The importance of brands and the brand-oriented industry in Germany

3

It’s all about the brandGerman brand-based companies are doing better than ever – and a study by the Markenverband (German Brands Association) and McKinsey & Company shows what needs to be done to ensure that things remain this way. The key finding: it is not prices that are most important, but product safety, brand trust, and marketing effectiveness.

Germany’s brand-based companies were very concerned that the 2008/2009 crisis would deliver a new blow to the industry in the wake of the “Geiz ist geil“ (greed is good) trend. That fear was unwarranted: consumers did not turn away from brands, they increasingly chose their products based on quality and innovation. Today, most brands are looking to the future optimistically – despite the volatile environment – and are doing so without losing sight of the challenges posed by increasing competition and price pressure.

The latest study on the importance of brands and the brand-oriented industry in Germany has just delivered these results. Conducted by the Markenverband and McKinsey & Company for the fifth time since 1999, it reassesses the economic benefits of brands and the prospects of the industry as a whole. Beyond evaluating official statistics, the study surveyed top managers from German brand-based companies in the consumer goods, durable goods, and services industries. Thanks to its comprehensive approach, it tracks the development of the brand-oriented economy over the past 12 years like no other.

Figures on recent economic developments show how well the German brand-oriented economy is currently positioned. German companies generated almost EUR 900 billion in 2010 with brand-name products and services. That figure corresponds to approximately 80 percent of German exports or the annual revenues in the retail, transportation, hospitality, information, and communication industries combined. In the manufacturing sector, the brand business grew at a continual rate of 3.4 percent each year to EUR 457 billion from 2001 to 2010. With this, the sector generated half of all brand revenues in 2010. Accounting for the remaining brand revenues are financial services at 20 percent, transportation and telecommunications at 15 percent, energy provision at 11 percent, and publishing, film, and radio at 3 percent (Exhibit 1).

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Courageous brand-based companies

Subjectively, the financial and economic crisis seems to have done little damage to the brand-oriented industry (Exhibit 2). Some 78 percent of managers surveyed indicated that their overall business situations were only somewhat or not at all affected by the crisis. Nearly all have kept prices more or less stable. Thus, German brand-based companies are part of a trend: for 10 years, the consumer goods sector has done a relatively good job of overcoming economic fluctuations.

One reason for the positive outcome may be that brand-based companies did not let themselves be forced into the defensive during the crisis. Instead of slashing budgets as many other industries did, they kept investments in marketing and product development relatively stable. Some 84 percent of brand-based companies spared little on communi-cations in 2008 /2009; in product development that figure was as high as 93 percent.

Germany's brand-oriented industry has annual revenues of almost EUR 900 billion

SOURCE: IHS Global insight; German Brands Association; German Federal Office of Statistics; McKinsey

MODEL CALCULATION,2010

894

28

457

Total brand revenues

Publishing, film, radio

Energy supply 98

Transportation andtelecommunications 134

Financial services 177

Manufacturing

Revenues by sectorEUR billions

Exhibit 1

The 2008/09 crisis did little to damage brand-based companies

SOURCE: German Brands Association; McKinsey

Product development "We made serious cuts to our product development expendi-tures during the crisis"

100

Business situation "The crisis had strong impact on our company" 100

Somewhatdisagree

Stronglydisagree

Communications "We reduced our spending considerably during the crisis" 100

Price "We lowered our pricesduring the crisis" 3461

23 55

3648

Survey resultsRespondents, percent

2568 100

Exhibit 2

5

Such prudence appears to be paying off: more than three quarters of those surveyed estimate that their price levels are higher today than before the crisis. At least 61 percent grew contrary to the general trend and were even able to expand their market share. The brand-oriented economy’s share of Germany’s total gross value added reached about 14 percent in 2010. In the manufacturing sector, it totaled 29 percent – significantly more than during the precrisis period (24 percent in 2007). In absolute figures, the gross value added in manufacturing amounted to EUR 135 billion, almost as much as the engineering and chemicals sectors combined. In the service sectors, the brand-oriented economy contributed approximately 9 percent to gross value added.

In line with this, the brand-oriented economy also plays a strong role in Germany’s labor market and in public finance. Currently, 11 percent of all employees work for brand-name companies – in manufacturing, it is 24 percent and 7 percent in the service industries. Particularly in manufacturing, numerous jobs have been created: since 2007, the number of workers has risen 19 percent to 2.1 million. Summing up all the taxes and social security contributions for these companies, their employees, and their customers, Germany’s brand-oriented economy generated 13 percent of all public revenues from taxes and social insurance contributions (Exhibit 3).

