Reprinted with permission from Marketing Management, March/April 2007, published by the American Marketing Association.

Companies must
manage brands like
tangible assets if they
want to reduce risk.

RISK JOCKEY
BY OVE HAXTHAUSEN

uccess is the ability to go from one failure to another

with no loss of enthusiasm. Most marketing executives

would probably nod approvingly to Winston Churchills

definition these days. Growing and managing a brand is no

easy task. The evidence is well-known: The average tenure
for CMOs at the top-100 branded companies is just 23
months, compared with 54 months for CEOs (per a 2004
study by global executive search firm Spencer Stuart).
According to various research studies on brand extensions
in consumer goods, innovation is difficult. In many categories,
line extension failure rates are in the 25%-30% range. And
when the brand moves into a new category, brand extension
failure rates can get as high as 80%. Two questions remain,
however: Does it matter, and do investors care?
MM March/April 2007

35

EXECUTIVE

According to research, companies that heavily rely on intangible assets to generate value tend to

briefing

be more risky. However, brands and other intangibles are the sources of competitive advantage
for companies. Therefore, companies need to manage them like tangible assets, to deliver opti-

mal and sustainable value. Brand valuation is a powerful tool in that regard. It can help marketing executives mitigate risk.

Intangible Assets
At Millward Brown Optimor, a global brand strategy and
marketing investment consultancy, we recently examined how
the importance of intangible assets in a companys business
model affects that companys risk profile. Looking at 2005
data for companies within the S&P 500, we found that companies whose intangible assets accounted for a larger percentage
of their value tended to be more volatile. Exhibit 1 illustrates
this finding, charting average risk levels by groups of companies with an increasing emphasis on intangibles.
To measure the role of intangible assets in generating the
value of the company, we took the total market value of the
company, subtracted the book value of tangible assets, and
then divided that difference by the total market value of the
company. We gauged risk using the unleveraged beta.
This is a measure of the volatility of a companys share price,
adjusted to eliminate the effects of financial leverage: the
amount of debt the company carries.
What are these intangible assets? Conceptually, theyre the
sources of competitive advantage that the company has in

I Exhibit 1
The S&P 500
1.2
1.1
1
.9
.8

Risk*

.7
.6
.5
.4
.3
.2

R =.80

.1
0
0

.1

.2

.3

.4

.5

.6

.7

.8

.9

Role of intangibles in generating value**

* Unleveraged beta
** Total market value of the company minus the book value of tangible assets, divided by the
total market value of the company
Note: Blue points represent the averages across the S&P 500, for role of intangibles
values in incremental ranges of .1, centered around the points X values
Sources: Bloomberg and Millward Brown Optimor analysis

36

MM March/April 2007

exploiting its tangible assets. Specifically, they include intellectual property, patents and technologies, distribution, operational processes, people, and brands. As mentioned, our
analysis showed that when these sources of competitive
advantage accounted for a larger part of a companys value,
the companys financial performance was inclined to be more
volatile. Although counterintuitive at first, this finding makes
sense. Activities that are asset-intensive, such as manufacturing, are well-known and predictable in nature. Activities that
heavily rely on intangibles, such as brand management, arent
as easy to graspand therefore tend to become riskier.
The implication is that companies need to find ways to
more effectively manage their intangible assets, to mitigate
the risk associated with such assets and better sustain their
competitive advantage. Specific categories within our S&P
500 sample provide additional insight.
Beverages. We looked at beveragesalcoholic and
nonalcoholicand clearly saw the aforementioned trend:
Companies heavily relying on intangibles were apt to be
more risky (see Exhibit 2). Coca-Cola and Pepsi are particularly interesting in that respect. The Coca-Cola Company and
PepsiCo are positioned toward the top right part of the graph,
whereas Coca-Cola Enterprises and Pepsi Bottling Group
(two of their major bottlers) are at the bottom left.
By spinning off their bottlers in 1986 and 1999 (respectively), The Coca-Cola Company and PepsiCo got rid of their
most capital-intensive and least profitable activities: the
manufacturing and distribution of soft drinks. Instead, they
focused on their sources of competitive advantage: the management of their brands and their distribution networks. As a
result, The Coca-Cola Company and PepsiCo improved their
returns on capital. In 2005, The Coca-Cola Company and
PepsiCo achieved returns on tangible capital in the 50%-70%
range before taxes, whereas Pepsi Bottling Group and CocaCola Enterprises achieved returns on tangible capital in the
18%-25% range. Yet as Exhibit 2 indicates, the higher returns
achieved by The Coca-Cola Company and PepsiCorelative
to their bottlerscame at a cost. Their risk was also higher,
because they focused on activities that were more volatile
than manufacturing (e.g., brand management).
This increase in risk is the dirty secret that comes with
outsourcing or spinning off noncore activities: less profitable
and more capital-intensive activities that arent sources of
competitive advantage. As companies refocus on activities
that generate competitive advantage, they deliver higher

I Exhibit 2
Beverage companies within the S&P 500
.9

The Coca-Cola
Company

BrownForman

.8
.7

Risk*

returns to shareholders. But their risk profiles also change.

