Brand Valuation
‘Spectrum’ – Research & Consultancy Group

Introduction

"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 Oats)

A brand is an intangible asset, so intangible that many branding practitioners do not even agree as to what a brand is. Some see it as a name and a logo. Others will say that those are just the symbols of what the brand stands for and that what the brand stands for really is the brand. The latter interpretation is preferred most of the times, i.e., the brand is a covenant with the consumer, a promise that the brand and the products it names will conform to the expectations that have been created over time. A brand exists only because of its commitment to its internal values. Without that commitment, it is nothing but a glorified product name.

In the wake of recent Mergers and Acquisitions, it has been observed that the stupendous valuation that acquired brands command (e.g. Parle Soft Drink by Coke, Indiaworld by Satyam, Lakme by HLL et al) does not justify their intrinsic value or their current earning capacity. Therefore it becomes important to assess the value of a brand. Valuation of a brand is also desirable from the point of view of providing objectivity to the "value" of the brand, which otherwise tend to become subjective and less useful as a guide for marketing decision making. In mergers and acquisitions, brand value could help in determining a corporation's price and support the decision process.

Who needs Brand Valuation ?

Any business that depends on the success of future cash flows from sales based on:

• Market reputation of product or service
• A historic link to a particular lifestyle, which includes the brand name that it owns
• Any business that eludes to a specific market segment or share that is image sensitive

 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

Brand Valuation Model

The model calculates Brand Value as the net present value of the earnings the brand is expected to generate in the future.

The model comprises four key elements:

1) Financial forecasting

Based on the data provided by banks and publicly available information it is desired to prepare a financial forecast for each brand. The forecasts start with the projections of Branded Revenues representing all revenues the brands are expected to generate in the future. From Branded Revenues all operating costs, corporation tax and a charge for the capital employed that are necessary to operate the branded businesses are deducted. As a result   Intangible Earnings representing all earnings generated by the intangibles of the branded businesses are generated. The concept of Intangible Earnings is similar to value based profit models such as intellectual capital or EVA TM  (Economic Value Added).

2) Role of Branding

Through the Role of Branding analysis Brand Earnings as the percentage of Intangible Earnings that are attributable solely to the brand are determined. The Role of Branding analysis identifies and weights the key drivers of customer demand and their dependence on the brands. This is calculated as a percentage and applied to the Intangible Earnings to derive Brand Earnings.

3) Brand Risk

The brand risk analysis provides the brand specific risk rate at which the forecast Brand Earnings are discounted to their net present value. The discount rate is based on the risk free rate, represented by the yield on a government bond for the forecast period and a brand premium according to our Brand Strength analysis. The analysis assesses the risk profile of the projected Brand Earnings based on the security of the brand franchise. Brand Strength is measured against seven key attributes comprising Market, Stability, Leadership, Support, Trend, Geography and Protection. It provides a brand specific discount rate for the Brand Earnings forecast.

4) Brand Value Calculation

The values of the brands have been calculated as the net present value of the projected Brand Earnings. The value of the brand depends both on a good financial performance and a strong marketing position. Sometimes even if short-term earnings performance is weakened, investment in the brand can produce better long-term results, a stronger brand and, consequently, a higher Brand Value.

Applications of Brand Valuation in Brand Management

Recognition of the economic value of brands has increased the demand on the management of the brand as an asset. In the pursuit of increasing shareholder value companies need to establish procedures for the management of brands that are aligned with those for other business assets as well as for the company as a whole.   Economic value creation becomes the focus of brand management and all brand-related investment decisions. In detail brand value based management provides the following insights and decision tools for understanding and managing brand value:

Understanding brand value

• Identify the value contribution of the brand asset to shareholder value

• Compare the value of the brand to other intangible and tangible company assets

• Understand the value of the brand in different markets: customer, consumer groups, countries, products and services, distribution channels, etc.

• Understand the leverage of the brand relative to competitors

• Focus senior management and investors on the value of the brand asset and its investment requirements

Managing brand value

• Establish an investment calculation for the brand asset to increase accountability of brand management: Return on investment of marketing expenses and initiatives

• Internal licensing of the brand asset to share brand investments more fairly amongst all beneficiaries

• Align brand management with existing value based management frameworks: shareholder value, economic value, balanced scorecards

• Establish best practice brand management

• Integrate brand value into the corporate planning process

• Establish brand value as performance benchmark (brand value score card)

2002 Brand Value ($MM)

                                             Source: business week online: special report the 100 best brands

By: ‘Spectrum’ – Research & Consultancy Group
(Team: Ashish, Deepak, Lalit, Mohit, Pankaj)
MBA (IB), II Year Students
Indian Institute of Foreign Trade, New Delhi
Email: spectrum_iift@yahoo.com

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