The value of a brand
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Summary:
Reel p. 3 Introduction p. 9 Brand Value p. 17 Legal p. 25 Brand Valuation p. 28 Interbrand p. 38 Case Studies p. 52 Conclusion p. 58 Opinions p. 59
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“ If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you. back to sumary
— John Stuart, Chairman of Quaker (ca. 1900)
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“ Brands account for more than one-third of a firm’s total market value. back to summary
Brand Valuation: The financial value of brands, By Interbrand
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“ One cannot ignore brands. Companies may pay large sums of money for them and, therefore, they should be included as an asset in the balance sheet. back to summary
Chris Pearce, Rentokil’s, CFO and President of Group 100
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“ Valuation is a tricky business because, unlike most of the activities associated with marketing, it is expressed in a single, comparable financial number. back to summary
Mark Ritson
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Introduction: back to summary
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Assets
An asset is anything that is capable of producing cash flow now or in the future.
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Tangible Assets
• Those that can be touched • Land, building, machinery, raw materials, inventory and finished goods, and cash. • In 1978, this assets accounted for 95% of the valuation of the companies in the Down Jones Industrial Average. • In 2006 the tangible figure had declined to around 20%. • This is caused by the emergence of information economy in which intellectual property had replaced physical assets as the primary source of value creation.
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Intangible Assets
• Cannot be seen, touched or physically measured, which are created through time and/or effort • The intangible assets are not particularly liquid, and unlike the material assets, they may or may not be owned by the company.
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Intangible Assets • Intangibles are becoming substitutes for physical assets. • Are the ones that don’t hurt when dropped on your toe. • Are those things that a company knows, has or does that make it worth more than just the sum of its tangible parts. • Is the difference between a company market capitalization to its net assets value. Five classes of intangible assets (IFRS 3): 1. Marketing-related (such as trademarks and brands) 2. Customer-based (such as customer list) 3. Artistic (such as movies and music) 4. Contract-based (such as drilling rights and licensing agreements) 5. Tecnology-based (such as patents) back to summary
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Intangible Assets Internal structure
• Patents, concepts, models, and computer and administrative systems. • Are created by the employees and are thus owned by the organization • Sometimes they can be acquired from elsewhere. • Decisions to develop or invest in such assets can be made with some degree of confidence, because the work is done in-house. • Also the “culture” or the “spirit” belongs to the internal structure. • The internal structure and the people together constitute what we generally call the “organization”.
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Intangible Assets External structure
• Relationships with customers and suppliers, brand names, trademarks and reputation, or “image”. • Some of these can be considered legal property. • The value of such assets is primarily influenced by how well the company solves its customers problems. • There is always an element of uncertainty. • Reputations and relationships can be good or bad, and can change over time.
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Intangible Assets Individual competence
• People’s ability to act in various situations. • It includes skill, education, experience, values and social skills. • Competence cannot be owned by anyone or anything but the person who possesses them.
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Brand Value: back to summary
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“ The brand is one of the few assets that can provide long-term competitive advantage. back to summary
Brand Valuation: The financial value of brands, By Interbrand
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Brand Value
Series of real options
• A brand can be considered as an asset that currently provides certain margins per unit that are higher than those of an unbranded product and a differential volume, and which also provides the brand’s owner certain real options for future growth. • These real options may be geographical growth, growth through the use of new distribution channels, growth through additional differentiation, growth through the use of new formats, growth through the possibility of gaining access to new market segments, withdrawal facilitated by the use of franchises . • One of the prerequisites of adequate brand management is to take into account the real options provided by the brand for making decisions that increase (and do not decrease) these options’ value.
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Valuation of Brands and Intellectual Capital Pablo Fernandez
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Brand Value Chain
Marketing Activity
Brand Image
Brand Equity
Customer Behaviour
Brand Value
Brand Value models put a dollar value on brands or marketing activities by identifying the incremental cash flows earned as a result of the strength of the brand or the effectiveness of the effort. They are aiming to deliver an ROI measurement, although this is more often expressed as a Net Present Value figure.
