The Important Hyperlink Between Advertising And Finance
Imagine you are working for the Chief Executive Officer (CEO) of Coca-Cola. He asks you to comment on a recommendation from the company's Chief Marketing Officer (CMO) to increase the advertising budget from $ 3.2 billion to $ 3.5 billion. Should Coke spend an additional $ 300 million on advertising? The chief financial officer (CFO) is against it, saying the money would be better spent elsewhere.
Alternatively, if you keep the ad budget flat, you can increase profits and drive up the stock price. The CMO counters that the increase in advertising spend is actually an investment in the brand and will also lead to higher sales and earnings over time. This was an actual decision that Coke's leadership faced in 2013. Coke was already the largest advertiser in the beverage industry and at that point was spending 6.9% of its sales on advertising.
What should Coke do in such circumstances? What would you advise the CEO to do? Is marketing an expense or an investment in an intangible but extremely valuable asset known as a brand? Is it both an expense and an investment? How should a company treat marketing from a financial perspective?
It is a misconception that marketing and finance are separate disciplines. In reality, they are closely related. They often overlap and inform each other about the current and future health of the company. This is the case even if the people performing finance and marketing functions either do not know or believe that they are interdependent. When executives look at marketing from a financial perspective and finance from a marketing perspective and work with this insight, good things usually happen in a company and other types of organizations.
Appearance can be deceptive. Finance seems to be a numbers game, a cold, fact-based area of business where money speaks and everything else goes. In contrast, marketing is often viewed as subjective, as the setting for creative, artistic types who love to talk about edgy concepts such as brand aura and emotional customer loyalty. However, finance is not just about money, it's also about marketing. In truth, both disciplines are about the same thing: how a company earns, grows and gains in value. Marketing is a key driver of earnings, growth and valuation. Finance is about measuring the impact of marketing – from deciding to operate in certain markets and serving certain customers, to pricing, basic advertising and messaging, product design and the size of the product lines.
When applying these concepts to the Coca-Cola situation, consider the following riddle: In mid-2018, Coca-Cola's balance sheet totaled $ 89 billion. The company's market capitalization, the company's total value, at that time was $ 199 billion. Why are the two numbers so different? The $ 110 billion premium for the company's value over the book value of its assets shows how the market values the Coca-Cola brand. What is it about Coca-Cola that creates such value in the investment community?
Is the Coca-Cola brand worth more than its competitors? Perhaps a look at the relationship between stock price and company profit (price-earnings ratio or P / E ratio) is revealing. Cola is traded at 33 times its profit. In contrast, Pepsi's P / E ratio is only 21. Broadly speaking, a dollar profit made with Coke's marketing machine is worth $ 33 for shareholders, compared to $ 21 for a dollar pepsis profit.
But wait. Aren't stock prices based on cash flow expectations? Yes, they give or take various other influences. And there is a connection between the brand (driven by marketing) and future cash flows. The value of a brand appears in the share price because it is able to generate and secure future cash flows. Good products, ubiquitous sales, television advertising, and a host of other marketing activities turn consumers into customers who make money. From this perspective, the interface between marketing and finance becomes clearer. We can see the nature of marketing and finance both as individual disciplines and as synergistic partners.
ContriBranding Strategy Insiders: David Stewart, Professor of Marketing and Commercial Law at the President of Loyola Marymount University, Author, Financial Dimensions of Marketing Decisions.
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