Sharp shock exposes fault lines and reveals risk UK to brands
To say this has not been a great year for UK brands would be something of an understatement. Nor is it going to shock many people, given the state not just of the UK this year but also the rest of the world, on which so many UK brands rely for sales.
But the reason why the Top 75 UK Brands have lost almost $34 billion in value in a single year – a 13 percent fall – is not simply down to there being a global pandemic. Nor is it the result of Brexit, which has been causing uncertainty for businesses and consumers for four years now.
These traumas have, without doubt, inflicted significant pain on business and brands. Sales this year have crumbled, and jobs have been lost as a direct result of COVID-19.
But the outbreak, lockdown and shifts in consumer sentiment have in many cases simply accelerated a downward trend that was already in full swing. The pandemic has been a catalyst for a sharper decline in the value of UK brands, but it has not been the underlying cause of it. UK brands have been gradually losing value since 2018.
As Warren Buffett says, when the tide goes out, you can see who’s been swimming naked.
Many of the brands that have been hit hardest were already battling to keep pace with changing market conditions, and those who have thrived in the time of COVID-19 have done so not just because they happen to be in the right industry, but because they were on the way up anyway, having invested in building a brand that is meaningful to consumers and is perceived as different to everything else in their category. More on the detail later.
But the big picture is a sorry state of affairs, and one that it pains us to say we could see coming. For several years in these BrandZ reports, we have warned of a widespread failure to invest in strategic brand building in this country.
Last year, we issued a rallying cry for UK brands to focus on innovation as a route to creating the meaningful difference on which brand value depends. We pointed to a dangerous “innovation gap” that stood to cost brands both sales and long-term brand equity. Then the pandemic happened, and the gap opened up into a chasm.
The situation facing UK brands is nothing short of dire. The 13 percent drop in brand value this year is significantly more than the forecast decline in the global economy (4.9 percent as of June, according to the International Monetary Fund).
It also stands in sharp contrast to the performance of the BrandZ Global Top 100 Brands, which this year have actually increased in value by 5.8 percent.
Only 10 brands from last year’s UK Top 75 have increased in value in the past year, and six have dropped out of the ranking entirely, usurped by some of the UK brands that are taking bold decisions about how to strengthen their brand equity.
This downward trajectory means that at the current rate of decline, there will be no UK brands in the Global Top 100 by 2023 – one year earlier than we were forecasting just last year.
For a country that has been home to dozens of pioneering global brands, it is shocking that UK brands have been failing to thrive in the same way as global brands have done. Again, this is not a new issue. In 2010 there were eight UK brands in the Global Top 100; there has been a gradual decline, and now there are just three.
Brand and the bottom line
For any CFOs thinking “well, that’s just the brand, not the whole business” and hoping that the marketing department will do something about it, be warned.
The BrandZ value of a brand has been shown over more than a decade to be closely linked to the performance of its parent company; stronger brands grow faster than the stock market, and in challenging times, they don’t fall as far and they pick up more quickly. Of course, the same is true in reverse: weak brands fall further and take longer to recover.
To zoom in on the past few months, we see that this trend holds true for 2020. Between February and March, the MSCI World Index lost 75 percent of its value, the S&P 500 was down by 51 percent. The BrandZ Strong Brands portfolio also took a hit, but less of one. Their market cap fell by 42 percent, and the BrandZ Powerful Brands Top 10 portfolio slipped by even less: 37 percent.
Strong brands emerged much more rapidly from the recession of 2008-09, and the early signs suggest history will be repeated in the current climate.
In the UK, however, brand equity has declined to the point where it no longer has much of the insulating effect that strong brands benefit from. The buffer has been eroded, leaving UK brands dangerously exposed.
Investment in brand should be a powerful form of defence, delivering returns in the long term, accelerating recovery and driving growth. Yet the BrandZ UK Strong Brands Portfolio is currently delivering returns that are about the same as the FTSE 100, and over the past four years, investing in either the FTSE 100 or the BrandZ portfolio would have delivered a net loss over the past four years. UK brands are not currently reaping the rewards or protection that strong brand equity provides. This is a big missed opportunity.
It’s tough at the top
The brands that lead the ranking have been battered as much as most others this year, but are still the most valuable in the country. The order of the Top 5 is unchanged since 2019. Lipton (in 6th place) has managed to retain its brand value and has climbed two places this year, with Sky and Tesco each dropping one place to make way. O2 makes it into the Top 10 this year despite a decline in brand value, bumping out Barclays, which drops to 11th place due to a double-digit fall in value.