22 Feb
2019

How much bigger can the brand behemoths grow?

This year’s Brand Finance Global 500 ranking saw large companies in key sectors continue their upward brand value trajectory. For many, this is a cause for concern.

The world’s biggest brands, those that permeate so many walks of modern life, continue to grow stronger by the year. Many of these brands are not especially old or ingrained, but they have become so firmly embedded in society that one would be forgiven for believing that they have been in circulation for many years. The age of new social technology has given us a cluster of brands that have grown enormously within a relatively short timeframe, so much so that we cannot imagine life without them. Brands such as Amazon, Apple and Google have long since overtaken those names that were familiar to us for decades.

In the latest Brand Finance Global 500 ranking, Amazon has defended its prime position as the world’s most valuable brand, following 25% growth to $187.9 billion this year. Apple ($153.6 billion), Google ($142.8 billion) and Microsoft ($119.6 billion) are close behind; together with Facebook ($83.2 billion), these US technology firms account for five of the top 10 brands.

But for how much longer can we expect this growth trajectory to continue – just how big can these companies and their instantly recognisable brands become in the years ahead and could gargantuan organisations become a problem for the stability and wellbeing of the global economy? Have we reached a tipping point in the way that these brands are accepted by consumers, broader society and even governments?

Universal concerns

Increasingly, in the post-financial crisis world, resentment of corporate profitability, compensation and behaviour has become a trend that many people have been happy to get behind.

Notwithstanding the negative reputation that some companies closely associated with the crisis are still grappling with – consider the plight of RBS, which is struggling to repair public perception a decade after the peak of the crisis – corporates and their apparent abuse of power have also come firmly into the spotlight. For instance, people are asking searching questions about the amount of tax that some of the world’s largest companies are paying, or rather not paying, and any hint of misdemeanour by corporates or senior executives is quickly seized upon.

As regulation becomes ever more restrictive and demanding on corporates and financial institutions, the issue of data privacy is increasingly a topic of heated discussion. Big Data was supposed to be one of the key ingredients that would shape the business landscape of tomorrow; it is therefore a major part of the corporate strategy of the 21st century, a rich seam of raw material that will differentiate companies and provide competitive advantages. This has also created a sub-industry of data analysts, scientists and marketeers, which is changing the business environment like never before.

The popular – and critical – view is that the world’s leading technology companies are taking our personal data and using it for their own commercial gain. Little wonder that law firms, social commentators and regulators are coming around to the view that we really do need to take stricter ownership of our own data, be it medical history, shopping preferences, internet browsing history, location status or phone usage, to name but a few aspects of our daily routines.

The old adage “information is power” has never been more relevant or indeed of greater concern, especially as technology brands – the chief exponents of personal data – continue to lead the way in the Brand Finance Global 500, demonstrating their size, market position and scope of operation.

In some countries, such as the United Kingdom, the growth of and reliance on companies such as Amazon have had a profound impact on local economies. The near-death of the traditional high street in the United Kingdom has been partly attributed to the dramatic growth of e-commerce, adding vast choice to the equation, but also removing the need for companies that employ people in small towns. Of course, Amazon is fulfilling a need and the customer base proves that the concept of the virtual universal supermarket clearly appeals to younger generations, but the modern company should also exercise sensitivity and demonstrate genuine and positive social responsibility. This is by no means a UK-centric problem, as the challenges facing Walmart show. The brand, which held the top position in the Brand Finance Global 500 just 10 years ago, has dropped out of the top 10 for the first time.

However, competition comes in many formats and there are no longer geographical boundaries in a global marketplace. We have seen huge brands come to the fore from emerging markets, such as China. Built on the endless possibilities offered by the massive domestic market, many of these brands are still at a relatively early phase of their growth journeys as they launch abroad.