On a risk-adjusted basis, these companies often dont deliver
additional value to shareholders, because an increase in
volatility has offset the increase in returns. The challenge is
to better manage the intangible assets, to reduce the risk
associated with them.
Computer hardware. Brands are at the top of the list of
intangible assets that companies need to manage more effectively. Based on our BrandZ Top 100 ranking of the worlds
biggest brands by brand value, published in an April 2006
Financial Times, we looked at the major computer-hardware
company brands that our ranking and the S&P 500 cover. We
wanted to assess how the importance of brands, in generating
value for shareholders, affects company risk. Exhibit 3 on
page 38 shows that increased risk tends to be associated with
the brand playing a larger part in generating value for the
company. We measured the role of brands by dividing the
brand value of the company (from our BrandZ Top 100 ranking) by the total company value. Apple was clearly striking,
with its brand playing a much larger part in the purchase
choice. This isnt surprising given Apples long-standing reputation in computer hardware, and its recent success with the

Constellation
Brands

.6

AnheuserBusch
PepsiCo

.5
Pepsi
Coca-Cola Bottling
Enterprises Group

.4
.3

Molson
Coors
2

R =.30

.2
.6

.7

.8

.9

Role of intangibles in generating value**

* Unleveraged beta
** Total market value of the company minus the book value of tangible assets, divided by the
total market value of the company
Sources: Bloomberg and Millward Brown Optimor analysis

MM March/April 2007

37

Brand Valuation
What does managing brand risk mean? The textbook
answer to high risk is diversification, of course. The Coca-Cola
Company and PepsiCo again offer an interesting example, in
that respect.
PepsiCo is more diversified than The Coca-Cola Company.
According to estimates we based on 2005 data, the Pepsi brand
accounted for about 20% of PepsiCos revenues, with remaining
revenues being generated by other PepsiCo brands (e.g.,
Aquafina, Frito-Lay, Tropicana). Meanwhile, our estimates indi-

DIVERSIFICATION does
mitigate risk, but it also
sometimes reduces returns.
cated that the Coca-Cola brand accounted for around 40%-60%
of The Coca-Cola Companys sales. Not surprisingly, PepsiCos
risk level was less than The Coca-Cola Companys, because
PepsiCo was more diversified. However, PepsiCos return on
tangible capital was only 53% on a pretax basis in 2005; The
Coca-Cola Companys return on tangible capital was 71% over
the same period. Diversification does mitigate risk, but it also
sometimes reduces returns. Were aiming to reduce risk without
diminishing returns.
The answer is to manage brands and other intangible
assets for shareholder value just like we manage tangible
assets. The first step is to assess the value of the intangible
assets. Then determine what drives that value, and identify
how it can be sustained and grown through optimal investments. Brand valuation does exactly that.
38

MM March/April 2007

I Exhibit 3
Computer hardware companies within the S&P 500

1.8
Apple
1.6
HewlettPackard

1.4
1.2

Risk*

iPod. However, the more prominent role of the brand in

Apples business model came at a price: increased risk. Dell
and IBM, whose brands played less of a part in the purchase
choice, also had significantly lower risk. Does this mean that
Apple should stop focusing on branding? Of course it doesnt.
It just means that Apple could benefit from better managing
its brand from a shareholder-value perspective.
Grocery chains. This category tells a similar story.
Compared with companies such as Kroger, Supervalu, and
Safeway, Whole Foods stands out. Again, intangibles represent a much larger part of its market value, and the company
is significantly more risky. Brands are part of this. Whole
Foods CEO John Mackey puts it this way: We are a lifestyle
brand and have created a unique shopping environment built
around satisfying and delighting our customers. The brand
positioning, around this new grocery shopping experience, is
at the heart of what has driven Whole Foods growth. But as
the company becomes larger, it will have to carefully manage
this competitive advantage to mitigate risk.

Dell

1
IBM

.8
.6
.4

R =.86

.2
0
.1

.2

.3

.4

Role of brand in generating value**

* Unleveraged beta
** Brand value divided by the total market value of the company
Sources: Bloomberg, BrandZ Top 100, and Millward Brown Optimor analysis

Putting a financial value on a brand transforms the role

of marketing in the companyfrom being a cost center to
managing one of the companys most valuable assets. That is
already a major cultural shift in many cases. But beyond the
number, brand valuation determines how the brand (1) creates
value and (2) aligns with customers drivers of purchase. This
is a powerful way to identify areas of strength and weakness
for the brand, relative to what matters to customers. Brand
valuation then becomes a means for communicating about
brand and marketing strategy in shareholder value terms,
both internally and externally.
Furthermore, by integrating the longer-term brand value
component into marketing return-on-investment models, the
marketing function can truly optimize brand investments:
looking at not only short-term direct sales impacts, but also
how brand investments generate longer-term revenues by
changing customer perceptions. And brand valuation can help
capture new growth opportunitiesby discovering areas of
fit for the brand, and by determining brand licensing rates
that accurately reflect the value that the brand creates.
Risk matters, and not just to investors. For marketing
executives, brand valuation is a powerful tool for personal
risk mitigation. It will help them keep a steady job. I

About the Author

Ove Haxthausen is a director at Millward Brown Optimor in
New York, and may be reached at ove.haxthausen@us.millwardbrown.com. To join the discussion on this article, please
visit www.marketingpower.com/marketingmanagementblog.