The case for better measurement and reporting of marketing performance

Business Horizons, Sept-Oct, 1995 by Irene M. Herremans, John K. Ryans, Jr.

More than 30 years ago, concerns about marketing costs were voiced by experts in the marketing field. Donald Parker indicated that "improvements in marketing efficiency and reductions in marketing costs still lie in the future, representing a major frontier for cost economies." Peter Drucker observed that "almost 50 cents of each dollar the American spends for goods goes for activities that occur after the goods are made, that is, after they have come in finished form."

These statements were made in an era quite different from today--a time when the industrial economy was still a major driver of wealth, high tariff and nontariff barriers existed for most of the countries of the world, and it took weeks for a company to produce what it takes days or even hours to produce today. If marketing costs were a concern in the 1960s and organizations did not answer the challenge, it is even more important that the challenge is accepted today.

Using 1991 Compustat data, Foster and Gupta (1994) found that for the perfume, cosmetics, and toilet preparation industry (SIC Code 2844), selling, general, and administrative costs (SG&A) made up the single most important cost category, representing 53 percent of every sales dollar. Of the 20 industries they analyzed, half had SG&A of more than 40 percent of every sales dollar, and all the industries had SG&A of more than 30 percent of every sale dollar.

If a comparison is made between the capital expenditure and the marketing expenditure found in some recent annual reports, one can easily see that the latter overwhelms the former. And although the literature on analyzing and reporting the performance of capital expenditure projects is well developed, the literature on analyzing and reporting the performance of marketing expenditure projects is virtually nonexistent.

To illustrate, Warner Lambert stated in its annual report that its capital expenditure for property, plant, and equipment was only $326 million, whereas its marketing expenditure for 1991 was $1.9 billion--nearly six times greater (see Table 1). However, the substance of the report of marketing's expenditure does not reflect this importance. A somewhat similar condition exists for Cadbury Schweppes (Table 2), whose marketing expenditure was nearly twice as much as its capital expenditure.

Is marketing really doing the job in these and other firms? Certainly little can be learned from what is reported. Marketing has advanced to the stage at which it has become a critical factor in determining the success or failure of the organization; therefore, accountability is essential. Can we hold it to certain standards and justify its means with measures appropriate for the environment in which it operates? The answer is a resounding YES! New technology, such as scanner data and UPI codes, has given the marketing manager a wealth of information that can be organized into benchmarks to use in monitoring marketing's progress. And measures are available to at least chart advertising's ability to help achieve awareness and image objectives. But has the controller's office typically requested such data?

As early as 1970, the Quaker Oats Company recognized the value of marketing assets, specifically, brand reputations. From 1922 to 1964, John Stuart moved from president of Quaker Oats to chairman of the board to a directorship. Upon his death, the company's annual report quoted him as saying, "If this business were to be split up, I would take the brands, trademarks and goodwill and you could have all the bricks and mortar-- and I would fare better than you."

A few other excerpts--taken from corporate annual reports of the 1990s--show that the role marketing plays within the organization is recognized as pivotal:

* "McDonald's is the second best-known brand in the world."

* "Hilton's most valuable asset is its name. The recognition and respect enjoyed by Hilton Hotels around the world are unmatched by any travel industry competitor."

* "Specifically, our major goal is to establish the Gerber brand... as a SUPERBRAND."

* "One of the key ingredients in Marriott's formula for success in the 1990s is the tremendous impact of its brand in the hospitality industry."

* "Great leading brands, worldwide coverage, global strategies that work, experienced local management, and financial strength are at the heart of CPC's ability to deliver vigorous, sustained growth."

* "Holiday Inn has the highest brand awareness and guest usage of any hotel brand in the world."

However, these comments--found so commonly in MNC annual reports and often accompanied by brand symbols and pictures--are rarely supported through a detailed discussion and analysis by management, or integrated into an explanation of the financial performance of the organization. The annual report's audience is left with believing an unsubstantiated claim or viewing it as "puffery."

Evidence of the Importance of Intangible Assets

Reporting a company's marketing performance has not progressed much beyond that of mere generalized statements about increases or decreases in advertising expenses or isolated statements about various elements of the marketing mix. In an era when close to half of the purchase price in mergers and acquisitions is allocated to intangibles or goodwill, and the amount of marketing expenditure overwhelms capital investment, firms are not adequately disclosing how this investment in brands is working for the company beyond the acquisition date or investment date. For instance, in the food and beverage industry from 1989-1991, intangible assets as a percentage of total assets averaged 28 percent. And in a recent single acquisition reported in John Labatt's 1992 financial statement, the "excess of purchase price over assigned values of identifiable tangible assets" represented 48 percent of the purchase price.