Don DeNovellis is riding high on the power of branding. As CFO of $250 million Ekco Group Inc., DeNovellis recently helped mount a successful turnaround at the Nashua, New Hampshire-based company following its record loss of $30 million.
Last year, the provider of kitchenware and bakeware, animal products, and cleaning products sizzled, its net income rising to $6 million on sales of $207 million. How did it do it?
“After the huge losses, the easy thing would have been to fire people and cut down on advertising,” the 53-year-old DeNovellis says. “We did just the opposite, allocating more than $10 million toward incremental promotions, advertising, and product development to build our best asset — our brands.”
Ekco’s brand image in the marketplace was as a reliable, low-cost supplier of culinary tools. This perception limited its products, however, to primarily low-cost retail outlets like Kmart. The company’s new chief executive officer, Malcolm L. Sherman, the former president of Zayre Stores brought in to spice up the company’s fortunes in late 1996, gave DeNovellis a mandate to improve the top line by enlivening its brand. “As a housewares company, our brand is everything,” says Sherman. “I wanted to expose Don to the drivers of our business. I wanted him to know the value of our products and the risk — the financial consequences — of mismanaging the brand.”
Sherman sent DeNovellis to the company’s Chicago production facility to see how the other half lives. “For 16 months, I was married to the senior marketing and sales executive,” DeNovellis says. “I watched him operate day in and day out. And I was his fulfillment guy. I ran the factories, warehouses, and distribution. When I came back to New Hampshire, I understood like I never did before what the hell brand equity was all about.”
The newly forged alliance led to the introduction of 350 new products in 1997. To penetrate the upscale marketplace, Ekco acquired the rights to use the Farberware brand, a supplier of high-quality cookware, and introduced a new brand, Via, which manufactures decorative teakettles and other products. The company doubled its advertising budget, nearly doubled its inventory, and invested heavily in a redesign of its packaging — all on the heels of the worst loss in its history.
Most important, DeNovellis communicated Ekco’s new brand image — as a supplier of a wide variety of quality kitchen products — to Wall Street. “I told the analysts we were not going to hunker down and take out the machetes, but that we would unleash our potential by redirecting our brand image and investing in that strongly,” DeNovellis says. “They trusted that vision and, evidently, are happy with our progress.”
Like DeNovellis, many other CFOs are realizing that brand management is not just for Coca-Cola, Nike, or McDonald’s anymore. In this era of revenue growth and global expansion, brands are one of the few “unopened closets of value,” says Eric Almquist, a director with Mercer Management Consulting Inc., Lexington, Massachusetts. In addition, brand equity has captured the full attention of finance’s main audience. “Five years ago, Wall Street’s focus was on numbers and not too much on strategy,” says Edwina “Wina” Woodbury, executive vice president of business process redesign at Avon Products Inc., a New York-based direct seller of beauty and beauty-related products. “Now the bulk of their scrutiny is on brands, especially where you’re positioning your brand for the future.”
The attention is well founded. Indeed, according to a study conducted by Corporate Branding Partnership LLC, a Stamford, Connecticut-based consulting firm, when stock markets suffer, companies with strong brand equity suffer less than the weaker brands. Take last October’s stock market plunge. During the two-day spiral, companies with “power brands,” such as General Electric, Microsoft, and Intel, regained nearly all their losses by the end of the second day. “The weaker brands did not come close to recovering from the first day’s precipitous drop,” says James Gregory, Corporate Branding’s CEO, naming Alberto-Culver and Nucor as laggards. “What that says to us is that there is a powerful link between the strength of a company’s brand and the performance of its stock.”
That link is driving many CFOs to adopt new roles in brand management. While DeNovellis’s foray may be extreme, some financial executives are teaming up with marketing to launch, solidify, or redefine their corporate images. Others are reinventing their traditional investor relations role to include brand communication. “We’ve got to [be involved],” says John Kriak, executive vice president and CFO of Crown American Realty Trust, a Johnstown, Pennsylvania-based real estate investment trust. “We can no longer think of ourselves as just the backroom boys. We have to be part of the management team that sets the platform for the company to perform. And that includes defining and communicating brand equity, cutting checks to support it, and measuring it for effectiveness.”
Traditionally, the finance department has backed away from brand management. Of the 20 companies contacted for this article, for example, spokespersons for roughly half said that their CFOs had little to do with the subject. And many others were serving in advisory, rather than active, capacities.
