Brand Valuation
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Brand ValuationCompilation by Rajesh Ingle - PhD27th & 28th Nov 2010
Section I
1)Introduction to Brands: Products v/s Brands
2) Anatomy of a Brand, Overview of brand building process
3)Customers and Brands: Understanding brands from the customer's perspective, Brand positioning and, Brand Identity
4)Introduction to Brand valuation
“What cannot be measured cannot be managed”
Jack Welch
Fundamentals
The Desire
The Willingness
The Ability
The Awareness
The word ‘brand’ is derived from old Norse word “brandr” , meaning burn,and it was by this method that early man marked is livestock
Salt
Soft Drin
k
Automobile
s
Cosmetics
Clothing
Jewelry
Furn
iture
Houses
Vacati
ons
Haircu
ts
Child Care
Television Repair
Lega
l servi
ces
Root Can
al
Auto Repair
Medica
l Diag
nosis0
20
40
60
80
100
120
IdeaServiceGoods
(Most Goods) ATL Activities
Product=
(Most Services)BTL Activities
Prosperity of Brand• Powerful consumer Insight
Understand and anticipate your consumers.• Focus
People and resources are concentrated where they can add greatest values.
• InnovationEvolve and adapt to changes in consumer needs and aspirations. The driver for innovation is not just insight , but foresight.
Successful brands• Have a clear customer benefit• Make a promise and keep it• Have simplicity, clarity and honesty• Have distinctive logos and design• Are widely available• Build trust• Have a price/quality trade off – win/win• Help consumers make good decisions• Offer consistently superior value• Are about the total experience• Result ? Higher margins, higher volumes, innovation,
better quality
Ref: Professor Malcolm McDonald (Cranfield University) 9th April 2010
Decline of brandBig five mistakes the company should avoid• Arrogance- Forgetting that the brand
actually belongs to the consumers.eg endless cycle of relaunches ,upgrades and extensions.
• Greed-Numerous companies have sought to make their prized assets more and more profitable.eg Unilever country soup.
• Complacency –Sitting back and resting on reputation only to discover that faster, hungrier , more innovative competitors have passed them by.
• Inconsistency- Consumer’s expectations of consistency extend well beyond the quality of the ingredients they expect to find in a branded product, or the customer service standard they expect from a branded service. Increasingly , consumers expect the values of brand to be reflected in every aspect of business behind the brand.
Decline of brand
• Myopia- We live in a world of permanent change. Those who fail to Understand the consequences for change for their brands inevitably put those brands at risk.
(Ref: Ex Unilever Chairman Mr. Nial Fitzgerald’s speech)
Decline of brand
What went wrong with many brands?
• Success led to smugness• Superior margins became the primary purpose• Cutting corners/reducing costs• Economical with the truth (eg. ‘low fat’, but no mention of
high sugar content)• Add some gold to the packaging (illusion of quality)• Made decision-making harder• Became the new commodities
Ref: Professor Malcolm McDonald (Cranfield University) 9th April 2010
What went wrong with many brands
Single brand across organisation
Endorsed brands House of brands
Branding possibilities, few examples………….
Source: Davidson H
BRAND PORTFOLIO AND ARCHITECTURE
Brand Relationship SpectrumTypes of Brand
Type 1:
Single Brand AcrossOrganization
Type 2:
Endorsed Brands
Type 3:
House of Brands
Organized Brand Individual Brand
IBMMayo ClinicHarvard UniversityGreenpeaceGoldman Sachs
None
Ralph LaurenMicrosoftSonyMcDonalds
PoloWindowsPlay station 2Big Mac
Procter & GamblePfizerWoodruff Arts Center
PampersViagraAtlanta Symphony Orchestra
Brand
Nest e
Brand
Source: Davidson, H.
Brand Value Added BVA® varies by sector
Perf
um
es
FM
CG
Con
su
mer
E..
.
Wh
ite G
ood
s
Fin
an
cia
l S
...
Mob
ile
Uti
liti
es
Bu
lk C
hem
i...
0
10
20
30
40
50
60
70
80
90
100
Source :Brand Finance
have paid £31 billion forbut have bought only £4 billion of tangible assets- Gillette brand £ 4.0 billion- Duracell brand £ 2.5 billion- Oral B £ 2.0 billion- Braun £ 1.5 billion- Retail and supplier network £10.0 billion- Gillette innovative capability £ 7.0 billion
TOTAL£27.0 billion(David Haigh, Brand Finance, Marketing Magazine, 1st April 2005)
Intangibles
• VW purchased Rolls Royce Motors from Vickers for USD 909 Millions.
• 2/3rd of the amount paid was for Good will.• This was a celebration time for VW till they
realised…………………………………….
• The trademark Rolls Royce belonged to company named Rolls Royce PLC.• This trade mark was sold to BMW for only USD 73 Millions.
Did you know??