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Vulcans Earthlings and Marketing ROI Savis Rutherford
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“ A company’s brands are often its most important assets, more important even than the bricks, mortar and machines, whose value is included in the accounts. back to summary
Chris Pearce, Rentokil’s, CFO and President of Group 100
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The Value of a Company • An asset is anything that is capable of producing cash flow now or in the future. • The value of a company comes for tangible and intangible assets. • The market puts a value on these, and reflects it in stock price. Funding Perspective Enterprise Value
Tangible Assets
Intangible Assets Marketing Related Customer Based
Market Value Equity
Artistic Contract Based
Enterprise Value
Market Value of Debt
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Tecnology Based Net Working Kapital Property Plan Equipment
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Brand Valuation
Two valuations of the shares of a consumer products company Value due to distribution of buyer's other brands 240
Goodwill= =brand value + + "intellectual capital" 337 Adjusted book value 501
Value of assets above their book value 194 Shares' book value 307 Present situation
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Better brand positioning 117 Value of shares for seller 838
Value of shares for buyer 1,34
Value of shares for seller 838
Buyer's expectations
Valuation of Brands and Intellectual Capital Pablo Fernandez
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Look “under the surface”! • Nokia had US$11 Billion of tangible assets. • A new investor in Nokia was willing to pay $40.90 per share, making the market capitalization a whopping $190 Billion. • ~$183 Billion in intangible assets. • It is the difference between the market value ~$190 Billion and the net book value $5.7 Billion.
Nokia’s Invisible Balance Sheet, Q3 2000
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Karl-Erik Sveiby
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Legal: back to summary
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Accounting treatment of brands and intangible assets in the United States • Recognition of goodwill: only when buying businesses and as the difference between the price paid and the purchased company’s book value. • Depreciation of goodwill: over its useful life and not more than 40 years. It may be written off if its value should deteriorate or disappear. • Definition of intangible assets: separately identifiable rights that have usefulness and value. • Depreciation of intangible assets: over their useful life. They may be depreciated immediately in the event of deterioration.
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Valuation of Brands and Intellectual Capital Pablo Fernandez
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ISO 10668
Inter. Standard on monetary brand valuation. Was developed to provide a consistent framework for the valuation of local, national and international brands both large and small. This sets out the principles which should be adopted when valuing any brand. The brand valuer must conduct 3 types of analysis before passing an opinion on the brand’s value: • Legal analysis: The first requirement is to define what is meant by ‘brand’ and which intangible assets should be included in the brand valuation opinion. • Behavioral analysis: The brand valuer must understand and form an opinion on likely stakeholder behavior in each of the geographical, product and customer segments in which the subject brand operates. • Financial analysis: ISO 10668 specifies three alternative brand valuation approaches: the Market, Cost and Income Approaches. The purpose of the brand valuation, the premise or basis of value and the characteristics of the subject brand dictate which primary approach should be used to calculate its value.
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Wikipedia
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Brand Valuation: back to summary
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“ The valuation of brands is still a relatively new concept... partly art, partly science. back to summary
Interbrand
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Brand Valuation
The brand valuation process increases the amount of information held by the company about its brand and it should be developed so that it can be used as a management tool for value creation. A good brand valuation process is a tool that helps maintain a coherent strategy over time and assign marketing resources consistently.
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Valuation of Brands and Intellectual Capital Pablo Fernandez
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Brand Valuation Past
• For most of the century, tangible assets were regarded as the main source of business value. • The market was aware of intangibles, but their specific value remained unclear. • Brands, technology, patents and employees were always at the heart of corporate success, but rarely explicitly valued. • Major brand owners were aware of the importance of their brands, but on the stock market, investors focused their value assessment on the exploitation of tangible assets.
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Brand Valuation: The financial value of brands, By Interbrand
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Brand Valuation Present
• Today the majority of business value is derived from intangibles. • The brand is a special intangible that in many businesses is the most important asset. • This is because of the economic impact that brands have. They influence the choices of customers, employees, investors and government authorities. • Some brands have also demonstrated an astonishing durability. • Today, leading companies focus their management efforts on intangible assets.
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Brand Valuation: The financial value of brands, By Interbrand
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Brand Valuation
“for whom” and “for what purpose”
• When valuing a brand, it is particularly important “for whom” that value is being determined, since the brand’s value is not the same for the company that owns the brand as for a company with a competing brand or for another company operating in the industry with a brand that does not compete directly with it, etc. • Likewise, it is vitally important to define “for what purpose” we wish to determine a brand’s value, whether it is to sell it or to collect a series of royalties or to facilitate the brand’s management or to capitalize its value in the balance sheet and then depreciate it.
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Valuation of Brands and Intellectual Capital Pablo Fernandez
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Brand Valuation When to do it Three uses: 1. Accounting Purposes: The international accounting standards require that “goodwill” in an acquisition be allocated to the intangible assets that the company is acquiring. The valuation of marketing-related assets is now part of the due diligence performed before an acquisition. 2. Prospective Transactions: 4 categories: Securitization involves raising funds against the security of future revenues. Brand-based tax planning is relatively common. It involves transferring ownership of the trademark to a central holding company–that then charges a royalty to the operating companies for the use of the assets.