One reason for the limited involvement is the exclusion of brand valuation from financial reporting. “CFOs in countries such as the U.K., France, Australia, and Spain have been keenly focused on brands for 15 years now,” says Raymond Perrier, director of brand valuation for Interbrand Corp., based in New York and London, “because they are allowed to separate brand value from goodwill on the balance sheet.” U.S. generally accepted accounting principles (GAAP) doesn’t allow for such a separation, he says, adding that the American focus on brands is largely due to external forces, such as increased competition and analyst scrutiny.
Still, the main barrier to finance’s involvement in branding is an internal one — the deep division between marketing and finance. “Most companies and CFOs will tell you there is an adversarial relationship between finance and marketing,” says DeNovellis. “The CFO is viewed as the person who wants to cut the [marketing] budget,” adds Gregory, “and marketing often fails to effectively explain the return on investment for communications.” The result is “a wall between the two departments,” he says.
From marketing’s point of view, that wall can often lead to a lack of financial commitment to branding campaigns. On the other hand, finance executives counter that left to its own devices, marketing can let costs get out of hand. Witness the more than $300 billion that will be spent on advertising and promotions in the United States this year alone (see chart, below) or the $5 million to $150 million price tag — depending on such variables as ad media, target customer, retail channels, product category, price tag, and geography — associated with launching a new brand.
Both sides agree, however, that a lack of brand appreciation within a company can lead to missed opportunities in the marketplace, or worse, a brand’s depletion through misguided cost cutting. Take the case of Joseph Schlitz Brewing Co., formerly in Milwaukee. In the 1970s, the company virtually bankrupted itself by launching a cost-cutting campaign that included reducing the quality of the ingredients in its beer and shortening the brewing cycle by 50 percent. By 1980, the results were apparent: Sales were down by 40 percent and the stock price plummeted from $69 per share to $5. “Schlitz had a fine reputation as a quality brand at a fair price,” says Gregory. “As soon as people noticed a difference in taste, their perception of the brew was altered. The company couldn’t survive the brand erosion.”
Barriers to Entry
Breaking down the many barriers between marketing and finance is no small task. DeNovellis points out that it was only “by sitting in their chairs that I learned there is value in spending money to enhance the brand — through advertising, new product design, and packaging.” PictureTel went so far as to install its former finance chief, Joan Nevins, as vice president of marketing for a time at the Andover, Massachusetts-based videoconferencing firm. Other companies, such as J.C. Penney and General Motors, are solving the problem by creating cross-functional teams and full-scale departments to oversee brand management. At GM, for example, finance executives have been assigned to both vehicle-development and brand-management teams since the mid-1990s.
Whatever their involvement, finance executives admit that a full appreciation of brand equity involves letting go of some long-standing biases. At John Hancock Mutual Life Insurance Co., for example, CFO Tom Moloney is the top executive on an interdepartmental team redesigning its brand image. “We’re known primarily as a life insurance company, but we wanted to redirect our brand identity with consumers and Wall Street into that of a financial services conglomerate selling annuities and managing mutual funds,” Moloney says.
By working with the marketing department in a two-year team process, “I learned that to do the brand-image redirection we needed, we would have to spend money on advertising, something that did not come naturally to me,” he says. “Frankly, this was something I never learned when I went to college to study finance.”
Moloney and other finance executives, however, point out that there are limits to their involvement in brand management. While he savors his role championing Ekco’s brand equity, DeNovellis is clear about where the creative aspects of redirecting a brand belong at a company. “Marketing must lead the creative charge,” he says. “That’s their job. What’s different now is that I understand what they are doing. Before, if they had told me they wanted to mount a new, expensive advertising campaign and complete package redesign, I would have blinked.”
The Risk Factor
The key role for finance hinges on understanding brands not just as assets to be valued, but as risks to be managed. “Someone has to create the plan, assess the risk, and hold the organization accountable to the plan. That’s the CFO,” says Peter Horvath, vice president and CFO/apparel merchandising at The Limited Inc., a Columbus, Ohio-based apparel merchandiser. After all, adds Bob Hiebeler, managing director of Arthur Andersen Knowledge Space, a Chicago-based unit of Arthur Andersen Knowledge Enterprises, “a CFO is a company’s ultimate risk manager, the person who is responsible for addressing any and all risks jeopardizing the bottom line. A misdefined or misdirected brand is a tremendous risk and, therefore, must be analyzed, quantified, and managed.”
