Brand Firm Performance and Tough Economic Times

• Author: Yuk Ying Chang,Martin Young
• Published date: 01 September 2016
• DOI: http://doi.org/10.1111/irfi.12081
• Date: 01 September 2016

Brand Firm Performance and Tough

Economic Times*

YUK YING CHANG AND MARTIN YOUNG

Massey University, New Zealand

ABSTRACT

Negative income shocks may cause lower consumption and a switch in con-

sumption from brand to non-brand products as consumers economize on price

(Larkin 2013). This switch can also be the result of the vigorous promotion of

private label products (Lamey et al. 2012). However, dedicated customers and

conspicuous consumption (Veblen 1899; Berger and Ward 2010) can mitigate

or even neutralize these effects on brand firms. Consistent with the notion that

enduring consumption by brand customers has a stronger effect, we find that

compared with non-brand firms, brand firms performed better in and reco-

vered quicker from the difficult economic times of the late 2000s.

We document that brand firms withstand crises better (suffer less and recover

faster) than non-brand firms. These results do not appear to be driven by missing

factors as confirmed by placebo tests, nor by observable characteristics as con-

firmed by various matching exercises.

Is this result surprising? Brand products are commonly considered to be luxury

goods.

1

Because consumption of luxury goods is procyclical (Lochstoer 2009),

brand firms, compared with non-brand firms, should suffer more during periods

of crisis. This is because if transitory income is lower during crises, the consump-

tion of luxury goods, in contrast to necessity goods, should be lower. Further-

more, if permanent income also declines during crises, people will try to save

more and hence purchase fewer luxury goods. Consistently, the literature has

long suggested that the popularity of private labels, in relation to national

brands, is countercyclical and negatively related to changes in disposable income

(Nandan and Dickinson 1994; Quelch and Harding 1996; Conroy and Narule

2010; Hoch and Banerji 1993; Lamey et al. 2007).

Lamey et al. (2007) and Lamey et al. (2012) further suggest that the market

share of national brands, compared with that of private labels, regains slower

or does not restore completely when the economy recovers. This may arise for

the following reasons. First, any initial increase in income may be used to pay

* We are grateful to Sudipto Dasgupta for insightful suggestions.

1 The top brand lists used in this study also consistently feature luxury brands such as Tiffany &

Co. (The Telegraph 2014). There is an overlapping of luxury goods and brand products. How-

ever, neither is a subset of the other. The same relationship holds for private labels and non-

brand products which will be discussed later.

© 2016 International Review of Finance Ltd. 2016

International Review of Finance, 16:3, 2016: pp. 357–391

DOI: 10.1111/irfi.12081

off debts or rebuild a precautionary stock of assets (Dynan et al. 2012). Second,

right after an economic downturn, consumers are typically at the lowest level

of actual income and thus least able to buy brand products (Gale 1996). Finally,

consumers are slow to change ingrained ‘thrifty spending habits’formed in reces-

sions (Thomasson and Skariachan 2013), probably out of a conservatism bias

that undermines the good news of economic recovery (Edwards 1968).

On the contrary, if richer people are less adversely affected during crises and

they are the major customers of brand products, i.e. people who are generally

rich matter more than people who are temporarily rich for brand firms, then

brand firms will likely weather crises better than non-brand firms. Zurawicki

and Braidot (2004) find that higher income households reduced and eliminated

various expenditures to a lesser extent during the Argentinean economic crisis

of 2001–2002. Nunes et al. (2011) suggest that conspicuous consumption en-

dures in recessions.

2

However, if brand firms are more committed to high selling expenses to main-

tain their brand visibility (for example, shops in high-end locations, upscale

stores, expensive advertising campaigns, sponsorship deals) which will not be

canceled unless these firms enter extreme circumstances, then the loss of internal

funds in hard times when external funds are costly could hurt selling activity and

sales more for the brand firms than non-brand firms. Consistently, empirical ev-

idence shows that brand support by firms is generally lower in recessions while

private label support is strong (Srinivasan et al. 2005; Srinivasan et al. 2011; Hoch

1996). Brand promotion activities tend to be cut more quickly during economic

downturns, but they are restored more slowly when good economic times return

(Axarloglou 2003). As a consequence of these asymmetries, consumers’switch to

private labels during recessions will be faster and more extensive than their sub-

sequent return to national brands in good economic times.