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Brand licensing requires an understanding of the economic benefit provided by the brand in order to establish an appropriate royalty rate Brand sale requires an understanding of the economic benefit provided by the brand expressed as an overall value rather than as a royalty rate. 3. Management of the Brands: A marketing valuation will reflect the fact that a brand is “a bundle of meanings,” and be based on a broader set of assumptions. It will also not generally be subject to external third-party validation.
Vulcans Earthlings and Marketing ROI Savis Rutherford
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Brand Valuation Uses
• Accounting and financial reporting • Insolvency and liquidation • Tax planning and compliance • Litigation support and dispute resolution • Corporate finance and fund raising • Licensing and joint venture negotiation • Internal management information and reporting • Strategic planning and brand management • Brand and marketing budget determination • Brand portfolio review • Brand architecture analysis • Brand extension planning
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Interbrand
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Brand Valuation Applications
Strategic Brand Management: Focuses on internal audiences by providing tools to manage and increase the economic value of brands. 1. Making decisions on business investments.
8. Assessing co-branding initiatives.
2. Measuring the return on brand investments.
9. Deciding the appropriate branding after a merger.
3. Making decisions on brand investments.
10. Managing brand migration more successfully.
4. Making decisions on licensing the brand to subsidiary companies.
11. Establishing brand value scorecards that provide actionable measures for optimal brand performance.
5. Turning the marketing department from a cost center into a profit center. 6. Allocating marketing expenditures according benefit. 7. Organizing and optimizing the use of different brands in the business.
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12. Managing a portfolio of brands across a variety of markets. 13. Communicating the economic value creation of the brand to the capital markets.
Interbrand
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Brand Valuation Applications Financial transactions:
1. Assessing fair transfer prices for the use of brands in subsidiary companies.
4. Determining a price for brand assets in mergers and acquisitions.
2. Determining brand royalty rates for optimal exploitation of the brand asset through licensing the brand to third parties.
5. Determining the contribution of brands to joint ventures. 6. Using brands for securitization of debt facilities.
3. Capitalizing brand assets on the balance sheet.
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Interbrand
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Interbrand: back to summary
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Interbrand
• A division of Omnicom, is a global branding consultancy, specializing in vast brand services, including brand analytic, brand strategy, brand valuation, corporate design, digital brand management, and naming. Today, Interbrand is amongst the largest brand consultancies and has grown to include 40 offices in 25 countries. • Was founded by John Murphy, a native of Essex in the United Kingdom. • In 1974, Murphy opened Novamark, a product-naming consultancy. In 1979, to the benefit of its growing client roster, Novamark opened an office in New York, but under the name Interbrand. • In 1993, Interbrand was acquired by the Omnicom Group, and throughout the 1990s and 2000s expanded their service capabilities by acquiring leading branding and identity. back to summary
Wikipedia
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Interbrand
Philosophy of brand building
• There must be a relationship between building a brand and enhancing shareholder value. • Building a brand should mean creating a tangible, measurable value at the shareholders’ end. • Brand building should help in wealth generation in an increasingly competitive world where there is tremendous possibility of wealth being destroyed. • The durability of the business is the reason why a company or an owner invests in brand building. • The brand value must ensure security of demand even as the world around turns highly competitive.
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Ramesh Jude Thomas, Chief Executive Officer of Equitor Consulting
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“ There was huge buying and selling of branded-goods businesses where what was essentially being bought and sold was brands. But nobody knew how to value brands. back to summary
John Murphy, Interbrand founder, Holdsworth, 2001
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Interbrand
Brand Valuation Model
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• Model name or ownership
Discounted cash flow (multiplier model)
• Year of development
1988 (multiplier model); 1993 (DCF model)
• Author
J. Murphy
• Country
United Kingdom
• Approach
Income
• Principal methodology
Capitalization of multiples based on P/E; strength and demand driver analysis
The International Brand Valuation Manual: A Complete Overview and Analysis By Gabriela Salinas
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Interbrand
3 elements of valuation method
1. An estimation of the strength of a brand based on its market and management. 2. An estimation of the proportion of company earnings attributable to the brand. 3. A brand multiplier based on the ‘quality’ of the brand: a measure that built on market data as well as data on the affective relations that the brand had managed to install with consumers. Most contemporary brand valuation models maintain some version of this approach
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The International Brand Valuation Manual: A Complete Overview and Analysis By Gabriela Salinas
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Interbrand
Alternative brand valuation models Basic valuation approaches proposed by Interbrand
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“DCFModel”
“Annuity Model”
Discount Rate
Multiplier
The International Brand Valuation Manual: A Complete Overview and Analysis By Gabriela Salinas
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Interbrand
Discounted Cash Flow model To calculate brand value, Interbrand uses a five-stage process: 1. Segmentation: This stage consists of determining the main homogenous client groups according to applicable criteria such as product or service, distribution channels, consumption patterns, purchase sophistication, geography, existing and new customers, on which the financial and demand analyses are based.
