Financial analysts view brand strength as more important than leadership quality, research finds

A larger proportion of financial analysts see advertising and promotional spend as an investment rather than a cost, according to new research published today. However, most would also view cuts to a company’s marketing budget as a “positive cost-saving measure”.

That’s according to the views of more than 200 analysts surveyed by the IPA and Brand Finance to better understand investors’ views of marketing and brand building. These financial analysts work for investment banks, asset managers, and others who invest in publicly listed companies in the UK and US, and who provide guidance to investors to inform their investing decisions.

In positive news for marketers, there does seem to be recognition of the power of brand among the City analysts surveyed. The strength of a business’s brand and marketing is more important to financial analysts’ assessment of a company than its leadership or reported profit, for example.

Analysts were asked how important various factors were to them in their appraisal of the publicly listed companies they analyse. Strength of brand/marketing (79%) was the factor most cited as “very important” by respondents. A strong brand came ahead of leadership quality (76%), technological innovation (72%) and reported profit (71%) in determining how the City judges companies.

While this suggests brand strength is valued, financial analysts also have a positive attitude toward marketing spend being cut to save money. Over half (52%) of the investors surveyed say they would view a company cutting marketing spend as a “positive cost-saving measure”, with just over a third (36%) viewing it as a “short-term fix with long-term negative consequences”.

Back in 2020, Marketing Week columnist Mark Ritson argued the best brands would be upping, not cutting their budgets in the face of recession. He cited research dating back to the Great Recession, suggesting companies who ramp ad spend up in recessionary times are rewarded by market share and sales growth.

Clearly, marketing leaders in businesses need to work harder to build the connection between maintaining marketing budgets and growth for businesses in the minds of financial analysts, who may otherwise pressure companies to cut spend when times get tough.

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Despite the perception that marketing budget can be sacrificed to save costs, City analysts are more likely to see advertising and promotional spend as an investment than as a cost.

Just over a third (37%) of analysts view advertising as an investment, with under a quarter (24%) seeing it as an operating cost. Analysts are most likely to see it as “a bit of both”. Similarly, analysts are most likely to see promotion as being a mixture of a cost and an investment (48%). However, a larger proportion of analysts see it as an investment (28%) rather than simply an operating cost (23%).

In line with this view of marketing spend as an investment, the research suggests analysts would also like changes to how this is accounted for on companies’ balance sheets. Most analysts (56%) think marketing spend should be capitalised, with a further third (33%) believing this should be done in some cases. Capitalisation is to record a cost on a balance sheet with the purpose of delaying the full recognition of the expense. An item is generally capitalised when it is considered an asset, rather than an expense. Many companies currently treat technology research and development spend in this manner, for example.

The IPA says the findings of the research indicate “investors are placing increasing interest and importance on investment in brands”.

“To improve understanding, it is incumbent on brand owners to provide the relevant data and evidence to investors, and to engage with them using their language in order to make the most compelling case for marketing as a long-term investment,” says IPA director of effectiveness Laurence Green.

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.

Those who do look at advertising and promotional spend as part of their analysis are more likely to believe it is an investment and drives organic growth. However, even among those who do analyse advertising and promotional spend, under half (46%) believe it drives organic growth.

There is also a lack of belief among investors in a strong brand’s ability to drive pricing power,

Just over half (54%) believe sales price can be benefitted by brand and advertising communications, while only 8% believe this is the factor most impacted by marketing. Analysts are much more likely to cite sales volume (71%), profit margin (77%) and market share as factors (66%) that benefit from brand and advertising comms.

This is despite analysis of the research carried out by former City investor Ian Whittaker, who is now founder and managing director of Liberty Sky Advisors. The analysis finds many strong brands have managed to retain volume despite price increases.

In the current inflationary environment, many major companies have cited their brands’ power as a key factor in their ability to increase prices in line with costs.

Last year, Unilever CEO Alan Jope credited the health of the FMCG giant’s brands with its ability to gain market share, even in an inflationary period where the business had put prices up.

Meanwhile, speaking to analysts in July, Heineken CEO Dolf van den Brink laid out his belief in the power of the company’s marketing investment.

“Brand power today is pricing power tomorrow,” he asserted.

While many big business leaders are aware of the link between pricing power and brand, findings from Marketing Week’s Language of Effectiveness survey suggest marketers themselves may not be prioritising price in their roles.

The Language of Effectiveness survey, supported by Kantar, revealed less than a fifth (19.7%) of the 1,300 brand-side marketers who responded believe growing profit is the main task of marketing, putting it joint last out of eight different jobs.

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