How big a risk is well documented. Coca-Cola’s ill-fated attempt to market New Coke, for example, cost it “hundreds of millions of dollars,” says one observer. And sales for McDonald’s Arch Deluxe sandwich, which was supported by a $100 million ad campaign, are reported to be well below expectations. While marketing-driven firms can absorb such hits a lot easier than others, the lesson is simple: “A good brand can shift demand to your company,” says Mercer’s Almquist. “A bad one can shift it away.”
Given the financial implications, says Larry Chiagouris, managing director of New York- based CDB Research & Consulting Inc., it is imperative that “CFOs reimagine themselves as stewards of the brand.” And nowhere is that more important than in their communications with consumers, employees, management, and especially financial analysts. “The power of brands may rest mostly in the minds of consumers,” says Almquist. “But the same can be said for Wall Street.”
And what’s the best way to communicate brand attributes to Wall Street? “Quantification,” says Hiebeler. “If Intel, for example, wants its image to reflect its incredible number of scientists, then its CFO could quantify that with the Street. He or she may say, ‘We’ve got 10,516 scientists, of whom 42 percent are Ph.D.s.’ What this does is create a partnering situation in the company, where CFOs back up marketing claims with valuable information.”
DTE Energy Co. is doing just that. The Detroit-based utility with $3.5 billion in revenues in 1997 had a strong perception as a conservative, stable company, but wanted audiences to also perceive its new emphasis on technology. “Utilities have difficulty differentiating themselves,” explains Larry Garberding, DTE executive vice president and CFO. “We’re all electric companies with generation, transmission, and distribution capabilities, and a franchise area. Long term, however, technology will be key to those utilities that survive. We want to make sure Wall Street sees us as a technology leader.”
To do that, DTE routinely broadcasts its investments in technology to the financial community. “Right now, we’re backing research into developing fuel cells like those used in the space program to produce electricity,” Garberding says. “As we learn from this research, we share the knowledge with Wall Street.”
Other CFOs are letting analysts experience their brands firsthand. “We’re in the regional mall business,” says Kriak of Crown American. “We’ve been redirecting our brand to convey malls that conjure up Main Street America. We want people who come to our malls to feel safe, secure, and entertained by the same kind of small-town feelings that captivated people in an earlier era.” To that end, Crown American introduced new “anchor” stores in its malls, replacing Kmarts with J.C. Penney and Sears outlets. It also unveiled electronic kiosks that use its name in conjunction with images suggesting friendliness and safety. To reinforce this message with the financial community, Kriak takes analysts on mall tours: “We want them to feel the brand by experiencing it.”
Measures of Effectiveness
Of course, what analysts really want to know is how much a company’s brand is worth. While there is no single accepted method for measuring brands, such businesses as Interbrand and Trademark & Licensing International have developed methodologies for measuring brands based on discounted cash flow analysis (see sidebar, below). “We identify brand earnings and brand risk,” says Interbrand’s Perrier. Ultimately, he says, “a brand’s value is based on what you can expect to get out of it.”
Other companies, such as Corporate Branding and CDB, have developed benchmarking programs that allow a company to measure the performance of its brands. “We can tell a company what its brand is worth against generic companies,” says Chiagouris of CDB, which charges from $50,000 to $250,000 for the service. “A year later, they can see if the needle has moved.”
Equipped with such information, says Gregory, finance executives can gauge the best use of their brand dollars. In the case of Norfolk Southern, for example, such research helped convince the railroad to continue investing in advertising. Says Gregory, “Norfolk Southern had made a significant investment in advertising for many years, prompting its senior management to ask a simple question: ‘How can we quantify what we are getting in return for this expenditure?’ Competitors spent less on their brands and were in some cases perceived as having a better reputation than NS. Clearly there was a need to illustrate the value this campaign was returning for the company. Our study found that their reputation not only surpassed the competition’s, but that the benefit/cost ratio was 5.7:1, based on the expected improvement in stockholder value. The end result was that the client continued its steady investment in brand advertising. The next year, a survey in Fortune magazine rated Norfolk Southern’s reputation the highest in the railroad category.”
Not everyone agrees that branding can be quantified, however. Richard Nanula, CFO of The Walt Disney Co., told CFO last November that he doesn’t even try to calculate the value of the Disney brand, because none of the methodologies used has become a generally accepted standard. “I don’t know how to value a brand,” he said, but added that he is acutely aware of the importance of Disney’s. “Our brand is in 50 or more categories, compared with 1 for Coca-Cola. What we spend more time doing is figuring out how to profitably expand it.”
