tech titans Apple and Microsoft. Having previously focused on leveraging its strength in upstream, while growing its downstream operations through acquisitions, in both Saudi Arabia and key global markets, the company must now focus on developing international perceptions of the brand in order to open it up for further partnerships and investment.
Saudi Aramco is now only a fraction behind Shell, which ranks 23rd in brand value at $47.5 billion. Despite sustained lower oil and gas prices, the Anglo-Dutch giant continues to achieve a significant price and volume premium thanks to its strong brand and has held on to its position as the most valuable brand in the industry. The company recently shared a new strategy to enable it to thrive throughout the transition to a lower-carbon energy system, placing focus on new energy investments that will shape the portfolio and help drive growth over the next few years.
World’s strongest brands
Ferrari in pole position again
For the second year in a row, iconic Italian luxury sports car manufacturer Ferrari has retained its position as the world’s strongest brand with a brand strength index (BSI) score of 94.1 out of 100. Brand Finance determines the relative strength of brands through a balanced scorecard of metrics evaluating marketing investment, stakeholder equity and business performance. According to these criteria, Ferrari is the strongest of only 12 brands in the Brand Finance Global 500 2020 ranking to have been awarded the highest AAA+ rating.
Alongside revenue forecasts, brand strength is a crucial driver of brand value. As Ferrari’s brand strength maintained its rating, its brand value grew, improving 9% to $9.1 billion. As well as announcing five new models in 2019, including the SF90 Stradale and Ferrari Roma, both aimed at new market segments, the company also established a manufacturing agreement with the Giorgio Armani Group to help push its collections into a more premium space. For years, Ferrari has utilised merchandise to support brand awareness and diversify revenue streams. Now, it is taking steps to preserve the exclusivity of the brand. The company plans to reduce current licensing agreements by 50% and eliminate 30% of product categories.
Disney bounces back
After failing to make the top 10 strongest brands last year, Disney is making a comeback, taking second place with a BSI of 93.9 and an
AAA+ rating. No longer just about children’s films and holiday destinations, with the acquisition of 21st Century Fox the company has secured its place as a leader in the media industry. Disney has also put an emphasis on delivering direct- to-consumer experience. With the recent launch of Disney+, intended to take on Netflix and other emerging rivals such as HBO Max, the brand has positioned itself for success.
WeChat’s appeal
In third place, WeChat has also claimed the elite AAA+ brand strength rating and a corresponding BSI score of 92.9 of out 100. With over 1 billion monthly users, the app has positioned itself as essential for everyday communication in China. Moreover, WeChat has significantly broadened its proposition since its inception, successfully leveraging its brand to develop an extraordinary level of vertical product integration. With WeChat Pay now accepted in more than 60 countries and the platform opening to international travellers in China for the first time, the brand has set its sights on global markets.
As its brand strength has flourished, so has its brand value, increasing 7% year on year to $54.1 billion. Simultaneously, it has claimed the titles of the highest brand value increase over the past five years – up a colossal 1,424% (72% compound annual growth rate) and the highest rank increase, jumping 415 places in the Brand Finance Global 500 since 2015.
A rollercoaster ride
It is beginning to look as though 1 January 2020 was the top of a rollercoaster ride for many brands. Starting in China, brand and share values are on their way down. Based on experience from the last two crashes, the brands that will rebound fastest are the ones with strong stakeholder brand equity, profits, cashflows and a clear brand vision infused with a strong and sustainable purpose, where customer and financier interests are aligned.
