“Brands are safer than Banks and Toothpaste is safer than Gold” – the importance of data quality when determining investments
10. May 2010 | « previous | next »
Claims of being overwhelmed by information flows have been around for a very long time. Managing these flows and establishing a valuable perspective regarding flow controls is important. Restaurants with menus that contain hundreds of choices are not usually better than those with ten and they are not necessarily using more cooking ingredients. The challenge is to figure out how much time to invest in reading a menu or digesting data based on the value the individual restaurant or data source can deliver, not on how long the menu is or how many pages a report has.
One of the most important times to have a good information “flow control” strategy and data management discipline is during a crisis. Recent financial crises have sent investors scrambling for safety. European and United States government debt and gold became “safe” investments for most investors. Many trusted consumer brands and their owners that have proven they can weather such storms in the past were ignored. Only the biggest global discount retailers and consumer brand portfolios received some of the flight to safety investments. Highly dependable mid-sized brand owners and retailers had their stock values fall dramatically despite consistent performance success. Why did stock markets treat leading brands like over-leveraged banks during the crisis?
Without the establishment of realistic information flow controls it is relatively easy to be overwhelmed by data and thus make poor decisions. Data quality not quantity is essential for determining brand value and brand investments. For example, if you do not know what you are looking for and why, the Internet can often be a very dangerous and misleading tool for brand managers and investors. The same is true for brand valuation studies and financial rating agencies. BrandZ, Y&R Brand Asset Valuator, Interbrand/Business Week – Best Global Brands, Dun & Bradstreet, Standard & Poor’s and Fitch Ratings all have their specific strengths and weaknesses. They all analyze large volumes of data with specific filters that need to be understood before they can be intelligently used to support investment decisions. Despite the recent catastrophically poor performance of financial ratings agencies like Standard & Poor’s and Fitch, brand and consumer behavior studies have gained limited extra attention.
Despite the claims of the world’s leading banks and credit ratings agencies, real estate is not always a safe investment. For those that were able to go beyond quantity and follow quality of information, the crisis was not only avoidable but enough time was available to profit from the bubble’s eventual burst. Similarly exaggerated values exist in the brand analysis community. How much do consumers really love Google and Microsoft despite the huge valuations given to their brands? Are more focused brands like Blackberry, PayPal and Skype better positioned for the future? What about brands like Ralph Lauren, Tiffany and Hermes that prosper even in difficult times? Are their business models safer than those of Deutsche Bank and Goldman Sachs?
Information technologies allow poor-quality data to be cost-effectively “dressed up” to look like valuable inputs. Data retrieval and presentation often receives more resources as compared to benchmark and strategic goal management. A poorly defined question that has limited strategic value does not produce better results when asked to 50,000 consumers instead of 500. In fact, increased test group sizes and numbers of variables used in a model often help to mask poorly executed data collection and analysis.
When consumers’ media-driven worlds stop making sense and their daily lives are filled with increasing amounts of negative data and fear, they still continue to buy their favorite toothpaste and detergent brands. The stock market valuations of companies with the most trusted brands in brand-driven industries have been surprisingly volatile over the last three years. The investment community largely ignored brand value and brand equity as a “safe haven” when their debt-fed bubble markets including real estate CDOs popped.
When the finance world sends the global economy into a panic, where do professional investors look for safety? This time around, when the global press cried fire in the crowded media theatre, it was predictably government bonds and gold that were purchased in huge volumes – and not trusted consumer brands or product producers that leveraged predictable consumer behavior patterns. Government bond yields were falling despite the fact that government debt and risk were rising. Gold prices are largely driven by professional investors rather than industrial demand. If one has lost faith in the financial system, why trust an instrument like gold that this same system so completely controls and regularly manipulates?
To support these claims, I will present charts of publically traded companies in the US and Germany that have brand-driven businesses compared to two leading risk-friendly banks, Goldman Sachs and Deutsche Bank. I have also included broad market indicators – the S&P 500 and DAX30 – to provide overall market perspective. I believe the charts underline that many safe brand-driven companies were treated like high-risk investment banks during the crisis.