establishes the “Role of Brand Index (RBI)” or the percentage of “intangible earnings” attributable to brand, referred to as “brand earnings.” Assess the role that the brand plays in driving demand for products and services in the markets in which it operates, and deter- mine what proportion of intangible earnings is attributable to the brand.
2. Financial analysis: Identify and forecast revenues and earnings from intangibles generated by the brand for each of the distinct segments determined in Step 1. Through this analysis, the model attempts to establish “economic earnings” or EVA (Economic Value Added), also referred to here as “intangible earnings.” Through Interbrand’s analytical framework, called ‘role of brand,’ the percentage of intangible earnings that is entirely generated by the brand can be calculated.
4. Brand strength analysis: Through competitive analysis, Interbrand analyzes brand strength, which is in turn related to the discount rate. Determine the competitive strengths and weaknesses of the brand. 5. Brand value calculation: In this stage, the discount rate is applied to “brand earnings.” The sum of the present value of “brand earnings” represents brand value. The ability of brands to continue generating future earnings.
3. Demand analysis: In this step, lnterbrand back to summary
The International Brand Valuation Manual: A Complete Overview and Analysis By Gabriela Salinas
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Interbrand
The Earnings Split Approach (Economic Use) Most commonly used for marketing purposes: 1. Market and Competitive Context: This identifies the overall dynamics of the market and the strengths of competition.
4. Brand Value Added: Identifying the drivers of purchase decision in each segment, and the impact exerted by the brand.
2. Business Segmentation: Brand influence varies by line of business, customer and product type. This step divides business into segments.
5. Risk Analysis: Assesses the strength of the brand’s franchise with trade customers and end customers to establish a security of future brand earnings attributable to the brand.
3. Financial Forecast: Projections for the future earnings of each segment.
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Vulcans Earthlings and Marketing ROI Savis Rutherford
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Interbrand Role of brand
Is determined via a three-step process:
1. Firstly, Interbrand identifies the demand drivers or the factors that motivate consumers to purchase a particular brand. Interbrand finds that Microsoft customers arc conscious not only of the brand in itself, but also of its market domination, Its presence in 80% of the market, and the difficulty associated with transferring files to a new software platform. In the case of Sheil, in addition to the brand alone, customers are aware of the location of its gas stations.
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2. Step 2 determines the relative importance of the specific attributes identified in step l. 3. Lastly, Interbrand determines the role that the brand plays in each of these drivers. This step is the most subjective part of the process .
The International Brand Valuation Manual: A Complete Overview and Analysis By Gabriela Salinas
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Brand Valuation
Brand’s differential earnings. Interbrand values the brand by multiplying the brand’s differential earnings by a multiple. This multiple is obtained by quantifying the factors that, according to Interbrand, determine the brand’s strength. Steps followed by Interbrand’s method to calculate the brand’s differential earnings.
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Interbrand
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Brand Valuation
Brand strength specific attributes or evaluation criteria by factor Factor
Evaluation Criteria
Max.
1. Leadership
Market share, market position, market segment, brand awareness
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2. Stability
History, current position, satisfaction, customer loyalty
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3. Market
Competitive structure (concentration), market growth, volume, sales
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4. International image
Presence in foreign markets, export, history
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5. Trend
Consideration, attractiveness
10
6. Support
Quality, consistency, share of advertising, identity
10
7. Protection
Date of registration, legal coverage and monitoring
5
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Zimmermann er al. (200 I) and Interbrand Zintzmeyer & Lux
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Brand Valuation
Examples of brand strength calculations
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Interbrand
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Brand Valuation Brand strength
In order to calculate the multiple to be applied to the brand’s differential earnings, Interbrand calculates the “brand strength”, which is a weight composed of seven factors:
1. Leadership. A leading brand is more stable and has more value than another brand with a lower market share, because leadership gives market influence, the power to set prices, control of distribution channels, greater resistance to competitors, etc. 2. Stability. Brands that have become consolidated over long periods of time or which enjoy a high degree of consumer loyalty obtain high scores in this factor. 3. Market. A brand in a stable, growing market with high entry barriers will score very high.
brands. However, not all brands are able to cross cultural and national barriers. 5. Trend. A brand’s tendency to keep up-to-date and relevant for the consumer increases its value. 6. Support. Brands that have received investment and support must be considered to be more valuable than those that have not. The quantity and quality of this support is also considered. 7. Protection. The robustness and breadth of the brand’s protection (“legal monopoly”) is a critical factor in its valuation.
