When Black Tuesday wiped 14 billion dollars off the New York stock exchange in 1929, the world fell into a recession that lasted for ten years. 2008 saw the biggest ever single drop in the Dow Jones Industrial Average and capital market value began to disappear from the world's global equity exchanges as a result of the US sub-prime crisis and subsequent credit squeeze. Now there's talk of a new bubble emerging which, if it bursts, could destroy up to four trillion dollars of share market value on the S&P500 alone. But what's different about this bubble is the power to burst it is in our hands.
In the heyday of CDOs, those bits of paper which were supposed to be backed by solid assets, but which turned out to be worth less than the paper they were printed on, they were understood by perhaps only a handful of people, and only some of the traders who were eagerly bundling, unbundling and repackaging them for sale. When the CDO market collapsed, the world went through a steep learning curve to understand how a motor home in Idaho could cause the failure of Lehman Brothers. Unlike CDOs however, brands are familiar to all of us, they invade every part of our life and define who we are. Apple Mac or Dell? Pepsi or Coke? Nike or Adidas?. But according to John Gerzema, author of The Brand Bubble, that brand definition could be waning and with it the value of the companies that comprise it.
The problem began, explained Peter Stringham, CEO of Young & Rubicam and a contributor to the book, around 30 years ago. Brand marketing had been around since the end of the World War II. Demand for labels had always outstripped supply, but that gradually changed as more and more brands appeared. With a growing world economy and rising consumerism, that shouldn't have been a problem. The issue, according to Stringham, was that too many companies have focused their attention solely on awareness and too little on why their product is different from the thousand of alternatives.
Now, as we go through a recession, consumerism is understandably fading. But Gerzema reckons that there's also real evidence that we're actually turning our backs on most brands, because we no longer believe that they are better. Not only will this affect the top line revenue figures, but waning consumer support could and should affect the value of the company as a whole, which is where we hit the second disaster trigger-valuation. Companies have always placed a figure on what accountants call intangible assets, things like goodwill, intellectual property and brands. The methods for calculating those figures, according to Gerzema and Stringham, are often deeply flawed. Not only that, but as equity values have soared, the proportionate value of those intangibles has also increased. It's the accounting equivalent of, "think of a number and double it". If consumers have lost faith in brands, Wall Street will eventually catch up. At present, approximately one third of the value of companies listed in the S&P500 is made up from intangible assets. That's too big a number to be guessing at.
So are we about to see another stock market crash?. "If you could predict that, you'd be a rich person." We will undoubtedly see some brands disappear as the recession deepens, those that survive will need to refocus their attention on what makes them different. The remaining brands will be those that consumers collect around and, according to Gerzema, the ones that listen to their customers. This is one bubble, it seems, that will deflate gradually over time, but unlike REITs and CDOs, it's one that you can affect. So are you for Pepsi or Coke?.
In the heyday of CDOs, those bits of paper which were supposed to be backed by solid assets, but which turned out to be worth less than the paper they were printed on, they were understood by perhaps only a handful of people, and only some of the traders who were eagerly bundling, unbundling and repackaging them for sale. When the CDO market collapsed, the world went through a steep learning curve to understand how a motor home in Idaho could cause the failure of Lehman Brothers. Unlike CDOs however, brands are familiar to all of us, they invade every part of our life and define who we are. Apple Mac or Dell? Pepsi or Coke? Nike or Adidas?. But according to John Gerzema, author of The Brand Bubble, that brand definition could be waning and with it the value of the companies that comprise it.
The problem began, explained Peter Stringham, CEO of Young & Rubicam and a contributor to the book, around 30 years ago. Brand marketing had been around since the end of the World War II. Demand for labels had always outstripped supply, but that gradually changed as more and more brands appeared. With a growing world economy and rising consumerism, that shouldn't have been a problem. The issue, according to Stringham, was that too many companies have focused their attention solely on awareness and too little on why their product is different from the thousand of alternatives.
Now, as we go through a recession, consumerism is understandably fading. But Gerzema reckons that there's also real evidence that we're actually turning our backs on most brands, because we no longer believe that they are better. Not only will this affect the top line revenue figures, but waning consumer support could and should affect the value of the company as a whole, which is where we hit the second disaster trigger-valuation. Companies have always placed a figure on what accountants call intangible assets, things like goodwill, intellectual property and brands. The methods for calculating those figures, according to Gerzema and Stringham, are often deeply flawed. Not only that, but as equity values have soared, the proportionate value of those intangibles has also increased. It's the accounting equivalent of, "think of a number and double it". If consumers have lost faith in brands, Wall Street will eventually catch up. At present, approximately one third of the value of companies listed in the S&P500 is made up from intangible assets. That's too big a number to be guessing at.
So are we about to see another stock market crash?. "If you could predict that, you'd be a rich person." We will undoubtedly see some brands disappear as the recession deepens, those that survive will need to refocus their attention on what makes them different. The remaining brands will be those that consumers collect around and, according to Gerzema, the ones that listen to their customers. This is one bubble, it seems, that will deflate gradually over time, but unlike REITs and CDOs, it's one that you can affect. So are you for Pepsi or Coke?.