The importance of brands and the
brand-oriented industry in Germany
It’s all about the brand
German 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).
3
Germany's brand-oriented industry has annual revenues
of almost EUR 900 billion
MODEL CALCULATION,
2010
Revenues by sector
EUR billions
457
Manufacturing
177
Financial services
Transportation and
telecommunications
134
98
Energy supply
Exhibit 1
Publishing, film, radio
28
Total brand revenues
894
SOURCE: IHS Global insight; German Brands Association; German Federal Office of Statistics; McKinsey
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.
The 2008/09 crisis did little to damage brand-based companies
Survey results
Respondents, percent
Exhibit 2
4
Business situation
"The crisis had strong impact
on our company"
Communications
"We reduced our spending
considerably during the crisis"
Price
"We lowered our prices
during the crisis"
Product development
"We made serious cuts to our
product development expenditures during the crisis"
SOURCE: German Brands Association; McKinsey
23
55
48
100
36
61
68
Strongly
disagree
100
34
25
Somewhat
disagree
100
100
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).
The brand-oriented economy accounts for approximately
13% of all public revenues in Germany
MODEL CALCULATION,
2010
EUR billions
Consumers of brand-name products
and services (taxes)
41.8
Employees of companies in the
brand-oriented economy (taxes and
social insurance contributions)
46.9
Companies in the brand-oriented
economy (taxes and social insurance
contributions)
36.8
EUR 125.5 billion
≙ ~ 13% of all public
revenues
SOURCE: German Federal Ministry for Labor and Social Affairs; German Brands Association; German Federal Office of Statistics; McKinsey
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 selfconfidence. 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.
5
Exports remain the key driver behind brand success
MODEL CALCULATION
Growth in manufacturing sector revenues
Percent, 2001 = 100
170
162 Foreign revenues
+5.5% p.a.
150
134
130
108
98
Index 100
2001
Exhibit 4
115 Domestic revenues
+1.6% p.a.
106
04
07
2010
SOURCE: German Brands Association; German Federal Office of Statistics; McKinsey
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).
In emerging countries, Western manufacturers of consumer goods
have to deal with strong local competition
FMCG sector revenues, 2005 - 09
CAGR1 growth, percent
Example: China – nonalcoholic beverages
Market share, percent
Top 50 consumer goods manufacturers worldwide
Leading local providers
15
16
Russia
18
Exhibit 5
6
17
10
1 Compound annual growth rate (average annual growth rate)
SOURCE: Handelsblatt
67
Other
6
11
Wahaha
Tingyi
16
Coca-Cola
12
India
China
EUR 125 billion
11
Brazil
21
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 pre­dom­
inant­ly 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.
Since 2005, consumers have been reorienting themselves
more toward brands
German1 attitudes on buying brand-name products
Percent
"Are brand-name products worth buying?"
40
"It's usually worth it"
35
"It's not worth it"
30
1999
2001
03
05
07
09 2010
1 Age 14 and over
SOURCE: Allensbacher market and advertising analysis
Exhibit 6
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).
7
Quality-oriented in retail, too: supermarkets win market share
Revenue by format
EUR billions
144
13
Drugstores
Self-service department
stores
34
152
13
152
13
154
13
36
35
35
36
37
38
+9%
Full-range food retailers
35
Discounters
62
67
67
68
2007
08
09
20101
1 Calculated based on GfK Consumerscan, FMCG receipt total
Exhibit 7
SOURCE: GfK; McKinsey
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.
Many brand-based companies intend to focus less on price
in their future communications
Survey results
Respondents, percent
"How significant will price be compared
with other purchasing factors in your advertising/
communications?"
2008
46
46
8
2011
48
41
11
61
Outlook
None
34
Low
Significance
Exhibit 8
8
SOURCE: German Brands Association; McKinsey
5
High
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).
Value-added and premium brands are on the rise
Market share development by brand format
Percent, 2005 - 10
Premium brands
8.8
8.4
9.3
9.5
9.7
9.7
+10.2%
Market leader
18.3
18.7
18.8
18.8
19.0
19.0
+3.8%
Mid-level brands
40.1
38.7
36.9
35.2
35.6
34.9
-13.0%
Value-added brands
8.8
9.1
9.3
10.2
10.9
11.3
+28.4%
Entry-level brands
24.0
25.1
25.7
26.3
24.8
25.1
+4.6%
2005
06
07
08
09
2010
SOURCE: GfK, based on 284 product groups
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 brandoriented industry is far ahead, and this head start should be used and developed further.
9
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).
Product safety and trust are the values most important to consumers
according to brand-based companies
Survey results
Respondents, percent
"How will the certain values change in significance
for consumers in the future?"
Safety/
security
Equally
important
More important
68
Trust
30
50
Responsibility
50
43
Innovation
43
7
43
7
5
46
33
Power
2
52
40
Solidarity
Less
important
14
49
18
Luxury
23
42
35
Adventure
22
45
33
100%
Exhibit 10
SOURCE: McKinsey
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.
10
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).
Marketing budget distribution: where do investments pay off?
Potential investment classes
Potential investment levels
Geography
Continent
Industry
Category
Channel
type
Channel
WWW
Country
Sector
Format
Region
Umbrella
Subbrand
brand
Account
City
Product
line
Store
Etc.
Etc.
Etc.
The lower the level of investment,
the greater the growth potential
SOURCE: McKinsey
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 onand 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.
11
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
12
Decision-relevant insights generated from large amounts of data create
measurable advantages
Generate insights …
… and create advantages – pricing example
Data
Analyses
Software
Team
… make decisions …
2 Price and range architecture
(brand, pkg., channel, region)
3 Promotion management
Optimal
pricing
4 Retail investment management
Implement
price commercially
Processes
Strategy
1 Category and portfolio pricing
Set
consumer
price
An improvement
of 1% for one of
the following levers
increases profits
by:
5 Price and customer management implementation
8.5%
Price
Variable costs
Volume
Fixed costs
5.5%
2.9%
1.9%
Exhibit 12
SOURCE: McKinsey
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.
13
Study initiators
The German Brands Association
McKinsey & Company, Inc.
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.
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.
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.
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.
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
Kennedydamm 24
40027 Düsseldorf
Tel.: 0211 136-40
Fax: 0211 136-4700
www.mckinsey.de
Contact:
Johannes Ippach
Manager, Press and Public Relations
[email protected]
Contact:
Adriana Clemens
Corporate communications
[email protected]
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.
14
© McKinsey & Company, February 2012