Let us begin with the publically traded company Lululemon Atheltica (nasdaq:lulu), a leading yoga-only apparel and lifestyle brand operating in the USA and Canada. I think we should begin with Lululemon and yoga because they are both very safe and predictable. Over 20 million Americans practice yoga regularly, supported by the success of yoga-related products, services and media creating a multi-billion dollar global industry. It is an affordable pursuit with a strong fan base within the desirable middle-income and middle-aged consumer groups. It has proven to be a recession and financial bubble resistant industry.
Many leading investors follow Lululemon stock and its market capitalization grew significantly after its IPO. Yoga mats, clothing and accessories like water bottles have great profit margins. Lululemon has established superior brand driven value and is now a market leader in a stable growth market. So why were Lululemon shares not seen as a safe haven during the debt crisis? Why did investors fail to analyze data around the yoga market and Lululemon shares?
Lululemon shares fell harder and faster than Goldman Sachs or the S&P 500 during periods of the debt crisis, despite delivering relatively good results. Poor data flow management and benchmarks turned what should have been a conservative investment into a volatile investment. Despite cash reserves, limited debt and growing market share, Lululemon became undervalued. When retail shares rebounded in 2009, Lululemon was suddenly noticed again and has been a shooting star over the last twelve months, outperforming its category. To add to the irony and general data flow management problems, Lululemon is now considered by many to be overvalued, trading at more than 40 times current earnings.
The chart below tracks Lululemon against the S&P 500 and Goldman Sachs. Please note Lulu valuation volatility both up and down. The downward fall from September 2007 until March 2009 was particularly dramatic, as was the rise in early 2010. This does not represent a relatively safe and predictable investment.
A similar case in Germany is the mature women’s fashion brand Gerry Weber. This company has reported consistent revenues, cash flows, margins and market share growth over the last three years within a brand-driven category where product innovation and competitive forces are limited. The Gerry Weber target market is mature middle-income women in Germany as well as other European markets and has grown via the company’s own retail outlets as well as retail partners. This is a very stable and predictable target group that displays strong brand loyalty and stable purchasing habits. Despite these consistencies, Gerry Weber shares were only marginally more stable than those of Deutsche Bank or the Dax30 during the recent crisis. Like Lululemon shares, they are volatile and have skyrocketed in the last twelve months from an undervalued position.
In contrast to the relative stability of the biggest market capitalization US brand owners and value retailers like Walmart and P&G, many more focused and brand-driven mid-sized lifestyle and fashion leaders suffered intense volatility during the crisis. Despite strong past performance and stable category properties, they too were not seen as safe havens in difficult times. Respected brands Ralph Lauren and Tiffany both suffered during the financial crisis. Even Puma and Adidas have experienced significant valuation fluctuations. The market seems to ignore consumer behavior and loyalty during tough times and often overvalues them during good times. I hope the following charts speak for themselves about poor data flow management and poor long-term value perspectives regarding brands.
How would investment funds behave if they were supported by market research, brand management, advertising and digital marketing professionals? I am still waiting for a brand-driven investment fund that effectively tracks consumer behavior for my hard-earned savings. Consumer behavior patterns and trusted brands are some of the best long-term investments available – especially in a crisis. Washing powder and candy bar brands tend to be more responsibly managed than CDOs and the national debts of Greece and England.
Alexander Shapiro (45) was born and raised in New York City. After his Philosophy studies at Wesleyan University he returned home to Manhattan to work in Investment Banking. Mr. Shapiro moved to Europe about 16 years ago where he has held numerous business development and strategy positions at companies including Spotify, Bartle Bogle Hegarty (BBH), Springer & Jacoby, Deutsche Telekom and Nortel. He currently lives in Hamburg in his beloved St. Pauli.