Marketing State of the Union June 2002

A SPECIAL REPORT by Interbrand

FOREWORD
In the spring of 2002, Interbrand conducted an online survey whose purpose was to measure marketers’ spending on marketing and branding-related initiatives, and to gauge their perceptions on how to build strong brands. This was a follow-up to a survey we completed in October of 2001, whose results reflected early reactions to the economic downturn, but did not reflect the impact of Sept. 11 on marketing spending. This report, Marketing State of the Union 2002, is the compilation of the survey results. For this survey, Interbrand collected data from 280 marketers who have decision-making responsibility regarding the disposition of their marketing budgets. The good news is that the majority of total participants (52 percent) report that their marketing budgets have either not been impacted by the economic slowdown, or have in fact increased, thereby attesting to the importance of brand-building for most organizations. And, for U.S. respondents, which make up 52 percent of the total, exactly half report the same. In fact, only nine percent of total respondents (12 percent U.S.) report budget decreases out of proportion to other cuts made within their organizations. We also found that while advertising remains marketers’ single biggest expense, it is considered a less important component in building a strong brand, ranking second behind brand strategy. However, only about a quarter of respondents’ budgets are allocated to areas that are brand specific, such as corporate and product brand development, brand portfolio restructuring, and the like. An area of significant change versus the 2001 survey is that internal branding is now ranked third in importance, moving up from seventh. We believe this reflects a refocusing of brand priorities that is substantiated by the respondents’ comments. Many say that recent economic and political events have underscored the need for an organization’s messages to reflect its values and culture. Employees are an integral part of this mix, with 80 percent of all respondents viewing employees as either very or somewhat important to brand-building. To date, however, our respondents indicate that very little investment is made in internal branding initiatives. Those who have experienced a shift in the focus of their marketing efforts report an increased emphasis on brand building for the long-term, strengthening existing brands in their portfolio, (as opposed to building new ones), segmenting their audiences in a more sophisticated manner, and using softer communications messages. Many marketers are also putting renewed focus on customer service, emphasizing what is important to the consumer, particularly since personal values have been re-examined by many people. They advise helping consumers identify product and services as fitting into their value system and priorities. Perhaps most important, our respondents clearly indicate that branding ROI can be measured. There is also overwhelming agreement with the idea that proper investment in brand-building can optimize a company’s future earnings (91 percent), and that the return on this investment can be measured (82 percent), despite some difficulty in quantifying intangibles. Interbrand believes the results of the survey reflect an understanding on the part of marketers and their senior management brand champions that brands are a vital, measurable asset, and that resources allocated to marketing and branding is an investment that will yield significant long-term benefits.

Interbrand asked marketers what impact events of the past year have had on their brand-building efforts in 2002. The answer: Investment in your brand now will pay healthy dividends later.

Marketing State of the Union
The information in this report is intended as general information only. Copyright 2002 Interbrand Corporation. All rights reserved. Additional copies of this report can be obtained by calling 212/798-7513. www.interbrand.com www.brandchannel.com

