Valuation of Brands
An Overview
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Most Valued Luxury Brands
Brand Value
Louis Vuitton $23.58 b
Gucci $9.45 b
Hermes $6.18 b
Cartier $5.5 b
Tiffany $5.16 b
Burberry $4.34 b
Prada $4.27 b
Ralph Lauren $4.04 b
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Prospects for Brand Values - 2013
Bain & Company sees luxury goods growth cooling
worldwide to 4 to 5% in 2013 from 5% last year. Bain
forecasts a luxury market compound annual growth rate of
5-6% between 2013 and 2015. The total size of the market
was $273 billion in 2012 and Bain thinks it could reach
$290 billion by 2015.
Those brands will be the ones to watch when it comes to
clothing and accessories, at least.(Forbes 6/7/2013)
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Introduction
Brand Valuation assigns financial value to equity created by
name or image
Traditional accounting information focuses on financial
reporting and hence needs restatement
Accounting focus – Data must be reliable, verifiable and
unbiased
Valuation Focus – Data should future oriented, collected
outside the firm (not verifiable)
Ensure delivery of consistent brand image
If the entire organization knows how brand value is computed it is
easier to avoid actions that negate or reduce brand value
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What is Brand Valuation?
Brand Valuation quantifies the benefit of brand equity to the
owner of the brand
Brand Equity – brand loyalty, name awareness, perceived quality,
brand associations, competitive advantage created by brands
(Aaker -1991)
The process of valuing a brand requires a certain degree of
estimation and subjectivity
Process can be consistently applied over time and
important for brand management
Brand Valuation is a measure of performance and helps
evaluate magnitude of the brand vis-à-vis the company
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Uses of Brand Valuation
Financial
Acquisition Strategic
Reporting
Merger Brand Management
Corporate
Strategy
BRAND VALUATION
Brand Portfolio
Evaluation Performance
Appraisal - Managers
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Methods of Brand Valuation
Cost Based
Formulary Approaches
Approaches
Market Based
Income Based Approaches
Approaches
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Cost Based Approaches
Consider the costs involved in creating the brand from the stage of
research, product concept and all the marketing and sales inputs
Looks at historical information
Little future orientation , some future orientation is possible by using
replacement cost.
Need to identify historical costs some of which are not directly
related to the brand – basis of allocation ?
Richard Branson incurs costs on trying to circumnavigate the
globe in a balloon $4.9 million in 1998. How much do you
allocate to building the Virgin Brand
What discount rate
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Market Based Approach
Externally focused based on the price at which a brand can
be sold.
Determination is difficult when there is no ready market for
such brands
Create proxies for how financial markets value a brand
Similar brands may not be easy to come by
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Income-Based Approach
Examine future potential of the brand
Determine net revenues directly associated with the brand
and discount using appropriate discount rate
Several ways of determining net revenue
Compare a brands price premium to generic
Overvalues small brands with high premium and undervalues
larger brands with low premium
Value royalties associated with a brand as in a licensing agreement
Useful for international brands
Sales volume of branded against un-branded
Comparison of direct sales with retailer sales
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Formulary Approaches
Interbrand - useful for reporting and strategy
Three weighted average PAT as brand profitability
Only factors directly related to a brand’s identity considered
Only factors directly related to brand identity considered
This is at times difficult since the function may not be separated
from the brand
Gillette’s powerful distribution network
Apply a multiplier to brand profitability
Multiplier based on 7 factors weighted by Interbrand proprietary
model
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Formulary Approaches – Interbrand Variables
Leadership – the ability of the brand to function as market leader and
secure the benefits of a dominant position
Stability – brands that retain their image and consumer loyalty over a
long period are more valuable
Market – brands are more valuable in certain product markets than
others
Internationality – brands known around the world have greater capacity
to increase market
Trend- The ability of the brand to remain current despite competition
Support – Brands that are consistently supported by the company
Protection – related to legal issues related to the brand. Is the brand
protected by a registered trademark
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Formulary Approaches – Financial World Variables
Estimate operating profits attributable to a brand and
compare with unbranded
Adjust resulting premium for taxes
Multiply adjusted premium with Interbrands seven variables
using Interbrand’s assessment of brand strength
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Acker’s “Brand Equity Ten”
5 categories of measures to establish a comprehensive
measure of brand equity
Measure of price premium
Satisfaction or loyalty
Perceived quality
Leadership
Popularity
Superiority of formulary approaches lies in the
comprehensive nature of these measures
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Capitalization of Brand Values
Even though a brand is not tangible it can be bought and
sold like a physical product.
