Since the recession, strong brands have become more valuable.
While many companies and global economies continue to struggle to grow, there is one bright spot in the business landscape: the power of brands.
In 2014, strong brands outperformed the market by 73 percent, up from 62 percent in 2013. And according to our long-term research in Germany, for example, brand relevance is back to levels from before the economic crisis. During the recession, consumers tended to look for bargains as buying factors, at the expense of brands that carry a higher price ticket. The effects of the crisis were further aggravated by the growing stronghold of private labels, aggressive discount retailers, and increasing online competition.
But in 2013, brand relevance regained pre-crisis levels across most categories, up three percent from 2010 on average (exhibit 1). This trend is consistent with recent increases in both consumers’ willingness to spend and actual consumer spending. By the end of 2013, analysts reported the highest consumer sentiment score since the beginning of the economic crisis in 2007. In the last four years alone, the total value of the world's top ten brands has increased by more than 50 percent, from $433 billion (in 2010) to $650 billion (in 2014).
The most striking change compared with 2010 is a continued increase in brand relevance in the energy category. Although still low in absolute terms, energy has seen a steep increase in brand relevance by 18 percent since 2010, the biggest such change among all service categories. Over the seven-year period starting in 2006, brand relevance has increased by almost two thirds in the energy market.
As companies look for growth in a world where consumer demands and expectations continue to rise, strengthening the core strength of the brand will become an ever-more-important strategic pillar.
Strong brands beat the market
How much value does a brand add? The answer to that question has always been difficult to quantify, but our updated analysis of brand strength and financial performance shows that strong brands consistently outperform the market average. Strong brands prevail both in the bear and bull phases of the stock market, and by an increasing margin. A portfolio of the companies that own the world's top 40 brands as ranked in Interbrand's annual “Best Global Brands” report has beaten traditional benchmarks like the MSCI World or the S&P 500 every single year since the ranking was first published in 2000 (exhibit 2). From a total-return-to-shareholders perspective, the MSCI World was outperformed by 73 percent in 2014, the highest value since the ranking was first published in 2000.
This brand effect is much in evidence with B2B companies too. We surveyed some 700 corporate decision makers with substantial influence on supplier selection at large companies in Germany, India, and the US. Relative to other purchasing factors, the brand emerges as an important element in their decision making (exhibit 3). In fact, decision makers consider the brand a central rather than a marginal element of a supplier’s proposition. The survey indicates that a company’s brand is on par with sales as an influencing factor. In India, brand-related factors are perceived as especially important. In Germany, the brand is perceived as less important, consistent with other observations of this market as a more value-driven environment.
From the perspective of corporate decision makers globally, brands are particularly relevant for the selection of suppliers of machines and components. The market for chemicals, commodities, and basic materials is characterized by medium brand relevance. Brands are generally perceived as somewhat less important in categories such as financial services and utilities. In the United States, however, the brand is a bigger factor in the selection of providers of financial services than in India or Germany. This may be due to the fact that the enduring effects of the banking crisis are particularly severe in the US, where prominent merchant banks have foundered or required government aid to survive.
Digitization is creating new battlegrounds for brands
Many companies have begun to allocate substantial shares of their marketing budget to digital media to stay relevant in the marketplace and forge deeper connections with their customers. The global net advertising market for digital channels is now worth more than $100 billion, and its share of all advertising is still growing. Online display advertising more than doubled in the US and more than quadrupled in the UK between 2003 and 2013. Across Europe, mobile advertising is the fastest-growing vehicle by far (exhibit 4).
At the same time, more brands are taking their business online. In some categories, consumer behavior does not leave brand managers much of a choice. In a McKinsey survey, “can be easily reached” emerged as the second-most important retail market driver, trumped only by “the store I trust most.” And these days, easy accessibility equals online shopping for an increasing number of customers.
That digital dynamic is emerging in a number of battleground sectors. When considering the purchase of a large appliance or a mobile phone, about half of all shoppers conduct online research before they make their choice. The actual purchase, however, still happens in stores in the majority of cases. These and similar categories collectively constitute the “digital battleground.” They will see fierce competition for the growing share of online purchases in the immediate future (exhibit 5).
Refining analysis to understand capricious customer choices
Aided by a growing arsenal of digital tools, such as price comparison portals and peer reviews, today's consumers often take unexpected shortcuts and sidesteps in their decision journeys. Sometimes they skip a step, revisit an earlier stage of their deliberation, or, on occasion, even circle back on themselves. One in ten customers will add a new brand to their consideration set at the last minute, and one in five customers recommends the brand of their choice to others by word of mouth.
In response to these changes, leading brand managers are upgrading the brand purchase funnel framework to account for the reality of customers making last-minute additions of brands immediately prior to purchase or contract renewal (exhibit 6). Such direct entries might be triggered by recommendations from friends, advice given at the point of sale (POS), or the appearance of an unknown brand in an online comparison portal.
Take candy. Although almost everyone knows all the major brands in this category, customers change their minds all the time. As a result, last-minute consideration is just as important as premeditated consideration. In many cases, the purchase decision is triggered by the way candy bars are placed and promoted at the point of sale. According to an industry study conducted in the US, candy accounts for 30 percent of all purchases at the checkout. The major takeaway for brand managers in this category is to focus their efforts on attracting the attention of spontaneous considerers (exhibit 7). Our initial research indicates that last-minute decision makers appear to be particularly susceptible to promises of value for money.
According to our survey, last-minute decision making is also a highly relevant topic for energy providers. Because many consumers don't care where they get their energy, they might simply not be aware of certain brands, especially if they are relatively new to the market. As a result, consumers often do research (e.g., on comparison portals) and discover new brands only immediately prior to a given purchase decision. For this reason, there is a window of opportunity for young challenger brands to capture the attention of switchers with attractive propositions.
In the post-crisis market, brands can add real value. But the transparency brought about by digitization makes it harder for companies to get customers' attention and earn their loyalty. If they want to keep their brands relevant, managers must develop accurate insights into how digital natives really arrive at decisions and influence the choices of their peers.
This article is based on the book, Power Brands, which is now available in its third edition. Find out more at powerbrands.mckinsey.com