Count The Ways: How Marketing Affects Your Stock Price

CoreBrand Builds Fund Based on Brand Health

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Marketers may soon get nostalgic for the days when all they had to do was sell stuff. An emerging consensus would give them credit -- and accountability -- for much more.
CoreBrand plans tolaunch a mutual fund that bases investment decisions on how well companies nurture brand equity.
CoreBrand plans tolaunch a mutual fund that bases investment decisions on how well companies nurture brand equity.

CoreBrand -- a 15-year-old research firm that sprang from legendary General Electric CEO Jack Welch's desire to quantify everything about his marketing -- is preparing to launch a mutual fund later this year that will base investment decisions in part on how effectively companies nurture their brand equity. It found, for example, that Procter & Gamble Co. gets 16.9% of its market capitalization, or $24 billion, from corporate brand equity.

The boardroom


Meanwhile, the Boardroom Project-a collection of market researchers, academics, agency and marketing executives-proposed earlier this month that cash flow become the standard metric marketers should strive to effect. It's a substantial expansion beyond such measures as volume, sales and margin many marketers once considered their responsibility.

The two approaches ultimately aren't so different. The Boardroom Project picked cash flow as the key metric for marketing to move because it's also the most important metric corporate financial managers and Wall Street analysts use.

"Cash flow essentially is the common denominator in all business," said Meg Blair, president-CEO of RSC, owner of the copy testing firm ARS and a member of the Boardroom Project. Every marketing activity produces an intermediate effect on such factors as revenue or margin that ultimately move cash flow, she said.

The goal for the Boardroom Project-formed in 2004 amid rising corporate concern about marketing return on investment-is to establish generally accepted measures and definitions for marketing ROI. Lack of a common industry definition of how to measure marketing ROI long has made it impossible to develop widely accepted ways of measuring it.

The Boardroom Project is trying to give "marketing science" the legitimacy that generally accepted accounting principals (GAAP) provided to accounting or the International Standards Organization (ISO) gave the quality movement in the early and mid 20th century, respectively.

CoreBrand, meanwhile, is taking a different tack to show how marketing adds value. Besides advising clients on how to maximize their brand image and, by extension, their companies' market capitalization, CoreBrand also has been trading stocks since 1999 using its own advice.

marketing's key role

Its statistical stock-picking system-in which corporate brand image as measured by continuing surveys of 12,000 business and finance executives carries about as much weight as debt and other financial-health measures-has produced a 200% return in six years, compared to a 0.5% decline for the S&P 500, according to CoreBrand CEO Jim Gregory.

CoreBrands' proposed mutual fund would be the latest in an increasingly popular wave of so-called quant funds, in which analytical models replace the judgment of stock pickers. It would be possibly the first such fund in which a measure of marketing performance played a key role.

Such factors as earnings per share, earnings growth and trading momentum still account for much more in CoreBrands' stock-picking formula than corporate image. Still, according to Mr. Gregory, corporate brands account for much, and sometimes most, of the 20% of factors behind stock prices that financial analysts can't easily quantify, he said.

"It's been 15 years of blood, sweat and tears that went into this," Mr. Gregory said of the nonstop survey research that goes into its corporate brand rankings. One thing he's found is the often unmeasured and ignored impact of marketing on the market caps of publicly traded companies.

On average, brand equity, developed largely through marketing, accounts for about 8.5% of the market cap of the 1,000 companies CoreBrand tracks, he said. Marketing accounts for about 50% of a corporation's brand equity, he said. Of that, advertising accounts for 30%, and other marketing activity, including public relations, employee relations and customer service, about 20%.

Like existing quant funds, CoreBrand isn't long on sharing the details of the secret sauce by which it calculates value of marketing and brand image. But it's fair to say that its brand equity is the difference between a company's market cap and what can be explained using financial models.

For some companies, the impact is huge. Though P&G's 16.9% of its market cap, or $24 billion, from corporate brand equity is good, Mr. Gregory said it's not nearly as good as Coca-Cola Co.'s 20.5%, or Colgate-Palmolive Co.'s 19% of market cap from brand equity.

A key reason is that much or most of the marketing Coke and Colgate do is behind their eponymous brands. Companies like P&G and Unilever "leave money on the table," he said, because they put most of their marketing behind product brands vs. corporate ones.

That's changing at both companies. P&G has developed a corporate brand-marketing group in recent years and P&G-branded programs, such as the BrandSaver coupon book. Unilever has slapped its "U" logo fairly prominently on all packages in the past year.

Mr. Gregory believes more companies will take similar steps in years ahead as shareholders learn about the considerable value that can be gained-or lost-through management of corporate brands.

"The corporate brand is becoming a bigger contributor to market cap over time," he said. "When we started in 1990, it was 5%. Now it's close to 8.5%. That's billions and billions of dollars of value on average."
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