News Analysis: The forgotten asset

Companies are missing a trick in failing to include indicators of brand performance in their results.

In a recent trawl of the annual reports of FTSE-100 companies, the Institute of Practitioners in Advertising (IPA) found that just four firms - British American Tobacco (BAT), National Grid, HSBC and Reckitt Benckiser - used brand or marketing measures as key performance indicators (KPIs). In one sense, the other 96 could be forgiven. After all, the guidance on what firms should report has not exactly been consistent.

Just as everyone was gearing up for the mandatory Operating and Financial Review (OFR), which required listed companies to provide contextual narrative and KPIs on areas such as brands and employees to make their results more meaningful, the then-chancellor Gordon Brown scrapped it in November 2005.

Firms that thought they were off the hook then found out that they needed to provide almost the exact same information to comply with the incoming EU Accounts Modernisation Directive.

This was to be reported in The Business Review - a less onerous version of the OFR - and the Accounting Standards Board downgraded the status of the OFR into a statement of best practice. Firms were then hit with The Enhanced Business Review, in force from October, which is largely indistinguishable from the original mandatory OFR.

David Phillips, partner and value reporting leader at PricewaterhouseCoopers, says there has been a step change in the quality of reporting, but KPIs remain a challenge. 'Firms have been debating which to report, but some may be worried about giving away information. Also, the legislation stipulates that firms only have to report KPIs when they help to better explain their strategy.'

The IPA's research revealed no such bashfulness when it came to non-brand-related KPIs. While 24 companies did not report KPIs at all, the 76 that did focused on profit, return on investment, environmental and social responsibility, human capital and sales.

The anomaly seems to result from a lack of understanding at board level about the link between brands and the value of the business. The marketing director of one FTSE-100 firm laments: 'We have powerful brand metrics that we serve up to the investor relations people who put the reports together, but all that transpires is a flimsy paragraph about the overall brand performance.'

Vodafone's global director of brand and customer experience, David Wheldon, believes that brand reporting is constrained by the inability of the industry to link brand metrics to performance, combined with the lack of shareholder demand for such metrics.

'Reporting brand KPIs is a way to demonstrate differentiation and strategy in action,' he says. 'Our brand strength is no accident and internally we use brand metrics to drive the business.'

Some firms have been reporting brand KPIs for years. BAT, for example, has reported the percentage of growth deriving from its Kent, Dunhill, Lucky Strike and Pall Mall brands. 'They are global properties and play an increasing role in driving growth,' says David Steer, global brand director for the value-for-money portfolio at BAT. 'We measure their volumes and growth internally to manage, invest in and prioritise them to maximum effect. It is straightforward to report those KPIs externally.'

Yet analysts are divided on whether more reported brand metrics is helpful. Celine Panutti, a food manufacturing, home and personal care analyst at JP Morgan, says: 'Most of the firms I cover are brand-focused, so we have continual conversations about brands, and the lack of reported metrics is not a problem.'

But Kevin Ryan, an insurance analyst at ING UK, is shocked by the dearth of customer and marketing spend data in his sector. 'It suggests they don't know what is going on in their businesses, and can't optimise opportunities,' he says.

The quality of information provided - and required - varies by sector. Ken Lever, finance director of engineering group Tomkins, admits that most of his company's reported KPIs are financial, its metrics related to elements such as the percentage of sales from products developed over the past three years. 'But we are not a "brand" company,' he argues. 'I would expect Cadbury or Diageo to report at the very least the percentage of revenue they spend on supporting their brands.'

Although the legislation encourages companies to report only what is most pertinent to their strategic success, there is unlikely to be a flood of brand and marketing KPIs reported without some framework.

It is a pity, because those organisations that put themselves in the reporting vanguard should be at a competitive advantage - not least by demonstrating their understanding of the pivotal role marketing plays in creating consumer-led demand, which is the only sustainable form of business growth.

Popular KPIs
Top 10 most popular KPIs in recent annual reports
- Earnings per share
- Profit
- Free cash flow
- CO2 emissions
- Employee retention
- Operating profit
- Operating margin
- Revenue
- Total shareholder return
- Return on average capital employed
Source: IPA


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