ABOUT Interbrand
Interbrand (www.interbrand.com), the leading brand consultancy, combines the rigorous strategy and analysis of a management consulting practice with the entrepreneurial and creative spirit of branding and design. The company offers a comprehensive array of consulting services that guide clients in the creation, enhancement, maintenance and valuation of their most valuable asset — their brands. Founded in 1974, Interbrand has offices in 34 cities in 22 countries around the globe and clients from among the most respected businesses in both the traditional and new economies. Interbrand’s areas of expertise include: Brand Strategy: An independent, expert view is invaluable when assessing complex branding issues such as the design of a new brand architecture, the repositioning of an existing brand, the reinvigoration of an under-performing brand or the development of a new brand to suit a particular market need. In all of these instances, our teams of strategic consultants work in partnership with clients to produce focused and actionable solutions. The results help yield the highest return on a company’s brand assets. Brand Valuation: Stock markets increasingly confirm that brands and other intangibles are a corporation's most valuable assets. Brand valuation is a unique tool that quantifies the economic value of a brand. It is critical to marketing investments and allows management to plan and assess the impact of their strategies. The first company to ever publicly put a value on a brand, Interbrand has developed the most widely endorsed brand-valuation methodology. To date, we have valued more than 2,500 brands worldwide. Corporate Identity: A well-orchestrated corporate branding system is an invaluable communications tool in today’s complex world and does more than just identify a business or organization — it acts as an indication and endorsement of quality, value and reliability. A corporation's established assets, all visible points of public contact, differentiate it from competitors. Interbrand believes that corporate identity is a powerful strategic weapon, one that promotes an understanding of the corporate purpose and differentiates corporations and their products in an increasingly competitive marketplace. Internal Brand Alignment: A corporate brand stands for the relationship that it has with its employees, as much as it represents the relationship it has with its customers through its product and service offerings. Brand building is an inside-out exercise, one that needs to engage the organization first before external messaging can be truly credible. Brand stewards should drive initiatives that close the gap between the actual and perceived, and focus on brand building within their organizations in order to communicate their values to an external audience. Our strategic consultants work with clients to align the organization and its operations around brand values to bring to life the brand promise through the four critical success factors: senior management stewardship, responsibility and accountability, aligning business and brand strategy and ongoing performance measurement and feedback. Naming: A name is the foundation of a successful brand and can be an asset of enormous value. Effective names project the personality of a product, service or company and should inspire the quality and integrity of what they represent. Successful brand names also should be relevant, pronounceable, memorable and free of negative connotations. Interbrand pioneered the field of name development and has developed thousands of effective, motivating names for scores of industries around the world. Packaging: Packaging puts a face to the name of a brand. The right design can leave an indelible impression, encouraging an initial purchase and fostering the emotional link that underlies consumer loyalty. A package must be a powerful selling tool in itself, standing out from the clutter on a shelf. A brand’s packaging must instantly communicate its positioning and product benefits, and reinforce that message after the purchase so that the brand becomes a mainstay on the consumer’s shopping list. Research: All decisions involve some level of risk. Clearly defining and quantifying that risk is the key to effective decisionmaking. Interbrand uses research extensively and commissions both qualitative and quantitative studies for clients. From the choice of a new name or package design to the repositioning of an existing brand, or the introduction of a new one, our experts help clients avoid expensive mistakes through research. 3D/Evironmental Design: Environments are one of the best opportunities a brand, corporation or institution has for communicating its identity. By developing an environment consistent with the brand message, a brand can provide its customers with a predictable and familiar experience in all locations — from retail environments and tradeshows to the corporate environment. Interbrand’s environmental design practices employ state-of-the-art technologies to design brand environments in a threedimensional world, including the design of interactive media and virtual environments.

INTRODUCTION
Survey Methodology
The survey was conducted online during the spring of 2002, and Interbrand received responses from 280 respondents, both in the U.S. and internationally. The goal of the survey was to understand the impact of the economic slowdown on spending for brand-related and other marketing activities across different industries, and to gauge marketers' perceptions regarding the importance of the role of branding.

Profile of Survey Participants
In addition to being responsible for their companies’ brand strategies, most respondents are also charged with tracking and evaluating the effectiveness of their marketing efforts. The majority of respondents work in marketing/communications and brand management/ strategy functions. Of the respondents, 77% are in mid- to senior- level management (directors, senior directors, associate VPs, VPs), and 18% are C-level executives. The majority work for companies with up to 1,000 employees (53%), with a significant percentage of respondents representing companies of over 5,000 employees (24%). 57% are with companies with annual revenues of up to $500 million, with also a very significant percentage of respondents coming from companies with revenues of over $1 billion (22%). Respondents also represent a broad range of industries, including professional/financial services (21%); consumer packaged goods (13%), and management consulting/creative agencies (20%). The remainder are divided among IT/telecommunications (10%), media/publishing/entertainment (10%), pharmaceutical/healthcare (5%), manufacturing/transportation (6%), with yet others representing the education, not-for-profit, and hospitality sectors.

KEY FINDINGS
The respondents indicate that the majority of their companies (71%) spend less than 10% of their revenues on marketing and branding initiatives; 34% devote less than 3% of revenues to marketing and branding. Many of the professional services, information technology and financial services companies are in this category. Companies in the consumer packaged goods industry invest the most in marketing and branding, allocating between 5%-15% of their revenues to their marketing budget.