In 1996 Plymouth Gin was acquired by private investors led by John Murphy. During this time Plymouth was again being produced with grain spirits and Master Distiller Sean Harrison began his career with Plymouth and is still there today. Production had dropped to an all time low with virtually no exporting. By 1999 UK sales had tripled to 18,000 cases and the exports were on the rise. Plymouth Gin returned to its traditional strength of 41.2% abv.
In 2001 Vin & Spirits (the parent company of Absolut) buys 50 % and global distribution was now available. UK sales went up to 36,000 cases. By 2002 case sales reached 60,000 and Plymouth Gin was declared the ##1 premium gin by Impact Magazine in the UK outselling Bombay Sapphire and Beefeaters. Today Plymouth is fast becoming the favorite spirit of mixologists world wide.
Did you know??
Notes of Cautiona)Drop in the Hutch brand in India must have resulted in direct loss of USD 6.5 Billion, as this is the perceived value of the brand.
b)Vodafone acquisition of Mannesmann (Germany). It paid a heavy price for its haste and recently announced that it was writing off £ 28 billion in goodwill from its balance-sheet related to its Mannesmann acquisition in 2000.
Did you know??
• On March 2001, the UK’s Post Office, founded in 1635 by Charles I, changed its name to Consignia.
• On June 13, 2002 the name was changed back to Royal Mail.
• USD 92,000 was spent on branding exercise and later USD 2million in consigning the Consignia name to history, as it alters the signs on 3,000 buildings to meet company law requirements.
Did you know??
How have other companies done it?
New positionand organisation
New identityand organisation
New beliefsand role
New directionand empathy
New contextand direction
New directionAnd organisation
Businessobjectivesof change
Whatdrove the
change
Whatactuallychanged
Estimatedcost of
rebranding
Benefitsof change
- Brand Value,-Business Value
Contextfor
change
• RJR Nabisco sold their brand to Kohlberg, Kravis and Roberts for $30 Billion?
• Philip Morris bought Kraft for $12.9 billion ($ 11.6 billion for “goodwill”)?
• Nestle bought Rowntree (home for Kit-Kat, After Eight, Polo…) for $4.5 billion. More than five times book value?
Did you know??
Harley Davidson has patented the thumping sound of its engine.
Did you know??
Brands are key intangibles in most businesses
Brand20%
OtherIntangible Assets55%
TangibleAssets25%
Developed Markets
Brands are estimated to represent at least 20% of the intangible value of businesses on the major world stock markets. Brands combine with other tangible and intangible assets to create value
Intangible assets
Brand
Software
Patents
Distribution rights
Tangible assets
Assembled workforce
Business Goodwill
Marketing intangible
Technology intangibles
Customer intangible
Contract intangibles
Illustrative
Source: Brand Finance
Customer relationships
Asset split across selected economies
Asset split across selected economies26
Asset Breakdown for the top 10 countries by Enterprise Value (US$ millions, 2008)
Inter Tech’s 5 year performance
Performance (£million) Base Year 1 2 3 4 5
Sales Revenue- Cost of goods sold
£254135
£293152
£318167
£387201
£431224
£454236
Gross Contribution- Manufacturing overhead- Marketing & Sales- Research & Development
£119481822
£141582323
£151632423
£186822625
£207902724
£218952824
Net Profit £16 £22 £26 £37 £50 £55
Return on Sales (%) 6.3% 7.5% 8.2% 9.6% 11.6% 12.1%
AssetsAssets (% of sales)
£14156%
£16255%
£16753%
£19450%
£20548%
£20645%
Return on Assets (%) 11.3% 13.5% 15.6% 19.1% 24.4% 26.7%
Performance (£million) Base Year 1 2 3 4 5
Market Growth 18.3% 23.4% 17.6% 34.4% 24.0% 17.9%
InterTech’s 5 Year Market-Based Performance
Customer Retention (%)New Customers (%)% Dissatisfied Customers
88.2%11.7%13.6%
87.1%12.9%14.3%
85.0%14.9%16.1%
82.2%24.1%17.3%
80.9%22.5%18.9%
80.0%29.2%19.6%
InterTech Sales Growth (%)Market Share(%)
12.8%20.3%
17.4%19.1%
11.2%18.4%
27.1%17.1%
16.5%16.3%
10.9%14.9%
Relative Product QualityRelative Service QualityRelative New Product Sales
+10%+0%+8%
+8%+0%+8%
+5%-20%+7%
+3%-3%+5%
+1%-5%+1%
0%-8%-4%
Why Market Growth Rates Are Important
A quick glance at Table 2, however shows that most market indicators are negative. It is obvious that, when market conditions are less benign, this company will not last long.
There is frequently one line of revenue and dozens of lines for costs. Can this be changed?
The Big Question?
• Why does the world need this brand?• Who are the competitors – near and far?• How does this brand differ from competitors?• Who are the customers for this brand?• Who are NOT customers for this brand?• What exactly is the product/service this brand
will offer?• What is the ‘know-how’ of this brand?• What is this brand NOT?• Are the company’s processes aligned behind the
brand?• Can employees articulate the answer to
question one?
