Recent Trends in Brand Valuation

By: Mr. Pravin Thorat

Asst. Professor, JSPM’s, JICA

"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you"
John Stewart (Former CEO of Quaker)

A brand is a name or a symbol - and it’s associated tangible and emotional attributes - that is intended to identify the goods or services of one seller in order to differentiate them from those of competitors. At the heart of a brand are trademark rights.

A brand designates a product or service as being different from competitors' products and services by signaling certain key values specific to a particular brand. It is the associations which consumers make with the brand that establish an emotional and a rational 'pact' between the supplier and the consumer. This security of demand means a security of future brand earnings, and this is what lies at the heart of brand valuation.

Why are Brands Valued?

The values associated with the product or service is communicated through the brand to the consumer. Consumers no longer want just a service or product but a relationship based on trust and familiarity. In return businesses will enjoy an earnings stream secured by loyalty of customers who have 'bought into' the brand.

 Applications of Brand Valuation

• Brand management and development
• Enhancing management communications
• Benchmarking of competitors
• Monitoring value year on year
• Creating a brand-centric culture
• Internal licensing, brand control and tax planning
• Mergers & Acquisitions
• Joint-venture negotiations
• Expert Witness - evaluating the economic damage of trade mark infringement
• Financing and insolvency- securing funds through identification of value of intangible assets.
• Balance sheet

How is Brands Valued?

Today, a widely accepted method of valuing a company or business is to discount the profit or cash flows it produces to a net present value. A similar approach can be used for brands. The profit streams produced by the brand are discounted to their net present value using a discount rate which reflects the riskiness of those income streams being realised. i.e. which reflects the strength of the brand - the drivers of those profit streams.

Interbrand, the original pioneers of Brand Valuation, employs an economic use method which is the most widely accepted and has made Interbrand a worldwide authority in this field. It is based on the premise that brands, when well managed, affect the way that consumers behave in the market and the brand owner derives an economic benefit as a result.

Interbrand's brand valuation methodology comprises four elements:

1. Financial Analysis - to identify business earnings and 'Earnings from Intangibles' for each of the distinct segments being assessed
2. Market Analysis - to measure the role that a brand plays in driving demand for services in the markets in which it operates and hence to determine what proportion of Earnings from Intangibles are attributable to the brand (this is measured by an indicator referred to as the 'Role of Branding Index')
3. Brand Analysis - to assess competitive strengths and weaknesses of the brand and hence the security of future earnings expected from that brand (this is measured by an indicator referred to as the 'Brand Strength Score')
4. Legal Analysis - to establish that the brand is a true piece of 'property'

Applied Brand Valuation

There have been more brand valuations conducted in the last year or so than in the last decade. Companies like NBS, I&J, ABSA, The Sunday Times, M-Net and Vodacom, among quite a few others, have felt it necessary to employ the complex methodologies developed for this purpose as part of their business process. Their reasons for doing this have varied, a fact alone that underlines the range of applications that these approaches reveal.

What stimulated the flurry of interest is probably the attention that has recently been paid to intangible assets by the accounting profession. Over a ten-year period, that reached its peak in 1998 with the adoption of IAS 38 by the International Accounting Standards Committee (IASC), they debated and discussed and eventually agreed to adopt a standard recommended to accountants worldwide that would unite them in a generally accepted way in dealing with brands, among other intangibles.

This anomalous situation has resulted in few brands being valued for balance sheet purposes. But the publicity that the new standard generated has stirred the interest in brand values of many managers of both the financial and marketing variety. They have realised the wide-ranging power of modern valuation methods and have applied them imaginatively.

Boosting the share price

A leading company in the media sector of the JSE commissioned a brand valuation to help make strategic decisions regarding the positioning of its various brands. When the valuation was completed it became clear that there was another use to which it could be put.

Management had been perturbed at the rating given to its share by fund managers and had long felt that analysts had failed to recognize the true underlying worth of the brand. They were given strong support for this idea by the brand value which explained about two thirds of the gap between book and market value. 

Now a new use is being contemplated for the brand value. It may well feature in the new round of investor conferences as evidence that the intangible assets that generate the future economic benefits had not been given their fair and full value. It remains to be seen if analysts will respond positively to this. But the evidence that will be presented is strong.

In the same vein, other companies are valuing brands with a view to featuring them as notes to the accounts. This, it is hoped, will provide previously unavailable information to the market makers who will adjust the share price accordingly.

The price of a brand

A leading fast moving consumer goods (FMCG) manufacturer did a deal during the year to sell off a number of its brands to an overseas’ investor. The brand leaders in the portfolio were the prize the acquirer was after. But there were other brands as well including two that were quite well known but which had been given scant marketing attention in recent years. As such they had suffered in terms of market share and also consumer knowledge.

