It’s tempting to convert brand value into temporary profits or sales.
For publicly traded companies the goal is sometimes to fool the financial markets into the thinking the company is healthier than it is. Some managers even say they have to do what they do in order to maintain the share price. The ethics, and even legality of such practice is questionable. Of course, converting brand value into temporary sales or profits really lowers the value of a company (and so will eventually lower market capitalization).
Here are the sorts of tricks managers use to hit immediate financial targets.
1. Cut advertising spend. For many packaged goods companies, advertising spend is equal to profits; or put another way if they didn’t advertise they could post double their normal profits for the year. So this gives management quite a lot of room to fill profit short-falls simply by reducing advertising spend. Of course this will depress sales, and therefore profit contribution, but the net effect will be a jump in profits. Next year sales will be even lower however, and will require more advertising to fix, or greater cuts to advertising to hide the reduction in profit contribution. A trick to hide reductions in advertising spend is to claim that marketing mix modelling or digital initiatives are delivering much greater efficiency so that the company can afford to cut advertising. As a marketing professor I can say that there are very good reasons not to buy this argument – financial analysts should beware of it.
2. More price promotion. The problem with cutting advertising is that sales revenue tends to also decline, probably not by much at first, but eventually the losses start to climb, and brands can risk being de-listed by retailers. So another trick is to replace some of the advertising cut with price promotions. These help fix (hide) sales declines.
3. Call discounts “marketing expenditure”. The problem with price promotions is that while they boost volume sales they decimate profitability and can even lower sales revenue. This can be fixed by registering sales as full price sales, not the discounted price they were really sold at, and instead booking the discount as a marketing expense (e.g. “trade marketing incentive”). This increased marketing cost can be useful to assay investment analysts who are worried that the company is inflating sales and profits by cutting the marketing budget (using the first two tricks above).
Few companies fully disclose and breakdown their marketing expenditure. This makes it easier for them to use such tricks to fool shareholders and potential investors. And ensure that management hit their performance targets.
It’s not just consumer goods companies that use such tricks. One automotive company told me that it’s common practice for manufacturers to ring their car dealers if they are going to miss a sales target and offer them cash payments if they can sell x number of cars/trucks in the few remaining days in the quarter/year. “Yes, no trouble” says each dealer, and then books a number of sales as they ‘sell’ these cars from one of the dealer’s registered companies to another. Then a “demo model” sign is placed on the cars along with a new discounted price (in effect paid for by the manufacturer). The car manufacturer hits their sales target, and books full price sales, they just register the money they paid the dealer as a marketing expense (possibly paid for out of the advertising budget). Of course, hitting sales targets next period will be even more difficult because there are just as many unsold cars sitting on the dealers’ lots.