4. Internationality. Brands operating in international markets have more value than national or regional back to summary
Zimmermann er al. (200 I) and Interbrand Zintzmeyer & Lux
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Case Studies: back to summary
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“ Interbrand has valued over 2500 brands for 350 clients over the last one decade. back to summary
Interbrand
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Rethink Possible
AT&T Rebrand as Lifestyle Company After SBC acquired AT&T in 2005 to form the largest telecommunications company in the United States, we were asked to position this new entity as a re-established and forward-looking brand that would re-emerge as a category leader. In 2009, the company helped AT&T launch Rethink Possible. Rethink Possible is rooted in optimism and possibility. It represents a point of view and a lifestyle choice that can be fueled by what AT&T has to offer. Interbrand’s work for AT&T spans more than five years of progressive brand evolution and has helped AT&T seize opportunity at key inflection points of industry change. A new design will roll out from Interbrand that, among other things, trades in the $125 billion company’s characteristic orange coloring on retail locations and packaging for more colors. The AT&T globe will also now appear alone without the copy “AT&T” beside it. The goal is to move AT&T’s brand perception among consumers from telecommunications company to innovation company. “There’s so much innovation happening at the company that I think people don’t know,” said Senior VP-Brand Marketing and Advertising Esther Lee. “We spend an average $18 billion to $19 billion a year on our network, our technology and our inventions in order to drive the future of how people are going to live on our network.”
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Interbrand
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Rethink Possible
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LEGO
Activate new and existing customers LEGO has moved with the times in quite dizzying fashion, especially for any adult who remembers the much more basic parallel world it embraced 20 years ago. You could go far with an imagination or instruction manuals alike, but these were still generic springboards for the imagination: a cityscape, space exploration… not into pre-defined, branded imaginary worlds. This is a brand that’s gone full-blown experiential, embracing the gamut of its tangible assets and turning them all shades of digital and analogue. It arguably began with its real-world theme parks, including those in Windsor (U.K.) and Denmark, via cobranded tie-ups (e.g. with Pixar, to create a Toy Story series), to hands-on store experiences with 3D product displays, and digital renderings you can generate by holding boxes up to special sensors. It helps, of course, that LEGO’s specialty has always been in generating parallel, imaginative worlds. Doing so in a branded way that speaks to a generation weaned as much on virtual as real gaming, this is an old-school brand that seems to be in pretty good brand health.
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Interbrand
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LEGO
Analytics and Brand Valuation LEGO commissioned Interbrand to create a management tool and go to market strategies that help them activate new and re-activate existing customers. When LEGO asked ‘tell me how to get new customers,’ Interbrand answered that it wasn’t about finding the magic bullet, it was about creating a process to identify the most valuable opportunities. For an analytics project, Interbrand inserted a key ingredient into the mix: INSPIRATION. LEGO is a creative company by nature. Interbrand created a systematic process, which included an insights and value driven workshop. This workshop is the centre piece for where markets can be inspired from the facts to develop ideas to create new users Active Share is now well understood and integrated across the entire LEGO business. Overall LEGO’s senior leadership team is convinced that the tool will professionalise LEGO’s process around the Active Share challenge. Interbrand have provided LEGO’s marketing management function (which is brand new) a systematic process including a working management tool – that will be rolled out across 22 markets! This dialogue is truly bringing LEGO together, helping them leverage the value of collaboration. The work substantiate the expression of the brand as a living asset envouraging inspiration and creativity, specifically targeted by the process. LEGO can now focus their energy and mission on the priority age groups of boys versus the world of boys 2-15. Interbrand is developing bespoke tools, such as the management tool, which can be the foundation for developing new capabilities and processes for clients. This is Interbrand building capabilities. back to summary
Interbrand
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Conclusion
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.
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Interbrand
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Opinions: back to summary
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“ Today there are at least 39 different proprietary brand valuation models practiced by different academics. back to summary
The International Brand Valuation Manual, By Gabriela Salinas
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“ 63% of all companies that do value brands use two or more different methods. back to summary
Gunther and Kriegbaum-Kling, 2001: 281
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A brand’s real value is nothing, except in the eye of the beholder. back to summary
Wally Olins
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The value of a brand
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