The brand valuations confirmed the damage that had been done to them. Profits were low as was consumer awareness. Strangely, those consumers who did know the brand associated the name, quite strongly, with positive evaluative criteria. These are the criteria that consumers use to select their brand and which determine loyalty or switching behavior.

The brands were not worth a great deal, but the valuation model was able to illustrate how the values could be increased by focused use of the available marketing budget. By concentrating on building awareness and maintaining the already well-established criteria, the value could be easily increased. Thus a useful chip had been added at the bargaining table.

Fending off closure

When an old established middle size bank was bought a few years ago it was the buyer’s initial intention to kill off the hundred-year-old plus brand and replace it with their own name. The acquired bank’s management decided to fight the proposal and among the weapons they brought to bear, was brand valuation. It was a quick decision on the part of the purchaser to keep the venerated name once they realized the value they would be destroying.

Not only was the brand name saved, the elements of the measurement methodology were used to estimate how the brand value could be enhanced by integrated marketing communications that focused on building the Brand Knowledge Structure (BKS). This is the framework of perceptions held in consumer memory that drives the valuation model.

By estimating the impact on the value of various increments in the BKS, targets that go straight to the heart of shareholder value were established and set as objectives.

Judging the size of the marketing expenditure in 1999 a major newspaper decided to bring its advertising in-house. The decision was approved but determining the amount of money that should be devoted to it was something of a problem. The amount to be allocated was put in perspective by a valuation of the brand. The real power of the valuation will come into play when the valuation is repeated during the current year. It will show what, if anything has happened to the brand, but more precisely, how the marketing effort has performed. Management will be able to use hard data and sensitive movements to judge what worked, what did not work, and what has still to be achieved. And if the brand value has increased, it will be able to demonstrate to the company’s investors, how management is adding shareholder value.

The ultimate measurement metric

By far the most exciting development in the field of brand valuation is the acceptance by major, multi-brand owning companies of brand valuation as a measurement metric. They are installing computer-based versions of the methodology in their brand plan procedures. This will require brand managers to assemble the complex input data that valuation requires, enter it in a menu-led program, have the inputs audited and then produce a valuation. 

The uses to which this will be put will essentially be to aid the brand planning and measurement process. Increments in budget allocation can be related, arithmetically, to increments in brand value to calculate return on marketing investment. It can even be used to measure the achievements of the advertising agency and whether the awards won at creative competitions like the Loeries, have translated into bottom line profit. 

And, many other uses

Valuation will serve all the above uses, plus be available for applications such as evaluating the strength of the brand to support extensions. Additionally, the totality of the brand valuations will be featured as notes to the financial statements, be used at investor conferences to show the underlying value of the firms’ intangibles, and will be available for less obvious purposes such as taxation, credit collateral, and in the value statements that will eventually replace or appear alongside the familiar balance sheet.

The days when brand values could be calculated on the back of a notepad using a notional ten year period and a guessed-at royalty rate, are past. Valuation must encompass both brand premium profit and consumer Brand Knowledge Structure (BKS). Brand premium profit is that portion of the profit that the brand itself generates and which another owner could pocket given a similar or better structure. BKS is a survey-based quantification of the strength with which the brand is held in consumer memory.

These two metrics are brought together through the corporate finance concept of Brand Expected Life. The stronger the BKS the longer the expected life. Since the model uses discounted cash flow and the cost of capital as the discount rate, the value of the brand is strictly related to the number of years over which the brand profits are expected to be earned. The brand premium profits are discounted back to their present value and capitalised. 

Where to now?

The chartered accountants have not yet accepted the existence of brands as assets. In their newly adopted standards they are equivocal in their approach to intangible assets. On the one hand brands that are acquired either separately or as part of a business combination are to be listed on the balance sheet, while those that the company has developed itself, are not. 

While the standard researchers and writers deal with the anomaly – in which they are currently engaged – brand valuation has only a partial application in this (probably its most critical) area. In the meantime the methodologies are developing and are becoming more sophisticated. 

With book values representing only one third of the market capitalisations of shares listed on many stock markets, the need for a more relevant and inclusive form of financial reporting is becoming urgent. There has been much talk about replacing historic cost statements with value statements, or of the two co-existing. Whatever solution the accountants finally select, it will elevate brands to the position they deserve. Using the language of the bean-counters brands are after all: “resources controlled by the enterprise as a result of past events from which future economic benefits are expected to flow.” That is their definition of an asset and brands fit the definition precisely. It makes no sense for them to be excluded from a statement that purports to set out the financial worth of the enterprise. 

While there are many uses to which brand valuations are being put, it is inevitable that balance sheets are their final home. While the accountants think and ponder, ways of calculating the value of these most valuable assets continue to develop and improve. Already the best methods are robust and reliable. It will be interesting to see if the accountants acknowledge this when they eventually unveil the results of their deliberations.