Analysts have been predicting an economic slowdown in China for a few years – yet despite ongoing trade war concerns and tension with the United States, Chinese brands continue to make their mark. Tech giants such as iQiyi (brand value up 326%) and WeChat (up 126%) have been growing dramatically, largely off the radar screen of the rest of the world, while the emergence of others, such as Huawei and Alibaba, has not gone unnoticed. Chinese banks have also moved to the top of their industry, not only growing domestically and regionally, but also on the global stage, taking advantage of ambitious infrastructure projects such as the Belt and Road Initiative. The top four banking brands in the world are all Chinese and they are growing faster than banking brands from the United States, their nearest competitors.

Blessing or curse of leadership?

Despite concerns, to many people, the rise of Amazon and its peers around the world appears to be a story of non-stop success. The way that some of the tech giants have diversified their strategies is an admirable example of how companies can evolve and experiment to protect their business models. Those that do not follow such a path are vulnerable to concentration risk and, ultimately, could become uncompetitive. However, in the case of many of these brands, their rapid development and subsequent commercial success rest in large part on the vision and drive of their leadership. Such a model is nevertheless prone to human fallibility. The recently announced divorce of Amazon CEO Jeff Bezos is a reminder that personal circumstances change no matter how powerful the individual; in this case, it could affect the future of Amazon as a whole. We do, after all, live in a time where CEOs are accountable, as demonstrated by recent events at Nissan and Uber.

The public reaction to Bezos’s divorce has been mixed; the potential change to Amazon’s shareholder structure could put the company’s stability at risk. Bezos has publicly stated that a brand is like a personal reputation, so he is aware that whatever he does reflects on his company. The role of the corporate CEO has never been more under scrutiny than it is today, so it was appropriate that Brand Finance organised a panel at the recent World Economic Forum in Davos to examine that very subject. Today’s CEO has to consider commercial, ethical and reputational issues, among many other aspects of corporate life.

The latter is something that has certainly moved front and centre with many corporate leaders. Warren Buffet said that it takes 20 years to build a reputation and five minutes to ruin it. Bezos is regarded as something of a visionary, in much the same way that Steve Jobs was seen at Apple. These almost iconic individuals are responsible not only for the commercial success of their companies, but also for the longevity of the relationship between their brand and its stakeholders. It is no longer enough to have a vision for the brand’s future, it is also about creating authenticity and reacting in the right way when there is a reputational crisis – the measure of a leader is how they respond when things are not going so well, not when there is fantastic news to disseminate. We estimate that if the Amazon situation is mishandled, the Bezos separation could cost the brand well in excess of $10 billion, with the expectation that the range of loss could be between 5% and 10% of Amazon’s current brand value.

Too big to fail?

At the moment, Amazon shows no sign of slowing down in its goal of becoming ‘the store of everything’. In the wake of its success, it appears that no industry can remain complacent about the threat of disruption. Food, media, consumables, financial services, broadcasting – there seems to be no area in which the tech brands have not embarked on a journey of market dominance. This poses the question, can companies of this type become too influential and enter the ‘too big to fail’ category, in the way that some of the world’s biggest financial institutions have done?

The services provided by the largest of the technology giants – Amazon, Apple, Google and Facebook – have become essential to the ways in which we live our lives. The ability to use mobile devices, order a delivery of household products, browse the Internet or connect with friends online is not that far from becoming a human right in some Western societies. But access is being monopolised by just a handful of companies. Will the state decide to encroach on their territory and regulate the market or might it perhaps intervene more drastically?

As we have seen throughout history, governments can sometimes act for the greater good to gently dismantle companies that become overwhelmingly large or too dominant. In the late 19th century, oil companies grew too large for comfort and, more recently, AT&T became so dominant that it was taken apart by the administration. We are in different times and corporates are arguably more powerful, but there are lessons to be learned from the past and even the crisis of a decade ago. Too big can be dangerous in economic terms and can also limit choice for the end user. Monopolies are rarely good news.