Percent of Revenues Spent on Marketing & Branding Initiatives
Do Not Know 16% More than 20% 3% Between 15% and 20% 4% Between 10% and 15% 6% Between 5% and 10% 16% Between 3% and 5% 21% Less than 3% 34%

The Impact of Recent Economic and Political Events on the Branding & Marketing Budget — US & International
For the majority of respondents (52%) the branding/marketing budget is either not affected at all (27%) by the economic slowdown or has indeed increased (25%). This shows that branding/marketing is still a priority to most organizations, and in some cases companies place even greater emphasis on it now, more than the past. So far, only 9% of respondents say their branding/marketing budget has decreased disproportionately to other budgets in their organization. Industries reporting the greatest declines are telecommunications, consumer packaged goods and financial services.

KEY FINDINGS
30%
27% 26% 27% 23% 20% 16% 27% Total US International

25% 20% 15%

12%

13% 10% 7%

14% 12% 11%

10% 5% 0%

9%

No change

Decreased, but comparably to other budgets in the organization

Decreased more so than other budgets in the organization

Increased, but comparably to other budgets in the organization

Increased more so than other budgets in the organization

“We are focusing less on new brands and are instead continuing to build the ones we currently sell.”

Shift of Focus in Marketing & Branding Efforts as a Result of Recent Economic and Political Events
While slightly more of the respondents (49%) report no shift in their marketing and branding efforts, an equally large portion of people (46%) believe they have actually experienced a shift in focus. This is especially true for U.S. respondents, whereas the international audience is more evenly split. The results are consistent across the industries. Generally speaking, there is a new focus on brand building as opposed to sales, with more intense focus on strengthening current brands, not on building new ones, as in the following: “We are more focused on core brands vs. new business.” “We are focusing less on new brands and are instead continuing to build the ones we currently sell.” There is a much narrower and sophisticated audience targeting: “We have tightened our focus on core clients and prospects and increased our expenditure on finding new prospects.” Marketing messages have also changed, both in terms of tone and scope: “The marketing collateral has become softer.” “Our creative messaging and overall style is much softer and more lighthearted than our past communications.” “More niche marketing as opposed to broad cross-border campaigns.”

Impact of the change
Although a portion of the respondents (32%) was not sure whether this focus shift is longterm or short-term, many agree it is a long-term shift (41%). This is especially true for U.S. respondents (45%), whereas the international respondents appear to be more unclear about the impact of the shift.

KEY FINDINGS
Allocation of Marketing and Branding Budget
On average, more than half of participants’ budgets (52%) is allocated to traditional marketing activities, such as advertising, promotions and public relations.
Brand Portfolio Structuring (brand/name architecture) 5% Corporate Image (name, logo, etc.) 6% Other 6% Market Research 7% Product Brand Development (long-term strategy, positioning) 7% Corporate Brand Development 8% Public Relations Activities 12% Promotions/Merchandising 14% Advertising 26%

Internal Communications Activities 4% Product Packaging Design 3% Legal Protection (trademarks, patents, copyrights) 2%

More than half of budgets (52%) is allocated to traditional marketing activities, such as advertising/promotions, merchandising and public relations.

Slightly over a quarter (26%) of the budget is allocated to areas that are more brand specific, such as: corporate brand development (8%), product brand development (7%), corporate image (logo, name, etc.) (6%), brand portfolio structuring (5%). On average, 7% of the current marketing/branding budget is allocated to market research, which represents a drop from last year (11% of total marketing budget in 2000). The current budget allocations are similar for participants in the U.S. and abroad, except that U.S. companies place greater emphasis on merchandising and promotions, while international companies have a slightly greater portion of their budget allocated for corporate brand development and corporate image.

The Most Important Components of Building a Strong Brand
Given the significant percentage of their budgets our respondents spend on advertising, it was interesting to discover that when asked to rank various components of brand-building, advertising ranked second, following brand strategy. Brand strategy is considered to be by far the most important component of building a strong brand (92%), followed by advertising (75%). Indeed, it is brand strategy that sets the tenor for all marketing communications initiatives. Internal branding is now ranked third (52%), representing an area of significant change versus the 2001 survey, where it was ranked seventh. We believe this reflects a refocusing of brand priorities that is substantiated by the respondents’ comments. Many say that recent economic and political events have underscored the need for an organization’s messages to reflect its values and culture. To date, however, our respondents indicate that very little investment is made in internal branding initiatives. Brand identity (51%) is considered about equal in importance to internal branding.