Success in exports continues to be the primary contributor to growth in Germany’s brand-oriented economy. Even though Germany did lose its title as export champion in 2009 – currently ranking third behind China and the United States – foreign revenues are still on the rise for German brand-name companies. In the manufacturing industry, export revenues increased 5.5 percent on average each year since 2001. For comparison: the average annual domestic growth rate was 1.6 percent during the same period (Exhibit 4). Overall, brand-name products and services account for 22 percent of all German exports, equivalent to EUR 260 billion in revenues.

Positive economic developments and strong economic positioning lend the industry self-confidence. From the corporate perspective overall, brands are doing well. Three fourths of respondents see a clear competitive advantage in them. More still (78 percent) are convinced that their brands have gained strength over the past two to three years.

The brand-oriented economy accounts for approximately 13% of all public revenues in Germany

SOURCE: German Federal Ministry for Labor and Social Affairs; German Brands Association; German Federal Office of Statistics; McKinsey

EUR 125.5 billion≙ ~ 13% of all public revenues

Companies in the brand-oriented economy (taxes and social insurance contributions)

Employees of companies in the brand-oriented economy (taxes and social insurance contributions)

Consumers of brand-name products and services (taxes) 41.8

46.9

36.8

EUR billions

MODEL CALCULATION,2010

Exhibit 3

6

From a global standpoint, however, the positioning of brand-based companies is no longer going unchallenged. In emerging markets, companies are already fending off growing competition from local players. Gone are the days when a large consumer goods manufacturer could establish new product categories at will in given country to then dominate the market. The success that Procter & Gamble enjoyed a few years ago in China with their hair-care products would be nearly impossible to replicate in today’s fast-moving consumer goods segment. Chinese brands now claim two thirds of the local shampoo market. Even a world-renowned brand like Coca-Cola has a market share of just 16 percent (Exhibit 5).

Exports remain the key driver behind brand success

SOURCE: German Brands Association; German Federal Office of Statistics; McKinsey

Domestic revenues+1.6% p.a.

Foreign revenues+5.5% p.a.

04 072001 2010

Index 100

150

170

130

108

98

134

106

162

115

Growth in manufacturing sector revenuesPercent, 2001 = 100

MODEL CALCULATION

Exhibit 4

In emerging countries, Western manufacturers of consumer goods have to deal with strong local competition

SOURCE: Handelsblatt

10

12

16

11

21

17

18

15

India

China

Russia

Brazil

FMCG sector revenues, 2005 - 09CAGR1 growth, percent

Example: China – non-alcoholic beveragesMarket share, percentLeading local providers

Top 50 consumer goods manufacturers worldwide

Coca-Cola

TingyiWahaha

Other

EUR 125 billion

16

116

67

1 Compound annual growth rate (average annual growth rate)Exhibit 5

7

These examples show that local brands have made great strides in recent years to catch up with products from the Western world. Many are now market leaders in their respective countries. This new balance of power sets new ground rules for the brand identities of German companies abroad. In the future, Western brand-based companies will need to focus on their traditional areas of strength in emerging markets in the future – namely, consistency in customer orientation and stringent brand management across all channels.

Quality-conscious customers

The fact that a majority of brands have gained strength in recent years can be pre dom-inant ly attributed to the changes in consumer behavior. Low price is no longer the primary criterion influencing the purchase decision. Increasingly, quality consciousness is playing a greater role. According to GfK studies, 49 percent of consumers focus primarily on product quality when making purchases – seven years ago, only 41 percent did so. The new trend has a direct positive effect on the brand. According to Allensbach surveys, almost 36 percent of Germans claim that they are once again open to considering brand products. Six years earlier, when the “Geiz ist geil” (greed is good) phase peaked, that figure was 13 percent lower (Exhibit 6). One reason for this turnabout is certainly the numerous food scandals, but also the sense of disillusionment among consumers regarding the low quality of alleged bargain products.

Food retailing formats developing in Germany reflect the new orientation toward quality. The seemingly unstoppable rise of discounters has ground to a halt; recently, these players even lost market share. Supermarkets and other full-line retailers, in contrast, are making headway: since 2007, their sales have increased by 9 percent (Exhibit 7).