Essential Questions
THANK YOU
1)Reasons for valuation of Brands
2)Brand Equity: Development and Measurement
3)Managing the Brand Portfolio over time
Section II
?Why Value Brands ?
Vendor Acquirer Goodwill/Consideration
Rowntree Nestle 83%Pillsbury Grand Metropolitan 86%Trebor Cadbury-Schweppes 75%Verkade United Biscuits 66%
Identification of opportunities
Price Negotiation
Mergers and Acquisitions
Competitive pressuresStock exchange pressuresAvailability of resourcesPresence of ambitious management team
Rational groundsKnowing the premium , before handPreparing the finance packageInherent value of the brand
Why Value Brands?
Projective visionary process based on fact rather than hunch
Brand ExtensionInternational
Branding
Resource allocation Financial Appraisal
Management Information
Brand Strategy
Which to milk andwhich to dispose off
Understanding the revenueproducing assets
Modelling tool for the exploration of various ‘what if? ‘ option
Internationalisation of brandsby identifying key strengths and weakness
Why Value Brands?
IFRS , US GAAP
Goodwill
Gearing
Balance Sheet Benefits
Borrowing capabilities
Lenders are beginning to look at Brands as assets on which to secure borrowings
Gearing ratios are closely watchedby lenders, making it inevitable forBrand valuations
Why Value Brands?
Investor Presentations
Brand Licensing and Franchising
Presentation on strength of brand to its share holders and investor’s community.Undergoing analysis to draw attention to the particular strengths and features of brands
Royalty rates planned are still largely subjective.Trademark owner still ask for what is attainableBrand valuation can assist to provide the framework for setting the royalty rates
Why Value Brands?
How is brand value created?
Customer Impact
BusinessDrivers
FinancialResults
MarketingInvestment
• Brand development• Innovation• Communications
• Unique experiences• Loyal behaviour• Price insensitive
• Revenues• Value uplift• Costs and risks
• Profits• Future cashflows• Returns to investors
BrandPower
BrandValue
BrandEquity
• Perceived value• Preference• Loyalty
• Business impact• Leverages drivers• Reduces risk
• Future security of earnings• Economic value • Royalty rates
Source: Brand Finance
Range of Services
Brand Valuation
Technical Brand Valuations
Brand Due Diligence
Value-BasedMarketing
Balance Sheet Valuations
Brand Portfolio Review
Tax Valuations
Dynamic Brand Value
Modelling
Acquisitions
Return on Brand
Investment
Development of Licensing
Programmes
Disposals
Private Equity Transactions
Initial Public Offerings
Brand Value Scorecards
Expert witness
Brand Licensing
Advice on Royalty Rates
Due Diligence on trade marks and licensing
Brand Transitions
Investor Relations
Investor Realtions
International Financial Reporting Standard (IFRS 3), which came into force at the end of March 2004, provides for a single international accounting treatment for acquisitions. Adopting the precedent set by US Financial Accounting Standard 141 (FAS 141) of June 2001, IFRS 3 requires that “goodwill” be specifically allocated to the intangible assets required.
FAS 141 and IFRS 3 is to require companies to be transparent about the nature and scale of the assets that they are acquiring. It is no longer permissible to report a single “goodwill” figure representing the excess of the purchase price over the tangible assets acquired.
Other current reasons on Brand Valuation
Other current reasons on Brand Valuation
• Goodwill must be allocated to five classes of intangible assets-
1)Technology based assets ( such as Patents),
2)Contract Based assets (such as Lease and licensing agreements)
3)Artistic assets (such as plays and films),
4)Customer-based assets (such as customer lists)
5)Marketing-related assets (such as trademarks and brands)
© Brand Finance plc 2006
“ISO 10668 gives brand valuation analysis the
Institutional credibility which it previously lacked. It
professionalises brand management.”
David Haigh, CEO, Brand Finance Plc
© Brand Finance plc 2006
The new ISO 10668 applies to Brand Valuation commissioned for all purposes
including :• Accounting and financial reporting• Insolvency and Liquidation• Tax planning and compliance• Litigation support and dispute resolution• Corporate finance and fund raising• Licensing and JV negotiations• Internal management information and reporting• Strategic planning and Brand management
Also can be used for:• Brand and marketing budget determination• Brand portfolio review• Brand Architecture analysis• Brand Extension planning
ISO 10668 – New International Standards on Brand Valuations
© Brand Finance plc 2006
ISO 10668 :Module 1 Legal Analysis
Define what is brand and which Intangible assets to be included
ISO 10668 :Module 2 Behavioral Analysis
To understand and form an opinion on likely stake holder behaviour in each of the
geographical, product and customer segments in which the subject brand operates.
ISO 10668 :Module 3 Financial Analysis
Conducting a thorough financial analysis
ISO 10668 specifies three alternative brand valuation approach: Market, Cost and
Income.
Requirements of an ISO Compliant brand valuation?
© Brand Finance plc 2006
ISO
THANK YOU
1)Various ways of valuation of brands and the advantages and disadvantages associated with it.