KEY FINDINGS
100% 80% 60% 40%
27% 92% 75%

Brand Strategy is ranked as the most important component in building strong and enduring brands.

52%

51% 44% 41%

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Employees are increasingly viewed as brand ambassadors, and essential to building strong brands.

1%

9%

7%

22%

62%

US

2%

8%

9%

21%

59%

Total

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20 Not at all important Somewhat important

40

60 Not very important Very important

80 Fairly important

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The importance of employees in brand-building
The majority of participants (80%) consider employees very/somewhat important in brandbuilding; this is consistent across geographies. This supports the current emphasis on internal branding in driving brand strength, and could represent an area of interest and investment to marketers and senior executives.

The brand champions
Marketing professionals (60%) are viewed as the primary brand champions by most respondents. Executive (45%) and senior (38%) management are seen as secondary champions of the brand.

Oth
100

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KEY FINDINGS
Measurability of Brand
There is overwhelming agreement with the idea that proper investment in the brand can optimize the company’s future earnings (91%) and that the return on this investment can actually be measured (82%). At the same time, most respondents agree that the intangible nature of brands makes them difficult to quantify (79%).
91% 4% 5%

A company’s future earnings can be optimized by proper investment in its brand.
63% 19% 18%

Brand strength can be measured as a corollary to investment in brand. The intangible nature of brands makes them impossible to quantify.

7%

88%

5%

79%

19% 2%

The intangible nature of brands makes them difficult to quantify.
82% 11% 7%

The return of branding/marketing investment can be measured.
50% 45% 5%

The value of brands can be measured in the same way physical assets are measured. 0 20 True 40 False 60 80 100

Do Not Know

Information that would be useful in convincing senior management of the importance of investment in brand
Correlating brand strength measurements with company’s financial performance in terms of stock price, P/E ratio and market valuation Correlating investment in brand with earnings and cash flow Correlating investment in brand with company’s financial performance in terms of stock price, P/E ratio and market valuation Correlating investment in brand with awareness or familiarity measurements Correlating investment in brand with general favorability measurements Other 0
6% 7% 36% 41% 52% 46% 51% 45% 61% 58% 59% 58%

10 2001

20

30 2002

40

50

60

70

KEY FINDINGS
Although most respondents share the view that the brand and the investment in it is related to the financial performance of the company, they indicate a need for concrete information to prove this correlation to senior management. Consistent with last year’s findings, the most valuable information is data, specifically correlating brand strength or brand value with the company’s financial performance (61%), and correlating investment in brand with earnings and cash flow (59%).

Industries Affected by Recent Economic and Political Events
Not surprisingly, the industries that our respondents consider most affected by the recent economic and political events are the following: airlines (90%), advertising and PR agencies (67%), and the hospitality industry (57%). The industries that are not considered to be heavily impacted are the following: consumer packaged goods (12%), Market research suppliers (14%), education (9%), healthcare (7%), and pharmaceuticals (6%). “Don’t forget about your brand, it’s the most important asset you have. Strong brands can weather this storm.”

Advice given to affected industries
Overall, respondents have a positive outlook on the current economic climate and on the future of brand-building. They believe marketers should be patient and to have strong belief in the power the brands hold. Respondents urge marketers to leverage this to help these companies get through the rough times: “Invest in your brands. This is a cycle and you want to have a strong brand when we come out of this slump.” “Don’t forget about your brand, it’s the most important asset you have. Strong brands can weather this storm.” “Maintain investment in branding/marketing when your competition is cutting back.” “See marketing and branding as an investment for the future, rather than a non-essential ‘nice to have if you can afford it’ extra you can cut to save money today.” Importantly, many marketers are also putting renewed focus on customer service, emphasizing what is important to their consumers, particularly since personal values have been re-examined by many people. They advise helping consumers identify product and services as fitting into their value system and priorities. “Invest in understanding how the attitudes of consumers and businesses have shifted.” “Build one-on-one relationships with customers, and re-focus on the core of the business.” “Return to the basics of what your organization does best and to your best customers.” “Get back to the basics. Focus on your core business and what it is that you are truly known for.”

Copyright 2002 Interbrand

Interbrand
Creating and managing brand value™

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