The counter-argument is that brand products do not need such product pro-

motion as they have dedicated customers. Brand firms may enjoy higher demand

in any given economic climate, because presumed higher quality associated with

a brand may serve as an important signal to reduce perceived risk (e.g. Erdem and

Swait 1998). In addition, product quality itself is a desired attribute and hence

will be associated with higher demand. Loyal consumers are also more likely to

repeatedly purchase brand products they value and are less likely to switch to

competitors, as it is costly to find a good match between product attributes and

consumer preferences (Gourio and Rudanko 2011). This behavior ensures stable

performance of brand firms over time and insulates these firms from downside

shocks. Anecdotal evidence also supports the persistence of consumer loyalty de-

spite income shocks during hard economic times. For example, in North America

the sales volume of top brand firm Coca-Cola declined by only 1% in 2008 and

2% in 2009, while US Gross Domestic Product (GDP) per capita contracted by al-

most 5% and the unemployment rate spiked to 9.9%. (Larkin 2013: 239–240).

2 Conspicuous consumption refers to extravagant spending on goods to display wealth and thus

signal status on purpose (Veblen 1899).

International Review of Finance

© 2016 International Review of Finance Ltd. 2016358

Hence, as a whole there is no clear prediction, nor conclusive evidence as to

whether brand firms, compared with non-brand firms, are more affected in times

of crises.

This study compares performance of US brand and non-brand firms over the

tough economic times in the late 2000s. We use Tobin’s Q and ROA and our

sample comprises publicly traded US firms in the top global brand lists of Brand

Finance, BrandZ, CoreBrand and Interbrand, along with brand data from the

Asset4 database. These firms are large and highly visible. Overall, our results sug-

gest that brand firms withstood the crisis better. Compared to the non-brand

firms, Tobin’s Q is statistically significantly higher for the brand firms for the years

2008 and 2009. After the crisis, for years 2010 and 2011, Tobin’s Q and ROA are

also statistically significantly higher for the brand firms than for the non-brand

firms. The brand firms also recover faster than the non-brand firms. Using their

own performance for the fourth quarter in 2007 as a comparison basis, brand

firms are generally more likely than non-brand firms to outperform in respect of

Tobin’s Q and ROA as of the fourth quarter in 2009, 2010 or 2011.

As we have mentioned, brand firms are generally larger than non-brand firms.

It is also known that size is associated with many factors such as resources and

product innovation and thus may explain performance. An important concern

is that the effects of brand on performance may reflect differential size effects be-

tween brand and non-brand firms. We address this concern as follows. First, we

control for firm size in terms of the market value of the firms in our regressions.

Second, our brand value measures are scaled by market value. Finally, controlling

firm size in regressions may not be adequate as brand may still reflect difference

in size between brand and non-brand firms. Hence, we need to compare brand

firms with non-brand firms that are similar in size. In particular, we only include

size-matched non-brand firms that are comparable in size, along with brand

firms, in two additional sets of matched-sample analyses. The matching is based

either on firm size measured by market value or on a propensity score with regard

to market value, leverage, tangibility and two-digit SIC industries.

Our findings of the differences in performance between the brand and the non-

brand firms mentioned above are not explained by market value, tangibility,

leverage, the beginning-crisis performance and two-digit SIC industry fixed

effects. The results are generally robust for the matched samples. The results also

remain for various brand measures and several brand samples. The differences

in performance do not appear in placebos for the year 2005 or 2006, which sug-

gests that the positive brand effects on firm performance do not exist during

non-tough economic times and the documented brand-firm performance rela-

tionships are driven not by missing factors.

Our work is most closely related to that of Lamey et al. (2007), Lamey et al.

(2012) and Larkin (2013). As discussed above, Lamey et al. (2007) study the value

market shares of the private labels and document that consumers switch more

extensively and quickly to private labels during economic downturns compared

with the extent and speed with which they switch back to national brands when

the economy recovers. In fact, some previous national brand consumers keep

Brand Firm Perfomance

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