Another example where this is more clearly felt is consumer goods. I always buy Tide - I couldn't tell you why until someone pointed it out to me. When I went to college and had to buy detergent there was easily 10 brands of detergent and Tide felt the safest. I've been watching Tide ads for the better part of 18 years and I feel that had to have some decision into why I paid a 10% premium for the brand.
It gets quantified as "Goodwill" any time a company is valued (acquisition, IPO, investment, etc.) or releases financial statement (it's on the balance sheet).
Coca-Cola is coming up a lot in this discussion. They have Goodwill of $17.7 billion, along with additional intangible assets of $11.2 billion. That $29 billion of Goodwill makes up about 32% of Coke's total assets of $90 billion.
The method that GAAP chooses is to move the $9B from cash to goodwill (assuming a cash transaction), which is a transfer from one type of asset to another. The alternative that I think you're suggesting is to move it from cash to expenses for the period in question. There's not necessarily a right answer to this question, accounting conventions are subjective, but I think most people think that the market premium you pay in an acquisition is more like acquiring an asset that will yield future business profits than an expense which, now that you've paid it, will have no future utility to the business. And it's easy enough to look at it the other way if you care to: the goodwill is reported in the balance sheet, and the cash flow statement shows the huge outlay of cash.
"The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists."
The first three are directly tied to advertising and brand-building. You call it "BS" for some reason (you seem not to believe in it), but it is a real thing and we have financial methods to account for it.
The balance sheet is typically abbreviated as BS, so a BS account is a balance sheet account.
It's been a while since I've had anything to do with goodwill, but if I remember correctly it's most commonly the difference in the assets net market value and the purchase price of a company. So if company A buys company B, which has assets of $50 for $100, then they'll add $50 in goodwill to account for the difference.
This is, of course, a simplification as I'm sure goodwill is regulated under GAAP/IFRS. But it does mean that you can't use goodwill to accurately estimate the effects of brand advertising as there could reasons other than brand marketing for a company being traded above its assets' fair market value at the time of the sale.
Goodwill is an asset and we frequently see it monetized. It isn't just a made-up number to make things balance, it is a stand-in for particularly "hard-to-value" assets like perception. Ford famously licensed their logo and built a $1 billion business [0]. Prior to the licensing deal, that value would have only been captured as Goodwill on Ford's balance sheet. It is the value of the blue shield that they have built over decades of company performance and advertising.
==But it does mean that you can't use goodwill to accurately estimate the effects of brand advertising as there could reasons other than brand marketing for a company being traded above its assets' fair market value at the time of the sale.==
Goodwill is a combination of many things, one of the largest pieces being brand value. Publicly traded companies generate a Goodwill number each time they release a financial statement.
[0] https://www.forbes.com/sites/dalebuss/2012/05/24/ford-has-bu...)
Could you go over some of them or point to some resource? I'd love to learn more!
== 3 methods for valuing intangible assets [1]:
1. Under the excess earnings method, valuators forecast the after-tax cash flow that the asset is expected to generate. This method can be the most complex (and costly), but is also usually the most accurate.
2. Under the relief from royalty method, valuators forecast the revenue that the asset is expected to generate, then apply a comparable industry royalty rate and subtract taxes.
3. Under the cost method, valuators determine the cost to develop the asset (i.e. labour and materials), plus a reasonable return on that investment. This method is often used for early-stage companies where forecasts are difficult to prepare or in instances where information doesn’t exist to use the first two methods.
== Financial Valuation: Applications and Models [2]
"Coverage includes state-of-the-art methods for the valuation of closely-held businesses, nonpublic entities, intangible, and other assets, with comprehensive discussion on valuation theory, a consensus view on application, and the tools to make it happen."
[0] https://blogs.cfainstitute.org/investor/2019/01/11/a-renaiss...
[1] https://www.bdc.ca/en/articles-tools/change-ownership/sell-b...
[2] https://www.wiley.com/en-us/Financial+Valuation%3A+Applicati...
Now, to be clear, this isn't the same thing as saying that all TV advertising has a positive ROI. It doesn't, I would guess that most is negative. But it is also true that there are a small number of firms who have made it work (as in most things, 80/20), and most of this gain is not easily measurable over discrete periods...it is continuous investment over decades.
But the market has clearly changed. People are spending their time doing different things. I think TV advertising time at certain periods is maybe cheap, but almost all the rest is overvalued junk. AdTech online isn't particularly well developed for this kind of campaign, online advertising isn't particularly effective either (the move to intention doesn't fit the long-term strategy that FMCG and similar big buyers of TV ads have) but it is probably more effective. Maybe if TV costs go down this will change, but...I don't know (radio and door-to-door is undervalued imo).
When I walk into the store there are a very limited number of colas on offer: a can of pepsi, a can of coke, etc.
What exactly is the advert for? My choice has largely been made.
I think a lot of the long-term bonus of ads is to simply build a moat that other competitors find difficult to surmount.
Many major retailers will require that new brands invest a certain amount of money in advertising product to their region/market before stocking the product. It's also common to 'lease' shelf space to manufacturers.
It was a super niche product they were making but were up against a couple products that I've at least seen ads for online. I think, theoretically, if those other companies didn't have a brand presence then perhaps my friends snacks would have had a slightly better shot at staying on the shelfs. However, from the other products data they may have seen no short-term gain from their ads.
2. People who don't drink soda need to get hooked somehow!
3. Increasing consumption. Think about the "Got Milk?" campaigns of the 90s - they weren't saying "drink XYZ brand milk", they were looking to increase milk consumption.
I think #3 is probably the biggest factor, tbh. That's why you see ads for cotton, milk, beef, avocado, etc.
The same applies to the others you named: sure there are brand, but there is something large below the brand that doesn't care what brand, only that you are eating.
Many people are unaware that a given product exists at all, and others are unaware of all its potential uses; even occasional users can sometimes forget that they liked a product or found it useful.
One of the ways that advertisers and marketing people stay employed is they say that the output of their effort and money spent is not quantifiable.