The Power of Celebrity

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the years the ad industry has clung tightly to the belief that celebrities sell products. A notable example is the winning 14 year plus relationship that (NASDAQ: PCLN) has had with William Shatner. Then there is a notable loser, the Nike (NYSE: NKE) ad campaign with disgraced golfer Tiger Woods.

A study called “The Economic Value of Celebrity Endorsements” co-authored by associate professor at Harvard Business School Anita Elberse and Barclays Capital analyst Jeroen Verleun from July 2011 studying stock price movements and sales figures for brands with celebrity athlete endorsements said,” The results show that an endorsement strategy generally leads to increased sales for the focal brands, both in absolute terms and relative to their competitors.”

One of the more interesting points is that the stronger the brand, i.e the more market share it has in its category, that  for each 10% increase in market share the value of a celebrity endorsement yields $25,000 extra in weekly revenue. Results are especially strong for partnerships that involve top consumer goods brands and top athletes-think Wheaties cereal.

The final conclusion, “In general enlisting the help of celebrity endorsers pays off.”

This dovetails with what Madison Avenue has been saying as well as Malcolm Gladwell in his book, “The Tipping Point” which says there is a very tiny but compelling group of individuals who are “influential.” Certainly celebrities would be influencers but also people who are social, respected, and voluble about their opinions. This whole theory was based on psychologist Stanley Milgrim’s work that propagated the “Six Degrees of Separation” theory (or more popularly the Kevin Bacon game).

A principal research scientist at Yahoo, Duncan Watts, has been disputing this with what he calls a Big Seed theory that ordinary people, not necessarily the movers and shakers of their community, can by what he calls a “pass around principle” generate brand interest and adoption. This other advertising theory has cracked Madison Avenue into two warring factions. The pass around principle is part of what Watts says is needed for a trend to go viral. He also notes the process is much more random than Mad Men would like.

It also explains why companies think they have to have millions of Facebook likes and run sponsored stories. And this is why so many people bought into the Facebook IPO.

The smartest companies would straddle both worlds and hire celebrities but hedge their bets with viral word of mouth campaigns with top Klout or Kred influencers or top bloggers, ordinary people who are extraordinarily social online and have a disproportionate effect on influencing average consumers like themselves.  Unilever and Kraft Foods have used ‘ordinary people’ campaigns to great effect with the Dove soap Real Women and Kraft’s ”Real Women of Philadelphia” for their cream cheese.

What companies have to watch out for is celebrities gone wild. In June, the University of Colorado at Boulder announced results of a study on negative transference to a brand by misbehaving celebrity endorsers.  Associate professor Margaret Campbell of their Leeds School of Business flatly stated, “In three different studies negative celebrity associations always (italics mine) transferred to an endorsed brand.”

She noted that Accenture quickly dropped Tiger Woods and cut their losses while Nike hung on grimly. Luckily for Priceline, Mr. Shatner at 81 is unlikely to indulge in scandalous shenanigans.

Some celebrities are so noxious that companies pay them not to use their brands as Abercrombie & Fitch did with Jersey Shore reality star Mike “The Sitch” Sorrentino not to wear their preppy brand as it was hurting their brand image. Nice work if you can get it.

How have Nike and Priceline fared as stocks?

Nike reported after the bell on September 27 selling off after hours after reporting earnings per share dropped to $1.23 from $1.36 the year before as well as reporting margin contraction for five quarters and a decline in future orders, especially from China. Before reporting its P/E was 20.30 and the yield was 1.50%. The 2009 Tiger Woods scandal is far away but Nike still plans a holiday blitz featuring athlete Lebron James sneakers at $270.

As for Priceline the company has made ten bagger shareholders out of early investors when they started the Shatner campaign. The stock has pulled back from its high of $774.96 but is still up 30.14 % over 52 weeks. Priceline has a P/E of 26.30 and is still the big name in online travel but is facing more competition from Orbitz Worldwide and Expedia.

What About Facebook?

Facebook (NASDAQ: FB) should theoretically benefit from Watts’ philosophy but the holy grail of going viral doesn’t just happen unless conditions are right. Like a real life viral epidemic, there must be a compromised immune system, the opportunity to be infected and the opportunity to infect. Unless the society is susceptible the trend won’t take hold, notes Watts. As I searched how many people click on Facebook ads I came upon a comment in by John Marsland of Zynga Marketing from September 25, 2010 that roughly estimated a rate of 4% more or less. Even doubling the amount of Facebook users for 2012 and doubling the rate would be less than a 10% click through rate.

At a P/E of 70.31 and only one earnings release under its belt, analyst after analyst has said Facebook has to monetize by improving mobile. On September 27, Facebook may have finally figured out one way to monetize by making available a feature called Facebook Gifts which allows users to send gifts, chocolate, gift cards even Uber driver credit to their Facebook pals. It’s already available on Android with iPad and Iphone soon to follow. This real time etailing initiative is likely to herald a shift to headwinds that lift Facebook out of the doldrums. Its May 18 purchase of Karma, a gifting startup, for $80 million may finally be vindicated and give analysts and shareholders something to applaud and diffuse attention away from click through rates.

The Final Takeaway

Famed department store owner John Wanamaker once said, “Half of advertising doesn’t work. We just don’t know which half.” With social media, viral videos, celebrities gone crazy, and more Madison Avenue still doesn’t either. Just pick companies with good fundamentals and don’t worry so much about their ads. If Watts is right the good brands will still outperform and get something even ad money can’t buy, good word of mouth.

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leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Nike, and Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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