2)Implication of IFRS on Brand valuation
Section III
Brand Valuation: Difficulties
……………..everybody has a opinion of price but the opinion rarely matches
Brand Valuation : Difficulties
• Future benefits need not be monetary in nature.
……..as a collector of old books, you will not buy it for future economic benefit but you will buy it for pleasure and satisfaction.
Brand Valuation: Difficulties It emphasizes the fact that value is dependent on
characteristics of the owner and the purpose for which the property is being held.
……….A winning formula one car has great value to the sponsors and owners of the cars. If the same car is owned by private individual for use on private circuit, it may have far less value
Brand Valuation: Difficulties
The more idiosyncratic the asset the more care needs to be taken in identifying the true purpose of ownership.
……….A ten dollar bill has an immediate recognisable and realisable value , at least in its home country, and will have the same value regardless of the characteristics of its owner or the purpose for which it is put.
Valuation: Defined
• Valuation is defined as a process of assessing the value now of all future benefits flowing from ownership of a particular property.
Case on Valuation of Beer Brand
Simple “Beer Math”
Existing Approximation
The Problem
The Problem
How do we calculate value of ……
Packaging
Advertising
Distribution
Ingredients
Market
A Solution framework
Product Effect of Non- Brand Product All Brand Revenue = Characteristics * Influences
= Category Product Promotion Drivers Impact Impact Brand Equity
* MultiplierDistribution Random (BEM)Impact Shocks
Revenue due to
unbranded product
BEM must be >1 for brands to be value enhancing
© Brand Finance plc 2006
Various Valuation Approach
Sr.No. Approach towards Valuation Value in INR (Million)
1) Cost Approach 183.5
2) Income Approach 657.0
3) Market Approach 221.19
4) Premium Pricing Approach 1105.4
5) Royalty Relief approach 21.9
6) Interbrand's Approach 845.6
7) Brand Finance Approach 1086
© Brand Finance plc 2006
How to Value Brand
• Cost Approach– ‘Creations costs’ may be estimated by looking
back to brand launch and restating actual expenditure in current cost terms. (Cost of reproduction)
– “Re Creation” may also be estimated. However, there is no such thing called as identical brand so it is difficult to calculate a relevant re-creation number. (Cost of replacement)
© Brand Finance plc 2006
Cost approach
• Advantage– Works well for tangible assets like plant and machinery– Ideal for a new brand, where the time period is short and
the costs are readily available.• Disadvantage
– Asset acquired not for economic reasons, the method is less appropriate. (Eg the case of old book )
– It takes no account of future benefits accruing to the asset.
– Valuing Coca Cola by this method will be an extremely difficult task.
© Brand Finance plc 2006
Cost Approach
Cost of reproduction Cost of replacement(Computing the cost for (Replacing existing asset with anproducing exact replica of the asset) alternative that provide same Good for new asset , may not work future benefits)for old asset
Identify current cost of Identify the individualsimilar asset then adjust cost required to bring anthat cost to functional asset to current depreciation , physical situationdepreciation & economicobsolescence
© Brand Finance plc 2006
Case studyValuation
I] Cost method (Rs.in Mn)
Particulars Year (Historical)
0 1 2 3 4 5
Direct cost 1.8 60.9 73.4 90.4 109.6 132.7
Less: Production cost 42.5 51.3 62.0 74.8 90.4
Cost incurred for brand building 1.8 18.4 22.1 28.4 34.8 42.3
Compounded value 3.3 30.2 31.9 36.4 39.4 42.3
Brand value 183.5
Weighted average cost of capital (WACC)
Type of capital Proportion Cost Wt avg cost
Equity 0.40 20% 0.08
Debt 0.60 13% 0.05
0.13
© Brand Finance plc 2006
Market Approach
• It establishes a value for an asset by identifying those values placed on similar assets in the market place.
• Best suited for Real estate, Machinery and equipments in general use, Vehicles, General purpose computer software, Computer hardware, Liquor Licenses and Franchisees
• It however requires following:– There must be a proper market in the assets being valued.– Transaction taking place in the market must be at arm’s length– The precise terms of transaction taking place must be known so
that valid comparison can be made.– The precise timing of the transaction should be known to allow
proper comparison
© Brand Finance plc 2006
Case StudySr.No. Statement Value in INR (Mn)
1) NOPAT (Five years) 44.23
2) Brand value (NOPAT *5)(Similar category soap brand was sold last year with multiple of 3)
221.19
Challenges:1)Every buyer has a different set of parameters regarding how much to pay for a brand or brand portfolio.2)Amount may fluctuate widely according to the buyer’s characteristics and purpose.3)Information that would facilitate comparable analysis is simply not available.
© Brand Finance plc 2006
Cash Flow/ Income approach
• This approach ignores the costs of reproducing or replacing an asset but concentrates on the future cash flows to be derived from the ownership of that asset.
