How Much for That Brand in the Window?

http://www.jrcanda.com/art_valuation.html

Thoughts about brand valuation

Back in 1988, when UK-based GrandMet acquired the Pillsbury company, it was estimated that 88% of the
price it paid consisted of "goodwill" i.e., GrandMet paid approximately $990 million (L608m) to acquire the
Pillsbury brand name and its other branded properties (Green Giant, Old El-Paso, Häagen-Dazs, etc.). There
have been other acquisitions since then which have demonstrated that brands can command very high prices.
Volkswagen, for instance, bought the assets of the Rolls-Royce automobile corporation for $780m. But it
somehow did not include the brand in the deal... The rights to use the Rolls-Royce trademark were subsequently
purchased by rival BMW for $65m and many analysts believe that BMW got the better deal.
Those transactions point to the impressive equity that brands can build. But they also raise the question of how
those brand values were arrived at by the bidders. How does one measure the value of a brand? How do you
know if you are getting a good deal or a bad one?

There are many answers to those questions but none that is fully satisfactory.

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. We prefer the latter interpretation, 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.

How do you put a dollar amount on values and commitment? You can't! For that reason, determining the value
of a brand is usually a combination of direct and indirect processes. A direct measurement process is one that
arrives at a price based on the communication investment made behind the brand. An indirect measurement will
value the brand based on what it can add to the bottom line. (I am leaving aside market valuation because
offering a brand for sale isn't a very practical way to measure its worth.)

The simplest direct measurement is to add all the brand's communication investments, adjusted for inflation. An
additional adjustment is sometimes made to account for and reward the risk taken by past managers when they
opted to invest in the brand rather than use the money to buy treasury notes. This adjustment is called the
discount rate and it is used to compute the Net Present Value of the successive investments, i.e., what they are
worth today. The method is simplistic and overvalues the brands but it is used by brand buyers for that very
reason. It also penalizes brands that do not advertise heavily (like Rolls-Royce).

Other more interesting but less frequently seen direct measurements are the Awareness Valuation and Franchise
Valuation methods. Product managers, when projecting the volume for a new product, routinely use equations
that convert a given advertising budget into its resulting awareness (aided awareness, please!), awareness into
trial, and trial into its resulting consumer franchise and consumption volume. Valuation just takes the same path
but reverses its direction. For example, a brand or product that is used by 3% of its target population was
probably tried by 9% of them. It has an awareness of 57%, the result of a communication investment of 850
GRPs. Assuming a cost per point of $12,500, the investment can be valued at $10.6m. (It is actually a more
complicated process but I just want you to get the idea.) The advantage of the method is that it is easy to use and
requires less research than the one previously presented. It also reflects the current cost of re-creating the brand
today independently of the way it was actually created. The problem is that it is more difficult to explain. It also
results in more conservative estimations of brand values than other methods: this can be a problem when those
who are in the market to acquire a brand seek valuation methods that justify bidding a higher price to win the
deal.

Indirect valuation methods are those which financial analysts favor in spite of their gaping flaws. One, referred
to as the "Excess-Earnings Method," tries to assess the increase in profit (or cash flow) attributable to the brand.
Then it projects these cash flows over the useful life of the brand (usually limited to 10 years) and does a
"Discounted Cash Flow" analysis, where each year's projected cash flow is discounted according to the assumed
risk of the investment and how far away it will materialize. The sum of these cash flows plus the residual value
of the brand at the end of the analysis gives the brand value at the time of the analysis. The major difficulty with
this analysis resides in estimating the incremental effect of the brand on sales or profits. I recall the "Logo/No-
logo" taste tests conducted by the NutraSweet Company where two cans of diet soft drinks were shown, one

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bearing the NutraSweet logo, one without it. Respondents were served two glasses, theoretically one from each
can but in reality both from the same can, and asked which they preferred. In the early 80's, after the bans on
cyclamate and saccharin, the can with the NutraSweet logo was clearly preferred. But in 1990, after NutraSweet
had invested many dollars in communication, the consumer preference was virtually undetectable! As
sophisticated as it may have been, that test wasn't measuring a branding effect. It was measuring the residual
consumer scare which followed the banishment of artificial sweeteners. As consumer memory faded, the
"preference" for the NutraSweet brand disappeared! The validity of that "brand equity" measurement
disappeared with it.

The last method used by financial analysts to value a brand, and possibly their favorite, is called the "Relief-
from-Royalty" method. It is based on the concept that, if the company did not have the use of its brand name, it
would need to license that right in exchange for a royalty fee. These royalty fees are usually based on a
percentage of sales (not profits). The valuation consists of first estimating the fee as a percentage of sales and
then projecting that fee over the useful life of the brand. One then computes the "Net Present Value" of the sum
of those fees over the expected life of the brand. Do not forget to adjust the discount rate down to account for
the lower risk: getting paid based on a percent of sales is much more secure than remuneration based on profit
(or cash flow).

Because all those financial valuation methods are but educated guesses, we cannot rely on any one. We
regularly use as many of those methods as we can. Then we do our own guess.

But whatever its paper value may be, a brand isn't worth anything without a strategy and an organization to
support it. Think about it: you may buy a brand logo, a name with consumer awareness... but logo and
awareness alone do not constitute a brand. A brand is a covenant with the consumer. It was created by
displaying a set of brand values, consistently, over a period of time. There are two ways to arrive at the required
consistency. One is to have an enlightened dictator at the helm. Many brands, from Revlon to McDonald's, were
built by dictators. The problem with brand dictatorships, aside from being very unpleasant to work in, is that a)
autocratic leaders are generally not for sale along with their brands, and b) they do not see the need for
developing a brand strategy. As a result, the brand seldom survives the disappearance of the dictator, or a
change of ownership.