In Australia, New Zealand and UK brands can be
accounted for on the balance sheet
US brands not included unless it was purchased in which
case it can be capitalised and amortised
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Example: FW Illustration
Brand Value = product of annual net after tax profits adjusted to
exclude the net earnings expected for an unbranded product (averaged
over time) and a multiple reflecting the brands strength
Leadership ability to influence the market;
Stability ability to maintain a consumer franchise
Market vulnerability of demand to changes in taste or technology
International scope cross cultural potential
Trend long term appeal to consumer
Support strength of communication
Protection strength of brand owners legal or property rights
Multiples range from 6 to 20. Greater the brand strength greater the
multiple
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Estimating the Value of Kellogg’s Brand
Brand all $ million 1992 1993 1994
Coca Cola 33,446 35,950 39,050
Marlboro 39,469 33,045 38,714
Pampers 5,924 5,732 5,919
Dewars n.a. 765 761
Black and Decker n.a. 855 1,627
Kellogg 9,678 9,372 11,044
Kodak n.a. 10,020 11,594
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Price/Sales Ratio
P0/S0 = P/S = [Profit margin x Pay-out ratio x (1+gn)]
÷ [r - gn]
Value of a brand name = [(P/S)b – (P/S)g] x Sales
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Corporate Brand – Live Example 1 (1999)
Alpha Limited
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Background
Wholly Indian Company
Company in Agro-chemicals, plant nutrients and pesticides
Turnover – US$ 300 million
Employees 500
Products – Widely sold all-over India under brand names
with a fixed corporate prefix – E.g. alpha-growth a plant
nutrient
Valuation of corporate brand Alpha used in all products
Purpose – To consider valuation for an IPO
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Data and Methods
Data collected 7 year
Historical
Annual data on all R&D and product introduction costs
Annual Data on all brand building efforts for each brand
Marketing costs on product awareness creation
Sales and distribution costs across regions
Volume growth for each product and product group
Price changes of each product and group
Market share data
Current
Price point of competition for each product
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Valuation Methodology
Corporate brand value is sum of all product brand values
For each major product/ product group examine brand
investment in terms of
Research and development expenses
Product development
Marketing investment
Sales effort
Investment recognized in terms of time and amount
Time Value of Money considered
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Valuation Methodology II
Price Premiums on products and product groups identified
Products classified into products of strong premium,
marginal premium and no premium
Product price difference between Alpha brand and
unbranded (weakly branded) identified as brand premium
Volume forecasts obtained for each product for the next 5
years
Forecasts of sales and expenses done for each of the
strong and marginal premium brands
Non premium brands ignored
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Valuation Methodology III
Investment in brand development
Specific investment on brands or product developments forecast for each of
the previous product groups
Other investments of marketing and selling expenses allocated in
proportion of brand sales to total sales
Corporate Discount rate determined on the basis of debt and equity
structure and reference group of listed entities in the same business
.
Sales less identifiable and allocated expenses taken as contribution
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Valuation 1 – DCF of Brand Premium
Sales premium = Difference in selling price x actual
quantities sold
Investment Premium = Actual investment by company less
standard investment based on selling and marketing
expenses of standard companies
Help in assessing this was taken from the marketing and
sales team
Terminal value a multiple
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Valuation Method 2 - Multiple
Based on margins price to sales ratios estimated for Alpha
and unbranded company on the basis of profit margins,
growth and cost of equity (Reference Damodaran)
The difference in P/S ratio between target and unbranded is
taken as the brand premium
Brand Premium x Sales (Current) = Value of Brand
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Limitations
Many companies unlisted so quality of data questionable
Quite a large number of costs were allocated and not
traced to building the specific brand as records not kept
with brand valuation in mind
Multiples valuation was based on many assumptions as
data for unlisted companies was not easy to come by.
Time consuming the effort took about 6 months
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Benefits
The entire top management and particularly MD (CEO)
takes a keen interest at all stages of the exercise
Brand consciousness in senior management
Achieves a benchmark for the corporate brand
Comprehensive review of all brands helped the company
evolve a new dynamic corporate strategy
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Beta Limited - 1998
An interesting brand valuation
exercise
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Situation 2009
From 1970s Beta has invested in building the brand and
has taken it from a relatively obscure unknown brand to the
best recognized brand in India for that product
Current Sales (2009): $200 m; Net Profit: $13m; Return on
Net-worth 31%
Sales CAGR since 2003: 21% Net profit (30%)
Leading brand in a product segment with almost 50%
market share
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Situation Historical
Gamma limited – privately held company owned by the
management group of Beta limited.
Beta a publicly held company listed on stock exchanges
with public shareholding
Gamma owns a brand which has been leased in perpetuity
to Beta. The lease was done in the 70s.
Lease in perpetuity and irrevocable unless the management
ownership structure of Beta goes down as a result of stake sales by
any of the management team
Fixed Lease rental unchanged since 70s
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1999 the Proposition
Brands to be sold by Gamma to Beta for a one time
consideration
The absence of ownership of brand seen as a poison pill
which destroys Beta’s shareholder value
Issues of Corporate Governance emerge
Brand Value created over 20 years by Beta and Beta plans
to extend the brand to many other categories (related)
taking the investment to another level.
Beta now a public company while the lease was agreed
when the company’s were small and closely held.
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Valuation Method
Market Multiples
Share Price to Sales of beta compared to market multiples of
unbranded lesser brands (Damodaran)
Lesser brands not listed so derived market multiple based on
margins, growth, risk. These were estimated after discussions
with Beta company sales and marketing executives
Royalty perpetuity
Value of Brand = Royalty / (WACC) Where WACC is the cost of
capital of Beta (Value of Brand in Beta’s hand)
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Valuation Method ctd
Brand Premium
Determine the investment in the brand over the last few years
Advertising budgets
Brand extensions
Promotion
Sales and Sales force budgets
Marketing Budgets
Discounted value of investments determined in 1999.
Sales Quantity x Pricing Premium = Brand Equity
Consider Sales of the original product and all extensions
All brand building expenses treated as cash outflows
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Valuation ctd
Determine proportion of Brand building expenses to Brand premium
Proportion x discounted value of various expenses (marketing etc.)
= Brand building investment = I
Discounted Value of (Brand Premium – Brand building expenses) –I
= Value of Brand
Value of Brand range
Royalty method : $ 5 m
Multiples Valuation: $88 m
Brand Premium Valuation: $130 m
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What is the right Brand Value?
Considerations
Fair to all shareholders of Beta => Minority, Institutions, Funds and
Management Group
Fair to owners of Gamma.
How to ensure value neutrality in the transaction?
What the market could pay?
Highest Valuation?
Weighted Average?
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What Happened?
Brand acquired at $6 million (1999-2001)
Estimated market value of brand $ 110 million (2001)
Turnover $146 million
Net Profit $ 10 m
Not to be quoted or transmitted in any form
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