• The future cash flows are discounted to what is called net present value by applying a discount rate which is intended to reflect the risk of the future cash flows being realised
• Best suited for Contracts, Licenses and Royalty agreements, Patents, trademarks , copyrights, Franchisees, securities and Business enterprises
© Brand Finance plc 2006
Cash Flow/ Income approach
• Challenges– Quantification of future cash flows: The future cash flows could be
impacted with market circumstances, outside the control of owners. Also difficult to separate out brand – related cash flows from cash flows generated from efficiencies of other area of business like such as plant and machinery, distribution etc.
– All brand have a finite life– Assessment of risk is required to establish an appropriate discount
rate: Strong brands are less risky than weak brands
© Brand Finance plc 2006
Case StudyIncome method (Rs.in Mn)
Particulars Year 5 Years (Estimation)6 7 8 9 10
Revenue 212.6 255.1 301.0 346.2 380.8 418.9 Estimated growth in revenue 20% 18% 15% 10% 10%Direct Cost 132.7 159.2 187.8 216.0 237.6 261.4 Cost as % of revenue 62% 62% 62% 62% 62% 62%Gross profit 79.9 95.9 113.2 130.2 143.2 157.5 Gross margin % 38% 38% 38% 38% 38% 38%Indirect overheads 37.7 39.6 41.5 43.6 45.8 48.1 EBITDA 42.3 56.4 71.6 86.6 97.4 109.4 Less: Interest 2.0 2.4 2.8 3.3 3.6 3.9 PBDT 40.3 54.0 68.8 83.3 93.8 105.5 Depreciation 1.0 1.0 1.0 1.0 1.0 1.0 PBT 39.3 53.0 67.8 82.3 92.8 104.5 Tax 13.3 18.0 23.1 28.0 31.6 35.5 PAT 25.9 35.0 44.8 54.3 61.3 69.0 Terminal value 888.6 Net income 25.9 35.0 44.8 54.3 61.3 957.5 Brand Value (Present value) 657.0 Discount rate 13% Terminal growth rate 5%
© Brand Finance plc 2006
Price Premium Approach• This system is based upon the extra price (or profit) which a branded
product may command over an unbranded or generic equivalent.• Challenges:
– The rise of private label makes it difficult to identify a generic.– Many Branded products do not have generic equivalent (eg Perfumes)– It is difficult to conceive that a generically equivalent product could be
offered at anything like as keen as a price as the branded product .(eg Mars bar)
– Selling prices are often related to short- term tactical factors.
• Hence this cannot be a way of understanding brand value. However premium pricing can serve as an indication of brand strength and may therefore play an important part in a valuation
© Brand Finance plc 2006
Case study5
• BV= ∑ (Earnings)ii=1 (1+K)I
Where k= opportunity cost of capital which is equal to WACC= 0.13
(Earnings)I = Earnings of the ith year growth earnings =15%
Hence Brand Value is 1105.4 Mn
© Brand Finance plc 2006
Simpler way
If Kellogg’s sells 1 billion cartons of cereal in Europe and we find that on average it sells at a rough price premium of 30% . We can say that the brand in Europe is worth 300 million Euros.
Volume X Price premium = Brand Value
© Brand Finance plc 2006
Economic substitution analysis
• If we didn’t have that trademark or brand what would the financial performance of the branded business be? How would the volumes, values and costs change?
• The problem with this approach is that it relies on subjective judgments as to what the alternative substitute might be.
• The two most useful economic use approaches are the earnings split and royalty relief approaches.
© Brand Finance plc 2006
Earnings Split Approach• Under an earnings split approach we attribute earnings above a break-
even economic return to the intangible capital. This involves four principal steps.
1) Appropriate segmentation of the market to ensure that we study the brand within its relevant competitive framework.
2) The second step is to forecast the economic earnings of the branded business earnings within each of the identified segments. These are the excess earnings attributable to all the intangible assets of the business.
3) The third step is to analyse the business drivers research to determine what proportion of total branded business earnings may be attributed specifically to the brand.
4) The final step is to determine an appropriate discount rate based on the quality and security of the brand franchise with both trade customers and end consumers.
© Brand Finance plc 2006
Illustration of valuation approach (Brand Finance)
= Total
+ Segment A
+ Segment B1. Segmentation
2. Due diligence of forecasts
Yr4
Yr2
Yr3
FutureValue
Discounted to present value
Future Cash Flows
BusinessValue
Yr1
3. Brand contribution to earnings4. Risk attached to
future earnings
Yr5
TrademarkValue
© Brand Finance plc 2006
Royalty Relief model
• Royalty relief assumes that a company has no brand and needs to license one. If a brand has to be licensed from a third party a royalty rate turnover will be charged.
• Ownership therefore relieves the company from paying a license, hence royalty relief.
• This is the most frequently used method of valuation because it is highly regarded by tax authorities and courts, largely because there are a lot of comparable licensing agreements in the public domain. It is relatively easy to calculate a specific percentage that might be paid to the trademark or brand owner.