Since 2005, consumers have been reorienting themselves more toward brands

SOURCE: Allensbacher market and advertising analysis

1999 2001 03 2010090705

30

40

"It's not worth it"

"It's usually worth it"35

"Are brand-name products worth buying?"

1 Age 14 and over

German1 attitudes on buying brand-name productsPercent

Exhibit 6

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Brand communication: Premium beats price

In the course of this new consumer behavior trend, the topic of price has taken a back seat among brand-based companies. Despite this, 52 percent of managers surveyed are convinced that price as a purchasing factor has become more important in the past few years (2006: 46 percent, 2008: 54 percent). Nevertheless, when looking ahead, the figures look a bit different: only 39 percent say that price will play a – largely minimal – role in their future brand communications, while 61 percent say it will play no role at all (Exhibit 8). It fits then that the Saturn Media Group, whose “Geiz ist geil” (greed is good) campaign characterized an entire era is now proclaiming an “end to pricing madness” in their most recent advertising campaign.

Revenue by formatEUR billions

Quality-oriented in retail, too: supermarkets win market share

1 Calculated based on GfK Consumerscan, FMCG receipt total

SOURCE: GfK; McKinsey

2007 08 09 20101

Drugstores

Self-service department stores

13

34

144 13

36

15213

35

152 15413

35

Full-range food retailers 35 36

+9%37 38

Discounters 62 67 67 68

Exhibit 7

Many brand-based companies intend to focus less on price in their future communications

SOURCE: German Brands Association; McKinsey

Survey resultsRespondents, percent

"How significant will price be compared with other purchasing factors in your advertising/ communications?"

2008 84646

2011 114148

HighLowNone

Outlook 53461

Significance

Exhibit 8

9

Premium brands are also benefitting from this new quality consciousness on the part of consumers. Since 2005, the segment grew more than 10 percent, while budget brands stagnated. At the same time, value-added brands are making massive gains of 28 percent in the classic brand segment. The mid-level brands are suffering as a result, and their overall market share has shrunk from 40 to less than 35 percent since 2005 (Exhibit 9).

Strong growth in value-added brands is creating challenges for brand-based companies. Some 95 percent of interviewees considered the topic important. Most notably, large retail chains are using the opportunity to bring a growing number of house brands to the market in order to rapidly achieve high customer reach. Still, retailers are having difficulty creating quality store-brand products and convincingly communicating this quality to consumers. Low current repeat-purchase rates reflect this. Increasing these rates would require comprehensive and systematic brand management. This is where the brand-oriented industry is far ahead, and this head start should be used and developed further.

Value-added and premium brands are on the rise

SOURCE: GfK, based on 284 product groups

Market share development by brand format Percent, 2005 - 10

07062005 20100908

Mid-level brands 35.236.938.740.1 34.935.6 -13.0%

Entry-level brands 26.325.724.0 25.1 25.124.8 +4.6%

Value-added brands +28.4%8.8 9.1 9.3 10.2 10.9 11.3

Market leader +3.8%18.3 18.7 18.8 18.8 19.0 19.0

Premium brands +10.2%8.8 8.4 9.3 9.5 9.7 9.7

Exhibit 9

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Five areas for action

The results of the study to date clearly show that brands have gained strength in Germany, and the growth outlook appears favorable. But what can brand-based companies do to make the most of the growing consumer affinity for quality products, while keeping their brands on track for success – especially considering that the economic situation will remain volatile for some time? Five key areas for action are emerging – ones that companies should increasingly focus on in the future. Success in these areas will prove decisive in determining whether brands can continue to reach customers, develop new target groups, and remain profitable and competitive over the long term.

Further improve product safety and build brand trust

Food-related scandals, recalls, and critical reports have considerably changed what consumers value. Instead of luxury or innovation, safety and trust are now central to brand promises. These values rank near the top of the scale with regard to issues that over 90 percent of customers believe will be increasingly important in the future (Exhibit 10).

The new customer desire for security is advantageous for brands – after all, quality is one of the key arguments for purchasing these products. It is no coincidence that product groups for which trust is important – be it facial cream, toothpaste, shampoo, or coffee – traditionally have a high brand share. Brands interested in profiting from the increasing level of the consumer need for assurance and trust should, however, respond professionally to customer questions, desires, and problems. More and more consumers look for answers online and share their product experiences via social networks. Companies need to have a presence there, while driving brand communications actively and systematically. One thing particularly important in the online world is that word-of-mouth reaches thousands of users in an extremely short period of time. If the tone of these communications is negative, the brand is endangered and permanent damage could result.

