Brand Firm Performance and Tough Economic Times

AuthorYuk Ying Chang,Martin Young
Published date01 September 2016
Date01 September 2016
Brand Firm Performance and Tough
Economic Times*
Massey University, New Zealand
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 rms. Consistent with the notion that
enduring consumption by brand customers has a stronger effect, we nd that
compared with non-brand rms, brand rms performed better in and reco-
vered quicker from the difcult economic times of the late 2000s.
We document that brand rms withstand crises better (suffer less and recover
faster) than non-brand rms. These results do not appear to be driven by missing
factors as conrmed by placebo tests, nor by observable characteristics as con-
rmed by various matching exercises.
Is this result surprising? Brand products are commonly considered to be luxury
Because consumption of luxury goods is procyclical (Lochstoer 2009),
brand rms, compared with non-brand rms, 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. 357391
DOI: 10.1111/ir.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 habitsformed 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 rms, then
brand rms will likely weather crises better than non-brand rms. Zurawicki
and Braidot (2004) nd that higher income households reduced and eliminated
various expenditures to a lesser extent during the Argentinean economic crisis
of 20012002. Nunes et al. (2011) suggest that conspicuous consumption en-
dures in recessions.
However, if brand rms 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 rms 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 rms than non-brand rms. Consistently, empirical ev-
idence shows that brand support by rms 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, consumersswitch 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 rms 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 nd a good match between product attributes and
consumer preferences (Gourio and Rudanko 2011). This behavior ensures stable
performance of brand rms over time and insulates these rms 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 rm 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: 239240).
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 rms, compared with non-brand rms, are more affected in times
of crises.
This study compares performance of US brand and non-brand rms over the
tough economic times in the late 2000s. We use Tobins Q and ROA and our
sample comprises publicly traded US rms in the top global brand lists of Brand
Finance, BrandZ, CoreBrand and Interbrand, along with brand data from the
Asset4 database. These rms are large and highly visible. Overall, our results sug-
gest that brand rms withstood the crisis better. Compared to the non-brand
rms, Tobins Q is statistically signicantly higher for the brand rms for the years
2008 and 2009. After the crisis, for years 2010 and 2011, Tobins Q and ROA are
also statistically signicantly higher for the brand rms than for the non-brand
rms. The brand rms also recover faster than the non-brand rms. Using their
own performance for the fourth quarter in 2007 as a comparison basis, brand
rms are generally more likely than non-brand rms to outperform in respect of
Tobins Q and ROA as of the fourth quarter in 2009, 2010 or 2011.
As we have mentioned, brand rms are generally larger than non-brand rms.
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 reect differential size effects be-
tween brand and non-brand rms. We address this concern as follows. First, we
control for rm size in terms of the market value of the rms in our regressions.
Second, our brand value measures are scaled by market value. Finally, controlling
rm size in regressions may not be adequate as brand may still reect difference
in size between brand and non-brand rms. Hence, we need to compare brand
rms with non-brand rms that are similar in size. In particular, we only include
size-matched non-brand rms that are comparable in size, along with brand
rms, in two additional sets of matched-sample analyses. The matching is based
either on rm size measured by market value or on a propensity score with regard
to market value, leverage, tangibility and two-digit SIC industries.
Our ndings of the differences in performance between the brand and the non-
brand rms mentioned above are not explained by market value, tangibility,
leverage, the beginning-crisis performance and two-digit SIC industry xed
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 rm performance do not exist during
non-tough economic times and the documented brand-rm 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
© 2016 International Review of Finance Ltd. 2016 359

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