“If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you.” — John Stuart, Chairman of Quaker (ca. 1900)

Company	($bn)	(%)	($bn)
Coca-Cola	69.6	51	9 69.0
Microsoft	64.1	21	65.1
IBM	51.2	3	52.8
GE	41.3	14	42.4
Intel	30	22	34.7
Nokia	30.0	51	35.0
Disney	29.3	68	32.6
McDonald’s	26.4	71	25.3
Marlboro	24.2	20	22.1
Mercedes-Benz	21.0	47	21.7

Source: Business Week, Interbrand/JP Morgan league table, 2002

Table shows how big the economic contribution made by brands to companies can be.The McDonald’s brand accounts for more than 70 percent of shareholder value. The Coca-Cola brand alone accounts for 51 percent of the stock market value of the Coca-Cola Company. This is despite the fact that the company owns a large portfolio of other drinks brands such as Sprite and Fanta. Studies by academics from Harvard and the University of South Carolina3 and by Interbrand4 of the companies featured in the “Best Global Brands” league table indicate that companies with strong brands outperform the market in respect of several indices. It has also been shown that a portfolio weighted by the brand values of the Best Global Brands performs significantly better than Morgan Stanley’s global MSCI index and the American-focused S&P 500 index.

Brands on the balance sheet

The wave of brand acquisitions in the late 1980s resulted in large amounts of goodwill that most accounting standards could not deal with in an economically sensible way. Transactions that sparked the debate about accounting for goodwill on the balance sheet included Nestlé’s purchase of Rowntree, United Biscuits’ acquisition and later divestiture of Keebler, Grand Metropolitan acquiring Pillsbury and Danone buying Nabisco’s European businesses

In terms of accounting standards, the UK, Australia and New Zealand have been leading the way by allowing acquired brands to appear on the balance sheet and providing detailed guidelines on how to deal with acquired goodwill. In 1999, the UK Accounting Standards Board introduced FRS 10 and 11 on the treatment of acquired goodwill on the balance sheet. The International Accounting Standards Board followed suit with IAS 38. And in spring 2002, the US Accounting Standards Board introduced FASB 141 and 142, abandoning pooling accounting and laying out detailed rules about recognizing acquired goodwill on the balance sheet. There are indications that most accounting standards, including international and UK standards, will eventually convert to the US model. This is because most international companies that wish to raise funds in the US capital markets or have operations in the United States will be required to adhere to US Generally Accepted Accounting Principles (GAAP). Today, many companies including LVMH, L’Oréal, Gucci, Prada and PPR have recognized acquired brands on their balance sheet.

Conclusion

As global competition becomes tougher and many competitive advantages, such as technology, become more short-lived, the brand’s contribution to shareholder value will increase. The brand is one of the few assets that can provide long-term competitive advantage. Despite the commercial importance of brands, the management of them still lags behind that of their tangible counterparts. Even though measurement has become the mantra of modern management, it is astonishing how few agreed systems and processes exist to manage the brand asset. When it comes to managing and measuring factory output the choice of measures is staggering, as are the investments in sophisticated computer systems that measure and analyze every detail of the manufacturing process. The same is true for financial controlling. But, strangely, this cannot be said for the management of the brand asset. Although many brand measures are available, few can link the brand to long-term financial value creation. Nor has investment in brand management reached a level or sophistication comparable with other controlling measures. As the importance of intangibles to companies

increases, managers will want to install more value based brand management systems that can align the management of the brand asset with that of other corporate assets. There is a similar lack of detail about the contribution of brands in the financial reporting of company results. Investments in and returns from tangible assets are reported at sophisticated and detailed levels, but this is not true for intangible assets. For example, Coca-Cola’s balance sheet, income

Overall, there is an increasing need for brand valuation from both a management and transactional point of view. With the development of the economic use approach, there is at last a standard that can be used for brand valuation. This may well become the most important brand management tool in the future.

References

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·          Kumar, T. Krishna. 2005. Disclosure Norms for Intangible Assets: Suggestions for Improving the Valuation of Intangibles. IIMB Management Review. March: 71-78.

·         Laing, Jonathan. 1997. Dangerous Games. Barron's Online. June.

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·         Upshaw, Lynn B. (1995), Building Brand Identity: A Strategy for Success in a Hostile Marketplace, New York: John Wiley & Sons Inc.

·         www.businessweek.com, July 27, 2001, ‘Brand Value Proves Stable Against Volatile Stock Market Valuations’, Interbrand Report, NY, USA.

·         www.danherman.com, Herman, Dan, CEO of Herman Strategic Consultants, serving worldwide clients ranging from local mid-sized companies to Fortune Global 500 corporations.

·         www.davedolak.com Dave, Dolak; ‘How to Brand and Market a Commodity?’ Dave’s ebook.

·         “The Best Global Brands”, BusinessWeek, 6 August, 2002.

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·         Interbrand, Brand Valuation, March 2003, p. 3. K.W. Suh, Manager, Global Marketing, Samsung Electronics, interview, 6 August 2003.