Unlocking the Power of Brand Strength: Why Financial Analysts Put it Above Leadership Quality, Reveals Research

According to new research published today, a significant number of financial analysts perceive advertising and promotional spend as an investment rather than a cost. However, most analysts would consider reductions in a company's marketing budget as a "positive cost-saving measure." These insights were gathered from the opinions of over 200 analysts surveyed by the IPA and Brand Finance. The survey aimed to gain a deeper understanding of investors' perspectives on marketing and brand building. These financial analysts work for investment banks, asset managers, and other entities that invest in publicly listed companies in the UK and US. They provide valuable guidance to investors to aid them in making informed investing decisions.

Among the City analysts surveyed, there is a positive acknowledgement of the influence of a brand. The analysis reveals that the strength of a business's brand and marketing carries more weight in financial analysts' evaluation of a company compared to its leadership or reported profit.

Respondents were questioned about the significance of various factors in their assessment of publicly listed companies. The majority of analysts (79%) emphasized the importance of a strong brand and marketing, labeling it as "very important." When determining their evaluation of companies, a strong brand surpassed leadership quality (76%), technological innovation (72%), and reported profit (71%) in terms of importance according to the City analysts.

Brand strength is highly valued, but financial analysts also have a positive perspective on reducing marketing spend as a means to save money. According to a survey of investors, over half (52%) consider cutting marketing spend to be a "positive cost-saving measure," while just over a third (36%) view it as a "short-term solution with long-term negative consequences."

In 2020, Mark Ritson, a columnist on our website, argued that the best brands would be increasing their budgets rather than cutting them during times of recession. He referred to research from the Great Recession, which suggested that companies that increase their advertising spend during economic downturns are rewarded with market share and sales growth.

Marketing leaders in businesses must work diligently to establish a stronger correlation between maintaining marketing budgets and business growth in the minds of financial analysts. Otherwise, these analysts may exert pressure on companies to reduce their spending during challenging times. Despite the belief that marketing budgets can be compromised to save expenses, City analysts tend to view advertising and promotional expenditures as investments rather than costs.

Approximately 37% of analysts perceive advertising as an investment, while roughly 24% consider it an operating cost. The majority of analysts view it as a combination of both. Similarly, when it comes to promotion, about 48% of analysts see it as a mixture of cost and investment. However, a higher percentage (28%) of analysts perceive it as an investment, compared to those who consider it solely as an operating cost (23%).

In alignment with this perspective on marketing expenditure as an investment, the research suggests that analysts believe changes should be made in how it is accounted for on companies' balance sheets. A significant 56% of analysts believe that marketing spend should be capitalized, with an additional 33% stating that this should be done in certain cases. Capitalization involves recording a cost on a balance sheet with the intention of deferring the full recognition of the expense. Items are typically capitalized when they are considered assets rather than expenses. For instance, many companies currently treat technology research and development expenditure in this manner.

According to the IPA, the research findings suggest that investors are becoming more interested in and giving greater importance to investing in brands.

Laurence Green, the IPA director of effectiveness, emphasizes the need for brand owners to enhance understanding by presenting relevant data and evidence to investors. Moreover, he emphasizes the importance of engaging with investors using their language and making a persuasive argument for marketing as a long-term investment.

Pricing power and marketing

Around eight in 10 of the investment analysts surveyed say they analyse advertising and promotional spend as part of their assessment of the companies they report on.

Investors who consider advertising and promotional spend in their analysis are more inclined to view it as an investment that fosters organic growth. Yet, even among those who analyze such expenditures, less than half (46%) believe it actually drives organic growth.

Additionally, there is a lack of faith among investors in the capability of a strong brand to enhance pricing power.

Just over half (54%) believe brand and advertising communications can have a positive impact on sales price, while only 8% believe that marketing is the main factor influencing this. Analysts are much more inclined to attribute the benefits of brand and advertising communications to sales volume (71%), profit margin (77%), and market share (66%).

This is in contrast to the research conducted by former City investor Ian Whittaker, who is now the founder and managing director of Liberty Sky Advisors. His analysis reveals that numerous strong brands have successfully maintained their sales volume even when implementing price increases.

Many prominent companies have attributed their ability to raise prices in line with costs to the strong influence of their brands in today's inflationary climate.

Unilever CEO Alan Jope acknowledged the robustness of the FMCG giant's brands last year when discussing its market share growth, even amidst a period of inflation where prices had been raised.

“Brand power today ensures pricing power in the future,” stated Heineken CEO Dolf van den Brink during an analyst conference in July.

According to findings from Our Website's Language of Effectiveness survey, although many big business leaders understand the connection between pricing power and brand, the survey suggests that marketers themselves may not be emphasizing price in their responsibilities. Supported by Kantar, the survey showed that only 19.7% of the 1,300 brand-side marketers who participated believed that growing profit is the primary objective of marketing, placing it last among eight different tasks.

The research by the IPA a Brand Finance will be unveiled at the EffWorks Global 2023 Conference later today (10 October 2023).