Tech giants are not the only ones that might be broken up into smaller entities. Following a number of high-profile scandals, as well as allegations regarding conflicts of interest, the so-called Big Four of accounting have faced criticism from inside and outside the profession, with many calling for reforms that would increase competition in the professional services sector. Despite this, Deloitte, PwC and EY remain some of the strongest brands in the world, all posting the elite AAA+ rating. However, they need to meaningfully address these concerns if they want things to continue the way that they are. KPMG has already felt the impact of its association with the infamous collapse of Carillion, when its brand rating dropped a grade from AAA to AAA-, leaving it substantially behind the other three accounting titans. The strength of the Big Four brands lies in their reputation, as well as the wealth of experience and skills enabled by the scale of their practice. If they permit more scandals to tarnish their good name, they might end up having to give in to pressure. Could breaking them up, despite their faults, mean that there will be no company big enough to handle some of the more complicated accounts in the globalised economy?

Yet strong brands are not necessarily the result of size. A smaller brand can also be very powerful, especially in the world of luxury. It is therefore no surprise that the ultimate trophy car, Ferrari, has the strongest brand in the world; equally unremarkable is the news that Rolex, the prestige watchmaker, is among the top 10 brands by strength. Exclusivity and scarcity are what make luxury products special and mass production would be the end of such brands. Brand managers need to learn where to strike the balance and Ferrari can be the perfect case study for this. It has diversified into other lines of business (eg, opening hotels and selling eyewear) but has managed to do so without diluting its cachet. Far from succumbing to blind exploitation of the brand, Ferrari keeps up with latest technology and trends, investing in excellence and unveiling new models.

Evaluating strength and calculating value

The importance of a brand should not be underestimated. A strong brand can drive perception of a company and ultimately shape business value. Increasingly, intangible assets such as brands are determining the value of a company – some 52% of global business value is now attributable to intangibles, a total in excess of $55 trillion, according to last year’s Brand Finance GIFTTM report.

Since the first brand valuations were conducted in the late 1980s, the discipline has become more professional and scientific. After all, without knowing the precise financial value of an asset, how can a company determine that it is maximising its returns or putting the correct price on licences to a brand? In the past, there were no recognised standards for conducting brand valuation or for reporting the resulting brand values. Over the years, there has been a gradual formalisation of brand definitions, brand valuation methods, reporting regulations and requirements, the accreditation of brand valuers and the application of brand valuations.

Today, the professional practice of brand valuation is guided by the ISO 10668 standard, which Brand Finance helped to craft almost a decade ago. According to its requirements, the valuation process must be transparent and based on valid and relevant inputs and assumptions. Brand valuations must be based on sufficient data and analysis to form a reliable conclusion. Further, financial, behavioural and legal parameters must all be taken into account when performing a monetary brand valuation. 

It is encouraging to see the recognition of the importance of brand valuation among more and more trademark attorneys and professionals affiliated with INTA. The organisation is now at the forefront of moving the agenda towards a commercial as well as legal understanding of all IP assets. Another opportunity opening up is that the non-financial evaluation of brands is to become regulated by an industry standard. Brand evaluation involves assessing the strength of brands – how a brand is perceived and how it performs relative to competitors. The publication of ISO 20671, in which Brand Finance also played a part, is scheduled for Summer 2019.

Conclusion

It is clear that the emphasis on the value and strength of brands is becoming greater year on year and rightly so as some brands dramatically accelerate in terms of growth and the way that they shape our economy. CEOs and their boards acknowledge that corporate strategy and brand strategy should be closely aligned. We are living in a time where enormous global brands are, without doubt, becoming more influential than ever before, belonging to companies whose market profile appears to be all-consuming. While we can admire the way that some of these companies have pursued their path of diversification and client experience, we also have to consider whether they are now at their zenith and if there is still scope, or the appetite, for them to grow much bigger. We also need to ask the question – might sheer size become a problem in the future?

David Haigh

Chief executive officer and chair

Brand Finance

[email protected]