Interactive Investor

This share 'does what it says on the tin'

13th May 2016 16:52

Richard Beddard from interactive investor

By all the metrics I use, BrainJuicer is a nailed-on buy and hold investment. Revenue and profit growth may have slowed to just 4% in the year to December 2015 but companies don't always grow in a straight line. In terms of profitability and cashflow BrainJuicer has few peers among the shares I follow, unless you are prepared to pay a much, much higher price in relation to their profits.

No doubt the market researcher would like us to look beneath the headline revenue figures at its quantitative market research services, which are growing faster and now account for 85% of the total, but something has spooked investors. The company, cash-rich, and still run by John Kearon, the entrepreneur who founded it, is rated on a par with firms that have much more chequered histories.

I'm attending the Annual General Meeting (AGM) with the words of an acquaintance and senior market researcher haunting me. He thinks market research is changing rapidly and, "unless agencies morph themselves, they are not going to be around in 10 years' time."

BrainJuicer wouldn't disagree - its annual report says "the market research industry will change more in the next 10 years than it has in the last 100" - but it expects to be a beneficiary as the industry adopts behavioural science, which BrainJuicer has pioneered for over a decade.

Warning signs

Beyond slower revenue growth in the last three years, there are other warning signs.

BrainJuicer may be drifting, or at least tacking, strategically. It was committed to chasing sole-supplier mandates with large consumer goods companies (like Coca Cola, McDonald's, Unilever, Cadbury, John Lewis, and P&G), but revealed in its annual report that they have lost interest, generally, in such arrangements.

Its newest initiatives, both experimental, target new kinds of business, which could be a sign the company is wondering about the prospects of its existing one. Its annual report identifies challenges coming from multiple directions: big data, passive data, social media, and neuroscience.

I'm at the company's new headquarters in Russell Square for the AGM. My aim is to decide whether a growth company with an unblemished record might not be around in ten years' time. If it prospers, it's probably a great investment now.

BrainJuicer's approach to advertising is the opposite of Alan Sugar's. The businessman and TV pundit is famous for berating candidates in The Apprentice if they develop fancy adverts and omit the basics: What the product is, what it does, how much it costs and where you can buy it.

Making people happy

When BrainJuicer tests an advertisement, it's not concerned with getting a particular message across. It's checking whether the ad makes consumers happy. If we feel more, we buy more, it says, a contention backed up by its own research and research by the Institute of Practitioners in Advertising (IPA), a professional body for advertisers.

When BrainJuicer tested advertisements for 3 Mobile in 2013 the clear winner, scoring a blockbuster five stars on the company's proprietary scale, featured a dancing pony that quickly became famous and, according to a case study written by BrainJuicer and 3 Mobile, increased 3's brand share by 0.9%. It would have been more, if the network had outspent rivals when it placed the advertisements, but it underspent.

There only appear to be two shareholders at the meeting, and I actually know the other one. He's even more inquisitive than me, and since the board is accommodating, we are guaranteed an education.

The first thing I learn is that one of BrainJuicer's strategic shimmies may not be a response to new competition, which is a relief. The company's failure to win big mandates is probably due to the adoption of zero-based budgeting by clients like Unilever.

The practice, which requires managers to reset their budgets every year to zero, precludes multi-year deals. Though it is meant to save cost, it may actually work in BrainJuicer's favour as it can now compete with firms who formerly had such mandates.

A new start-up agency

BrainJuicer's new System1 agency is more of a puzzle because it is such a radical departure. There is little doubt the new virtual ad-agency is John Kearon's baby. He hands me a promotional booklet, A Little Book of Feeling, which lists only two contacts. He's one of them. It's a start-up, but, if it is successful, it will put BrainJuicer in charge of the creative process.

System1 will contract three creatives, at a cost of £7,000 each, and test the advertisements they produce until they have achieved at least three-star work on BrainJuicer's scale. Three stars isn't average, only the top third of all the ideas BrainJuicer have ever tested achieve three stars, and setting the bar at five would be unrealistic (only 4% of ideas are five star).

Naively, I ask how employing three freelance creatives is cheap and Kearon quickly educates me about the salaries of creative directors in large advertising agencies. Neither, he says, is BrainJuicer skimping on talent, citing Steve Henry as one of the creatives in System1's network. He's the man behind the famous Tango ("You know when you've been Tango'd"), Ronseal ("Does what it says on the tin") and The AA ("The Fourth Emergency Service") advertisements.

Though it may be a big opportunity, System1 makes me a bit nervous. It's a new service aimed at a new customer, the chief marketing officer as opposed to the often junior head of insight and/or research.

I've witnessed entrepreneurs of previously prosperous companies reinventing their way out of trouble as their core business succumbs to new competition. Grafenia (formerly printing.com), a printing franchise, is reinventing itself as a web design business, and Haynes, the publisher of motor manuals, is turning itself into an online auto data supplier. Their costs are mounting, and their prospects uncertain.

Disrupting the industry

BrainJuicer is limiting its investment in System1 to £300,000 in its first year though, less than one tenth of adjusted profit in 2015, and I don't think Kearon is running away from a threat, I think he sees an opportunity. BrainJuicer isn't straying from the behavioural methodology that made it successful and the normative database it has built, it's using them to disrupt the advertising industry as well as market research.

While Grafenia's centralised printing hub, and Haynes' commitment to stripping down cars to draw better schematics no longer give them an advantage, BrainJuicer's advantage is probably intact.

Just in case, though, I throw Google into the ring. It's a big technology company, a kind of universal competitor, the kind of company that could perhaps make mincemeat of the market research industry. It sells advertising and operates Google Surveys, a self-service market research tool, a market BrainJuicer is also experimenting with.

Though Google Surveys has representatives of Lowe's, Coca-Cola and Unilever on its advisory board, Kearon thinks it's for small businesses. Generally, digital advertising means more freedom, more disruption, and more opportunity for BrainJuicer's specialist skills.

Psychologists use the terms "system one" and "system two" to describe the different ways we think. My rational, system two brain wants to resist his enthusiasm but it's run out of ammo. My instinctive system one brain is entranced.

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