SOURCE: McKinsey

More importantEquallyimportant

Lessimportant

100%

Responsibility 50 43 7Innovation 43 52 5Solidarity 40 46 14Power 33 49 18Luxury 23 42 35Adventure 22 45 33

Trust 50 43 7

Safety/security 68 30

Product safety and trust are the values most important to consumers according to brand-based companiesSurvey resultsRespondents, percent

"How will the certain values change in significance for consumers in the future?"

2

Exhibit 10

11

Increase marketing ROI

With regard to marketing budget allocation, potential-oriented distribution is crucial for 87 percent of respondents. The key here is to view expenditures as investments in future opportunities for the company, rather than as a cost block that is simply updated year after year according to sales then distributed across brands and categories. Any company interested in growing first needs to recognize growth potential (“pockets of growth”) in the various brands, categories, channels, and regions, and then promote growth using marketing resources to their full potential (Exhibit 11).

The second most important marketing topic (as indicated by 70 to 80 percent of respondents) is optimizing the media mix. This expenditure is an unresolved issue for many brand-based companies, since more and more media are available both on- and offline. This makes comparison difficult in terms of efficiency and effectiveness. Thus, optimization is often limited to sporadic measurements coupled with trial and error. Depending on the availability of data, pragmatic solutions can be achieved by systematically comparing the reach, cost, and quality of different marketing investments, while identifying the most effective among them. Two points are important here: capturing the individuals actually addressed within the target group (net reach), and taking full campaign and media costs into account. This includes development and production costs along with possible costs to build up the channel.

The effectiveness of individual instruments should always be differentiated with respect to specific marketing objectives. In this way, some instruments will be primarily suitable for promoting sales, others are more useful in brand building. So-called media mix modeling makes it possible to derive the sales impact of individual activities based on statistical, fact-based analyses. The results can then flow into optimizing the media mix.

Marketing budget distribution: where do investments pay off?

SOURCE: McKinsey

The lower the level of investment, the greater the growth potential

Potential investment classes

Geography

Channel

WWW

Category

Potential investment levels

ContinentCountry

RegionCity

Etc.

IndustrySector Umbrella

brand Sub-brand Product

lineEtc.

Channel type

FormatAccount

StoreEtc.

Exhibit 11

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Many brand-based companies still do not use such differentiated techniques; approximately half are relatively dissatisfied with their marketing-related auditing. Only 40 percent comprehensively measure the impact of their marketing activities. Some 35 percent implement selective advertising effectiveness checks, and one fourth do not check at all or do so only sporadically. The increasing variety of media instruments, target group profiles, and products necessitates systematic marketing auditing based on a clear measurement and optimization rationale.

Rely on digital media

Companies interested in directly communicating with, winning over, and retaining customers will not get around using online advertising. According to Thomson Media Control advertising statistics from 2010, successful brand-based companies already invest 176 percent more in advertising than their competitors. For online advertising, they spend 877 percent more. Customers also reward them for this: top brand Facebook sites have 43 percent more fans. Top brands outperformed competitors by 63 percent in online brand searches. And users with their own Internet access visit top brand Web sites one and a half times more frequently than they visit those of other brands – excluding multiple visits.

In the future, brand success online will be driven predominantly by the ability to select the right channels and to use these in both a creative and a customer-focused way. Appropriate analytical instruments to achieve this already exist, and these can also be exploited in the digital world to compare advertising impact based on reach, cost, and effectiveness. Companies with online experience already use these approaches to adjust their media mix; for Internet newcomers, such analytical tools will aid in selecting the most effective and profitable channels.

Better understand customer data

In industries particularly close to end customers, economic power will increasingly depend on how well a company succeeds in managing highly complex data. Wal-mart alone already processes one million customer transactions per hour in databases with capacities exceeding 2,500 terabytes – the approximate equivalent of 250 times the amount of all printed information in the United States Library of Congress.