© Brand Finance plc 2006
Source :Brand Finance
• Determine a royalty rate range in each sector Comparable licensing agreements Industry norms, databases, precedents
• Calculate specific royalty rate Quantify the strength and performance of the
brand relative to its competitors – Brand Power Index
The composition of the Brand Power Index will depend on the market, customer and market research data available
Apply the Brand Power Index score to royalty rate range
• Margin analysis and commercial sense checks
Royalty rate range
Brand PowerIndex
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
71
Royalty Relief model
© Brand Finance plc 2006
Case Study (INR mn)
Royalty Relief method Years 6 7 8 9 10
Revenue 255.1
301.0
346.2
380.8
418.9
Royalty rate 0.0
0.0
0.0
0.0
0.0
Royalty 1.3
1.6
1.9
2.1
2.3
Terminal value 29.1
Cash flow 1.3
1.6
1.9
2.1
31.4
Brand value 21.9
Discount rate 13% Terminal growth rate 5%
© Brand Finance plc 2006
Interbrand’s Approach
• To determine a brand’s value, certain key factors needs to be determined– Brand earnings– Brand Strength (which sets the multiple or
discount rate)– The range of multiples (or discount rates) to be
applied to brand earnings
© Brand Finance plc 2006
• Step 1-Identify the factors that may impact a brand’s value. Market Leadership Stability Market Internationality Trend Support Protection
© Brand Finance plc 2006
Interbrand’s Approach
• Step 2-Decide the relative importance of each factor.Since the mentioned seven factors are of equal importance , so Interbrand has weighted them appropriately by giving each one a different maximum score.
Interbrand Factors WeightingLeadership 25Stability 15Market 10Internationality 25Trend 10Support 10Protection 5Brand Strength 100
© Brand Finance plc 2006
Interbrand’s Approach
• Step 3: Score the brandsInterbrand Factors Weighting Brand A Brand BLeadership 25 20 7Stability 15 12 7Market 10 10 10Internationality 25 22 12Trend 10 7 5Support 10 7 7Protection 5 3 3Brand Strength 100 81 51
© Brand Finance plc 2006
Interbrand’s Approach
• Step 4: Estimate the amount of earnings attributable to the brand
Brand earnings for Brand A and Brand B
$ million Brand A Brand BProfit after tax (PAT) 200 150Deduct overhead costs (50) (50) Deduct profit (Not attributable to brand) (100) (50)Brand earnings 50 50
© Brand Finance plc 2006
Interbrand’s Approach
Multiple
Brand Strength Score
Converting Brand Strength into Multiple
© Brand Finance plc 2006
Interbrand’s Approach
• Step 5: Value the Brands
Brand values for Brand A and Brand B (USD Million)
Brand A Brand BBrand earnings 50 50Multiple 18 11Brand earnings 900 550
© Brand Finance plc 2006
Case Study
Valuing the Brand A
Brand Earnings 52.8
Multiple Applied 16
Brand Value (INR mn) 845.6
© Brand Finance plc 2006
Brand Finance Approach
• This approach seeks to forecast future brand earnings. These are then adjusted –discounted- to reflect the ‘time value of money’ (the dollar today is worth more than a dollar a year from now).
• It uses Financial forecast, Branded business earnings, Demand Drivers Brand Value Added Index and Risk Factors (Brand Beta)
© Brand Finance plc 2006
Start with a ‘Branded Business’ valuation
FutureValue
discounted at cost of capital
FUTURE CASH FLOWSOVER PLANNING PERIOD
PERPETUITY
BrandedBusiness
Value
Today Time
Yr.1
Yr.2
Yr.3
Yr.4
Yr.5
© Brand Finance plc 2006
Tangible
BrandedBusiness
Value
Intangible
Business value - Value tangible assets =
Split between tangible and intangible assets
%
%
Value intangible assets
© Brand Finance plc 2006
Intangible
Brand represents a proportion of intangible value
Patents
Trademark
Software
Recipe
© Brand Finance plc 2006
Reconciling the answer
• Brand value should be reconciled back to total intangible asset value and to Branded Business Value as a sense check
Tangible
BrandedBusiness
Value
Intangible
Patents
Trademark
Software
Recipe %
%
%
%
%
© Brand Finance plc 2006
Illustration of valuation approach
= Total
+ Segment A
+ Segment B1. Segmentation
2. Due diligence of forecasts
Yr4
Yr2
Yr3
FutureValue
Discounted to present value
Future Cash Flows
BusinessValue
Yr1
3. Brand contribution to earnings4. Risk attached to
future earnings
Yr5
TrademarkValue
© Brand Finance plc 2006
Flexing the brand’s economic use
BVA
Magnitude ofearnings
BVA
Magnitude ofearnings
Brand Beta
Quality of earnings
Brand Beta
Quality of earnings
Contributionof brand
to demand
Contributionof brand
to demandResilience of
the brandResilience of
the brand
• Increase cash flows levels
• Accelerate cash flows
• Reduce risk attached to future cash flows
© Brand Finance plc 2006
1 Brand Value Added BVA® varies by sector
0
10
20
30
40
50
60
70
80
90
100P
erf
um
es
FM
CG
Co
ns
um
er
Ele
ctr
on
ics
Wh
ite
Go
od
s
Fin
an
cia
lS
erv
ice
s
Mo
bile
Uti
litie
s
Bu
lkC
he
mic
als
© Brand Finance plc 2006
2 Setting the Discount Rate
• A strong brand provides a more secure stream of future earnings and demands a lower discount rate
• We use a variant of WACC based on brand strength scoring– Cost of equity flexed for brand risk– Cost of debt flexed for brand risk– Weighted for owner or for sector
© Brand Finance plc 2006
3 ßrandßeta®Scoring Template
Attribute ScoreTime in market 0 -10Distribution 0 -10Market share 0 -10Market position 0 -10Sales growth rate 0 -10Price premium 0 -10Elasticity of price 0 -10Marketing spend/support 0 -10Advertising awareness 0 -10Brand awareness 0 -10
TOTAL max 100
© Brand Finance plc 2006
Forecasts
Economic Value Added
Branded Business Value
Internaldue
diligence
Marketdue
diligence
Outline of Brand Valuation process
Drivers of demand(BVA®)
Discount rate(BrandBeta®)
Market
Business
Customer
Market
Business
Customer
Branded Value
© Brand Finance plc 2006
Is brand investment creating value?
