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Mark talks with John Gerzema, Chief Insights Officer for Young & Rubicam and co-author (with Edward Lebarof) of a new book called The Brand Bubble  – The Looming Crisis and How to Avoid it, about consumer behaviour and how it affects his argument of a $4 trillion “brand bubble”, which if not corrected, could drive down the stock prices of today’s best-known companies.

John argues that data from the world’s largest study of consumer attitudes and perceptions on brands reveals that investors are increasingly overvaluing brands while at the same time consumers are losing trust and interest in them. Considering that a third of shareholder value is brand value, this growing disconnect should be of urgent concern to CEOs, marketers, analysts and investors.

Mark: How did you come to the conclusion that we are in the midst of a “brand bubble” and what do you believe caused this disconnect between how investors value a brand and consumers value a brand?

John: Today, brand value accounts for 30% of market capitalization of the S&P 500. This has risen from 5% in thirty years, meaning brands are approaching the total business value in a company. Yet our research going back over 13 years of data across 2,500 brands reveals that brand awareness declined 20%, brand esteem, 12%, perceived brand quality eroded by 24%, and trust in brands is down a staggering 50%. And 70% of brands in our study were either stagnant or declined in differentiation and relevance to consumers.

How can brands account for a growing percentage of market capital when most aren’t growing in consumer estimation? Fragmentation, social media and digital acceleration are causing a widespread diminution of brand value. Consumers, armed with more information and operating with instant access to networks of critical support (e.g. engadget, gizmodo, e-pionions, [Hellopeter locally – ed]) are quicker to punish uninteresting and undifferentiated brands. Today, brand equity is decaying in compressed periods of time. Brands simply aren’t evolving and innovating fast enough to keep up with today’s super-enabled consumer.

Mark: Which companies are most at risk of falling victim to a Brand Bubble and which are best positioned to ride out any storm?

John: We know it’s quite a few: While brands have never been more important, but there are fewer ‘important’ brands. The percentage of brands in our study that beat the S&P 500 index actually declined by 36% from 2002 to 2007. This means a smaller number of brands now account for a significantly greater share of market capitalization. And conversely, more brands may be overvalued.

We would worry most about brands that lag in momentum, innovation and creativity (think Chrysler, Sprint or AOL). We also have seen poor performance indicators for brands that aren’t fully grasping new media and online. And companies that see marketing as cost centre, or have not properly aligned to build Integrated Marketing Communications are also at risk. Today, a brand has nowhere to hide.

In contrast, those best to capitalize in this environment are doing a couple of important things: They are making sure the brand experience lives up to the brand promise (e.g. Whole Foods, Pinkberry or Uniqlo). And for a brand to sustain its real value it can’t just be different; it has to keep being different (think Geico, Apple or Nintendo). Consumers constantly re-evaluate brands and drawn to those who are continuously innovating and reengaging; who provide a sense of direction and creativity (Target, Virgin and Mini). Creativity is the way to avoid the brand bubble.

Mark: What are the parameters established by consumers to identify a company, and what influences our perception of that identity? Further how does our perception put a value on a brand?

John: We’ve found that consumers don’t see a distinction between company and brand reputation — everything communicates. Consumers form perceptions from a sales experience, a customer call centre, or a corporate social responsibility program. This means that action and reputation are equally important. The direct messages from a brand (e.g. advertising and other forms of paid communications) must be consistent with the indirect influences on consumer perceptions formed by experience (e.g. how the company behaves and performs, word of mouth, social media, etc.). The stronger these messages are aligned, the more consumers respect the company and the brand.

Mark: Why and how are social media and consumer power reshaping the meaning and value of brands?

John: Social media has caused tectonic shifts in how consumers perceive and experience brands. First they’re huge: If MySpace was a country, it would be the 11th largest in the world. Second these virtual societies make sure brands have no where to hide. In fact, consumers now trust each other more than they trust brands. Media Edge/CIA found that 76% of people rely on what others say versus 15% on advertising. 92% of consumers now cite word of mouth as the best source for product and brand information, up from 67% in 1977. No wonder reviews sites, such as Digg and Reddit, have become the third-most-common use of the Internet after e-mail and search.

Mark: Finally, what needs to change in how marketers engage with consumers, to optimize brand building and positive customer equity?

John: First, the consumer is simply demanding greater creativity, and this creativity goes well beyond clever advertising. This means immersive brand experiences that align and deepen the brand’s meaning and promises. And consumers want the option to have more control, whether that comes in consumer generated media, or functionality that allows the consumer to customize their own experience with the brand.

And perhaps most importantly, we’ve found that ‘Energized Differentiation’ is what’s most important: Consumers want to feel brand differences that are meaningful, and continuously evolving. They’ll quickly punish uninteresting and undifferentiated brands, hastening the decay in brand equity and expanding what we call, the brand bubble.