Disney has taken brand expansion almost to an art form. Witness its crossover marketing from movies to merchandise to theme parks and even hockey teams. Other companies are following its lead: The Gap and Calvin Klein, for example, are widening their sales margins by licensing their well-known brands to third-party manufacturers of perfumes, luggage, and toiletries. And at Avon, Woodbury, who was formerly CFO, is leveraging the company’s strong brand to expand into global markets.
“Avon is a highly recognized brand around the world that we weren’t leveraging the way we needed to,” explains Woodbury. To capitalize on new opportunities, she says, Avon is building a global marketing program based entirely on its brand image. “Our makeup and fragrances, for example, were different from country to country. We’d introduce two new fragrances in the United States each year, but then we’d change them around the world. We decided instead to leverage our name by developing a global fragrance that would be sold simultaneously around the world.” The company’s first global perfume, Far Away, generated more than $50 million in sales in 55 markets last year.
As Avon’s venture illustrates, a strong brand can open up a new category or even a new country. And going forward, says Interbrand’s Perrier, the possibilities are endless. “Brands are absolutely going to get more important. We’ve moved from a world where only physical assets mattered to one where intangibles of all sorts, including brands, are the drivers of corporate success.” With that shift, he says, it’s inevitable that finance’s involvement in branding will grow. “It has to,” he says, “for the simple reason that shareholder value will increasingly depend on harnessing those intangibles and making them work harder for the business.”
Ultimately, the shift into branding may not be easy for all finance executives, says The Limited’s Horvath, given that “you are required to think out of the box and to dream a bit.” But, once entered, the brave new world of brand management can be personally rewarding, says Ekco’s DeNovellis. An amateur race-car driver, DeNovellis compares the experience to driving a Porsche at 160 miles an hour. “You must be intensely involved with what you’re doing, never letting your concentration slip,” he says. “But when you do it right, the experience is extraordinarily cathartic.”
Russ Banham is a business writer based in Missoula, Montana.
Beyond Gut Instinct
How finance executives measure the effects of brand strength.
Finance executives are often asked to rely on gut instinct to discern whether brand investment reaps top-line results. Yet, because of the impact of brands on shareholder value, companies are increasingly turning to more scientific methods.
The most widely accepted avenue, of course, is brand valuation. Pioneered by the London and New York-based Interbrand Corp. in the mid-1980s, this method computes brand value by forecasting future earnings attributable to the brand and discounting them to a net present value. Interbrand, which counts among its clients IBM, Bank of America, and MCI, bases the discount rate used on the strength of the individual brand.
Of course, determining brand strength and future earnings is a bit of a gray area — and one in which consultants part ways. Says Weston Anson, head of La Jolla, California-based valuation consultancy Trademark & Licensing Associates Inc.: “Our definition of net earnings, for example, takes into account what someone else would pay to rent or buy the brand.” Anson, who works with such companies as Procter & Gamble and Barneys New York, explains that the component is determined by a database of roughly 10,000 transaction royalty rates that the company has compiled.
Other techniques that attempt to measure a brand’s success include such large-scale consumer-brand surveys as Young & Rubicam Inc.’s Brand-Asset Valuator and Total Research Corp.’s EquiTrend. The BrandAsset Valuator, for example, measures 450 global and 8,000 local brands on an ongoing basis according to four indicators: differentiation, relevance, esteem, and knowledge. While the result is not a single valuation, the study compares brand characteristics with others in the model.
Mercer Management Consulting Inc., in Lexington, Massachusetts, on the other hand, uses a technique that combines brand asset valuation with the nonfinancial or image-related aspects of the brand. Says Eric Almquist, a Mercer director, “Because brands are not accounted for in the U.S., assigning a single value to them is pretty useless, unless it helps you figure out a price advantage or a [market] share advantage.”
Old-fashioned surveys, however, are still a good starting point for brand management. At John Hancock Mutual Life Insurance Co., for example, CFO Tom Moloney points to standard market research to prove the effect of a 1996 brand redirection campaign. “The team drew heavily from our own market research to determine how we were being viewed, and then brought in our ad agency to help us redirect the brand,” says Moloney, adding that “the work paid off in spades.” In fact, according to the survey, 77 percent of consumers now agree that Hancock has a “highly recognizable name as an investment company,” as compared with 54 percent in January 1996.
Once established, however, brand value can have several financial applications. For example, says Anson, Barneys New York and Boston-based Safety First have used their brand valuations to collateralize loans. Such companies as P&G use valuations to determine rates for intercompany transfers. Others have included the value in rights offering prospectives, and still others have computed brand value as part of their mergers-and-acquisitions due diligence.