D
Current valueof portfolio
BrandedBusiness
Value
Value creationopportunity
Resources allocation &Management Time
??
B
C
A
E
F
© Brand Finance plc 2006
What is driving consumer value?
Importance
10 20 30 40 50 60
Size
Features
Availability
Design
Exclusivity
CompetitorsPerformance
10 20 30 40 50 60
Size
Features
Functional delivery
Availability
Design
Exclusivity
Image
Leadership
… and understand how we perform against competition
© Brand Finance plc 2006
How do they effect business results?
10 20 30 40 50 60
Size
Features
Weight
Availability
Design
Exclusivity
Coolness
10 20 30 40 50 60
Size
Features
Weight
Availability
Design
Exclusivity
Coolness
Volume
Pricing
Cost of sale
Cost of ops
Cap employed
Cost of cap
Image
Revenue
Costs
Op Profits
Capital cost
Ec Profit
… how does customer economics impact our revenues and profits
© Brand Finance plc 2006
MVEquity
MVDebt
IntrinsicBrandedBusiness
Value
MVGap
MarketValue
Market and intrinsic value often differ
HiddenValue
© Brand Finance plc 2006
Brand:
Enterprise valuation
Branded Business Value 3,181,300 Total Brand Value 254,504
Earnings approach - Enterprise Value
GBP HistoricYear ended 30 September 2002 2003 2004 2005 2006 2007
Revenue DriversTotal Market Size 700,000 833,333 925,147 944,138 986,717 1,029,412 Market Share 25% 27% 29% 31% 31% 32%Volume 175,000 225,000 268,293 292,683 305,882 329,412 Price 8.00 8.00 8.20 8.20 8.50 8.50
Total Sales 1,400,000 1,800,000 2,200,000 2,400,000 2,600,000 2,800,000growth % 29% 22% 9% 8% 8%
Total Direct Costs 790,906 1,200,000 1,350,000 1,500,000 1,600,000 1,700,000growth % 52% 13% 11% 7% 6%
Gross Profit 609,094 600,000 850,000 900,000 1,000,000 1,100,000margins % 33% 39% 38% 38% 39%
Forecast
Utilities Brand
Branded Business Value Brand Value
Which links to the valuation model
Drivers of revenue: market share/ volume/ price premium
Drivers of direct cost: supplier costs/ trade discounts
© Brand Finance plc 2006
Salaries 294,000 300,000 308,000 316,000 325,000growth % #DIV/0! 2% 3% 3% 3%
Marketing 46,000 50,000 52,000 53,000 55,000growth % #DIV/0! 9% 4% 2% 4%
Other overheads 112,000 118,000 124,000 130,000 135,000growth % #DIV/0! 5% 5% 5% 4%
Total administrative expenses 595,901 452,000 468,000 484,000 499,000 515,000growth % -24% 4% 3% 3% 3%
Profit Before Interest and Tax 13,193 148,000 382,000 416,000 501,000 585,000growth % 1022% 158% 9% 20% 17%
Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%Tax Charge 3,958 44,400 114,600 124,800 150,300 175,500
Profit After Tax 9,235 103,600 267,400 291,200 350,700 409,500
Discount Rate 12.5% 12.5% 12.5% 12.5% 12.5%Discount Factor 1.13 1.22 1.37 1.54 1.74
Discounted Profit After Tax 92,062 219,632 212,543 227,464 236,021
Drivers of internal cost: staff costs/ productivity
Drivers of financial cost: cost of debt/ cost of equity/ gearing = WACC
Which links to the valuation model
© Brand Finance plc 2006
Brand Finance Approach Reporting Unit:
Brand: Soap
Market: Total
EARNINGS APPROACH Rs. £m
Branded Business Value 1,086 128
Value in Perpetuity 843 100
Value - Years to 2010 243 29
Enterprise Valuation (Rs. In Crores) Historic Forecast Year ended 31st March 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Revenues 121 146 176 213 255 301 346 381 419 461