Given this inundation of data, it is becoming increasingly important to distill relevant insights and ensure these consistently flow into decision making. Tesco continues to be a pioneer in this area. In 1994, the British retailer introduced the “club card” loyalty program. Since then, it has established an organization that is driven above all by consumer insights – the knowledge of customer behavior and preferences. Based on this, the company was able to increase its market share by more than 14 percentage points. Possible uses for such a data pool are limitless. They range from targeted, direct marketing and pricing to product range and product design. In each of these areas, comprehensive consumer insights could contribute considerably to gaining a competitive edge (Exhibit 12).

Show confidence

In the current Euro crisis, the economic environment will once again prove difficult for brand-based companies. The risk of increasing volatility at the market and

13

consumer levels has rarely been as high as it is today. Companies have now succeeded in guiding their brands to new strength based on careful brand management and by skillfully playing their brands’ trump cards. Consistently adhering to quality – an important factor in the competitive arena – has paid off just as much as it has to proactively invest in marketing, product development, and new talent.

Steadfast during the previous crisis and armed with unwavering confidence – even countering the purported trend by consistently relying on the brand as a recipe for success – Germany’s brand-oriented industry has established a solid foundation to map a successful course into the future. These players are better prepared than ever to handle future fluctuations, also thanks their latest experiences. If recent turbulence has taught the industry anything, then it’s that courageously moving forward and investing in brand management, product development, and quality will result in new strength. In a world of constant change and in which nothing seems certain, brands anchor stability – both for consumers and the economy as a whole.

SOURCE: McKinsey

Generate insights …

… make decisions …

Data

Analyses

Software

Team

Processes

Strategy

… and create advantages – pricing example

Optimalpricing

Set consumer price

Implement price com-mercially

Category and portfolio pricing1

Retail investment manage-ment

4

Price and range architecture (brand, pkg., channel, region)

2

Promotion management3

Price and customer manage-ment implementation

5

An improvementof 1% for one of the following levers increases profits by:

Price 8.5%

Variable costs 5.5%

Volume 2.9%

Fixed costs 1.9%

Decision-relevant insights generated from large amounts of data create measurable advantages

Exhibit 12

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Study initiators

The German Brands Association

The Markenverband e.V. (German Brands Association) represents the interests of the brand-oriented economy in Germany. Founded in 1903 in Berlin, the association now has almost 400 members responsible for brand sales of more than EUR 300 billion in consumer goods and EUR 200 billion in services throughout Germany. The association is the largest of its kind in Europe.

Member companies are active players in the food and beverages, pharmaceuticals, and services sectors. They include Beiersdorf, Hugo Boss, Coca-Cola, Deutsche Bank, Deutsche Post, Falke, Nestlé, Procter & Gamble, Dr. Oetker, Volkswagen, along with numerous other renowned companies.

Markenverband e.V. (German Brands Association) Unter den Linden 42 10117 Berlin Tel.: 030 206168 -0 Fax: 030 206168-777 www.markenverband.de

McKinsey & Company, Inc.

McKinsey & Company is the leading global top management consulting firm. Established in the United States in 1926, the firm currently operates more than 90 offices in 50 countries. Approximately 8,500 McKinsey consultants around the world advise companies and institutions on key issues in strategy, organization, and operational excellence.

In its generalist approach, McKinsey combines comprehen-sive expertise in all relevant company-related questions with competent recommendations for top management. McKinsey not only consults the majority of the 100 largest industry and service companies around the globe, but also fast-growing medium-sized enterprises, government agencies, and private and public institutions. Some 26 of the top 30 DAX companies benefit from McKinsey’s expertise.

McKinsey & Company Kennedydamm 24 40027 Düsseldorf Tel.: 0211 136-40 Fax: 0211 136-4700 www.mckinsey.de

Authors

Dr. Thomas Bauer is a Senior Expert in McKinsey & Company’s Munich office. He specializes in marketing strategy, brand management, and marketing ROI.

Dr. Jesko Perrey is a Director in McKinsey’s Düsseldorf office and head of the firm’s German Marketing & Sales Practice. He specializes in marketing strategy and brand management.

Dr. Thomas Tochtermann is a Director of McKinsey’s Hamburg office and has more than 20 years of experience advising companies in the consumer goods industry on topics such as strategy, organization, marketing, and sales.

Contact: Adriana Clemens Corporate communications adriana_clemens@mckinsey.com

Contact: Johannes Ippach Manager, Press and Public Relations j.ippach@markenverband.de

© McKinsey & Company, February 2012