The other and better road to achieving the required consistency is to enshrine the brand values in a brand
strategy and to nurture an organization to service it. Without that, think twice about buying the brand, whatever
good value the finance folks say it may have.

By Jacques Chevron
Partner
JRC&A Management Consultants
La Grange, IL
Ph.: (708) 784-0730
Mail: Please click here for our e-mail and snail-mail addresses

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Brand Valuation and its Applications
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By Jane Yates of Interbrand Newell & Sorrell

"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)

Why are Brands Valuable?

A brand is a name or a symbol - and its 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 signalling
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 pact is an ongoing
relationship between the supplier and consumer, and because of this, brands provide a security of demand that
the supplier would not enjoy if they did not own the brand. This security of demand means a security of future
brand earnings, and this is what lies at the heart of brand valuation.

How did Brand Valuation Originate?

Ten years ago Interbrand conducted the first ever brand valuation for Rank Hovis McDougal. This exercise
succeeded in putting the worth of the company's brands as a figure on the balance sheet. RHM's management
wanted this information to fight a hostile takeover bid. With the brand value information, the RHM board was
able to go back to investors and argue that the bid was too low, and eventually repel it.

It was the wave of brand acquisitions in the late 1980's that exposed the hidden value in highly branded
companies and brought brand valuation to the fore. Some of these acquisitions included Nestlé buying
Rowntree, United Biscuits buying and later selling Keebler, Grand Metropolitan buying Pillsbury and Danone
buying Nabisco's European businesses. All these acquisitions were at high multiple price tags.

The amount being paid for the acquisition of a strongly branded company was increasingly higher than the value
of the company's net tangible assets. This resulted in huge levels of 'goodwill' arising on acquisition. This
'goodwill' actually disguised a mix of intangible assets - brands, copyrights, patents, customer loyalty,
distribution contracts, staff knowledge, etc.

An Interbrand study of acquisitions in the 1980s showed that, whereas in 1981 net tangible assets represented
82% (on average) of the amount bid for companies, by 1988 this had fallen to just 56%. It became clear that
companies were being acquired less for their tangible assets and more for their intangible assets.

Why are Brands Valued?

Although public perceptions of brand valuation are often focused on balance sheet valuations, the reality is that
the majority of valuations are now actually carried out to assist with brand management and strategy.
Companies are increasingly recognising the importance of brand guardianship and management as key to the
successful running of any business.

The values associated with the product or service are 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.

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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 are 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, employ 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 bases its valuation method on this concept of economic use and the fundamental question: how much
more valuable is the business because it owns certain brands? It is thus a marketing measure that reflects the
security and growth prospects of the brand and a financial measure that reflects the earnings potential of the
brand.

Given this concept of economic worth, the value of a brand reflects not only what earnings it is capable of
generating in the future, but also the likelihood of those earnings actually being realised. Broadly speaking
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'

To find out More...

The most comprehensive text book on this subject is "Brand Valuation" edited by Raymond Perrier, Global
Director of Brand Valuation at Interbrand.

It has been published in its third edition in 1997 by Premier Books, London. In addition, papers by Interbrand on
the subject of brand valuation have been published in, among others, The Times, the Harvard Business Review,
the Journal of Brand Management, Financial World and Interbrand speakers have in the last 10 years addressed
over 100 conferences around the world on this subject.

Interbrand is currently compiling a league table of the value of the world's top fifty brands. This is due to be
published in Forbes in the near future.

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http://www4.jaring.my/harveyg/articles/brand/
www.brandfinance.com/pdfs/research/ica.pdf (Brand Valuation: Measuring and Leveraging your Brand )

Brand Valuation: The Seven Components Of Brand Strength

By Colin Bates
Contributing Writer
Article Date: 2003-06-20

The Interbrand model of brand strength - part of their valuation methodology - is a useful framework to consider the
performance of your own brand. Reflect on these seven points and you should get a better sense of the strength of
your own brand, as well as some ideas on how to move forward…

The seven components of brand strength in the Interbrand valuation model are:

Market: 10% of brand strength. Brands in markets where consumer preferences are more enduring would score higher. So
for example, a food brand or detergent brand would score higher than a perfume or clothing brand, because these latter
categories are more susceptible to the swings of consumer preference.

Stability: 15% of brand strength. Long established brands in any market would normally score higher, because of the depth
of loyalty they command. So for example: Rolls Royce would score higher than Lexus.

Leadership: 25% of brand strength. A market leader is more valuable: being a dominant force and having strong market
share matters. So for example on this score it is likely that the Coca-Cola brand would out-perform Pepsi on a global basis.

Profit trend: 10% of brand strength. The long-term profit trend of the brand is an important measure of its ability to remain
contemporary and relevant to consumers, according to Interbrand.

Support: 10% of brand strength. Brands which receive consistent investment and focused support usually have a much
stronger franchise, but the quality of this support is as important as the quantity.

Geographic spread: 25% of brand strength. Brands that have proven international acceptance and appeal are inherently
stronger than regional brands or national brands, as they are less susceptible to competitive attack and therefore are more
stable assets.

Protection: 5% of brand strength. Securing full protection for the brand under international trademark and copyright law is
the final component of brand strength in the Interbrand model.

This model is not perfect, for example several of the components have a built in preference for older brands and so may not
give adequate recognition to the value of newer brands such as Amazon or Starbucks. However, it is certainly useful to
reflect on the seven components, and for your own brands ask yourself:

How do my brands currently perform? Does the model suggest any ways in which I could strengthen my brand?