Executive Summary
Social media empowers the consumer and is emerging as a disruptive force. Social media awareness and usage is growing rapidly, with now over half of consumers and Fortune 500 companies active on Facebook.
As the power shifts from the company to the consumer, we believe customer relationships will be the new driver of firm value, with social media exposing the depth of a company’s customer relationships and accelerating the value creation/erosion process.
We believe the greatest investment opportunity will come from identifying companies with “heart and soul” that are ideally positioned to leverage their high level of brand enthusiasm and grassroots community marketing efforts through social media. We caution investors against the “empty shells” that are at risk of cracking as social media exposes the inauthenticity and shallowness of their relationships with customers, employees, and other
stakeholders.
We developed an analytical framework for investors to assess a company’s level of “heart” and “soul” by bringing together social media and financial data to come up with the following four metrics: 1) Facebook “likes” per store; 2) Twitter “followers” per store; 3) Facebook “likes” to website visitors; and 4) advertising spend per Facebook “like”. To gain further insight, we recommend investors pore over a company’s Facebook Page to assess its level of sales tactics, brand enthusiasm, and community engagement.
We believe it is worth tracking a company’s growth rate in the number of Facebook “likes” but until this starts to plateau, we do not believe there is any merit in attempting to establish benchmark valuations. However, we believe it is rational to assume that an “engaged” customer will spend more than an “unengaged” customer as he or she is likely to become more emotionally connected to a company and keep current on its new product or service launches. So we can start to think about how the sales per “like” will differ between companies by looking at their average sales per store and how the market cap per “like” will differ by looking at their valuation multiples.
We conducted a case study on six consumer-facing companies to illustrate how investors can use our social media analytical framework. Based on our analysis, we classify the companies as follows: 1) Heart and Soul (lululemon and Starbucks); 2) Heart (Coach, Tiffany & Co., and Tim Hortons); and 3) Shell (Yellow Media). Please note these ratings only provide our quantitative and qualitative assessment of a company’s depth of customer relationships and do not provide a recommendation to BUY or SELL the security.