% Growth 20.7 % 20.8 % 20.7 % 20.0 % 18.0 % 15.0 % 10.0 % 10.0 % 10.0 % Cost of Goods Sold ( Variable Overheads) (73) (90) (110) (133) (159) (188) (216) (237) (261) (285) % Growth 23.2 % 21.2 % 21.1 % 20.0 % 18.0 % 15.0 % 9.7 % 10.1 % 9.2 % % Margin (60.8%) (62.0%) (62.2%) (62.4%) (62.2%) (62.3%) (62.3%) (62.3%) (62.3%) (62.3%) Gross Profit 47 55 67 80 96 113 130 144 158 176 % Growth 16.9 % 20.0 % 20.2 % 20.0 % 18.0 % 15.0 % 10.4 % 9.8 % 11.4 % % Margin 38.0 % 37.8 % 37.6 % 37.6 % 37.6 % 37.6 % 37.8 % 37.7 % 38.2 % Advertisement & Promotions (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) % Growth 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % % sales (0.3%) (0.3%) (0.2%) (0.2%) (0.2%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) Fixed Overheads (33) (34) (36) (38) (40) (42) (44) (46) (48) (50) % Growth 4.9 % 5.0 % 5.0 % 5.0 % 4.8 % 5.1 % 5.0 % 5.0 % 4.0 % % Margin (27.0%) (23.5%) (20.4%) (17.7%) (20.6%) (19.6%) (19.3%) (19.8%) (19.6%) (19.6%) EBIT 14 21 30 42 56 71 86 98 109 126 % Growth 44.4 % 45.2 % 38.4 % 33.7 % 27.5 % 20.9 % 13.2 % 12.1 % 14.7 % % Margin 11.9 % 14.3 % 17.1 % 19.7 % 21.9 % 23.7 % 24.9 % 25.6 % 26.1 % 27.2 % Taxation 0 0 0 0 (21) (26) (32) (37) (40) (42) Tax rate 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Net Operating Profit After Tax (NOPAT) 14 21 30 42 35 45 55 61 69 83.50 % Growth - 44.4 % 45.2 % 38.4 % (16.5%) 29.2 % 20.8 % 11.7 % 14.0 % 20.3 % Discount Rate 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% Discount Factor 1.10 1.21 1.33 1.46 1.60 1.76 Discounted NOPAT 32 37 41 42 43 47
© Brand Finance plc 2006 106
Brand Scorecard Framework
Market & Financial
Performance
BehaviourMarketingActions
Perceptions
Trial
Frequency
Loyalty
Awareness
Familiarity
Salience
Quality perceptions
Value perceptions
Image perceptions
Preference
Marketing Investment & Performance Scorecard
Brand equity measures
Activitymeasures
Behavioural measures
Performance & Financial measures
© Brand Finance plc 2006 107
Brand Value Added($ million)
$25$20$15$10
$5
$0
-$5-$10
-$15-$20
-$25
Brand Equity Index
010
2030405060
7080 90100
Brand Performance Score
010
20
3040
5060
7080 90 100
Note: Measures have to be customised to each business model. Those shown above are for illustrative purposes. (Brand Finance)
Summary
Various Valuation Approach
Sr.No. Approach towards Valuation Value in INR (Million)
1) Cost Approach 183.5
2) Income Approach 657.0
3) Market Approach 221.19
4) Premium Pricing Approach 1105.4
5) Royalty Relief approach 21.9
6) Interbrand's Approach 845.6
7) Brand Finance Approach 1086
Other Proprietary Methodologies
Brand Asset Valuator:• One of the first models of brand equity. It was launched
by the advertising agency Young & Rubicam in 1993. It outlines four different blocks of brand equity:– Differentiation: It is the starting point for all strong brands.– Relevance: It should fulfill their specific need , it ‘fits in’ with
their lifestyle, they feel ‘this brand is for people like me’– Esteem: Extent to which the brand is held in high regards
(perceived quality)– Knowledge: It measures the extent to which consumers
understands and have internalised what the brand stands for.
Other Proprietary Methodologies
Equitrend• It is a brand equity measures developed by research house Harris
Interactive , and is used predominantly in North America. It has three key measures:– Quality : Measured on 10 point scale ranging from outstanding to poor
quality.– Salience : It measures the percentage of respondents who have an
opinion about the brand.– Equity: It Measures over all good will associated with brand
• Challenges– It lacks the diagnostic to depth.– It contains no real measure of brand loyalty– It fails to capture dynamic changes in brand’s position.
Other Proprietary Methodologies
Brandz• Method developed by WPP. It is a study collected annually by
interviewing over 650,000 consumers and professionals across 31 countries to compare 21000 + brands from a broad range sectors.
• Brand Dynamics pyramid consists of : Bonding, Advantage, Performance, Relevance, Presence, No Presence
Brandz Voltage• Bonding provides an indication of the strength of the brand, Voltage
score is a one- number summary of the growth potential of brand.
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