Professional Documents
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Master Thesis
ZARA: A Case Study about Brand Valuation
Porto 2011
CATHOLIC UNIVERSITY OF PORTUGAL
School of Economics and Management
MSc. in Finance
Master Thesis
ZARA: A Case Study about Brand Valuation
The 100 most valuable brands in the world increased their value last year
by 3,7% to a total of USD 1,203 thousand million (based on Interbrand 2009 and
2010 database). This seems to be somewhat controversial given the financial
crisis that we are experiencing. However, one may think that is especially during
these times that there are the major opportunities for mergers and acquisitions.
Following this, when we consider a transaction, the first issue that we think
about is how determine its right pricing. Some assets, such as properties and raw
materials, can be easily identifiable and converted into a monetary value. In turn,
the brands, as others intangible assets, despite may be the most important assets
in many business, they cannot be explicitly valued.
Firstly, we are going to approach some essential concepts that are critical
for a better comprehension of all the case study. Therefore, we will focus more on
the topic of brand valuation. Our purpose is to describe the different motivations of
brand valuation as its different approaches.
The second major part of this work is the review of the Brand Rating, BBDO
Brand Equity Evaluator and Interbrand models. Every method will be presented
in particular and afterwards critically assessed by means of the list of the compiled
requirements. After these three analyses, we gather the conditions to select the
one most appropriate to valuate ZARAs brand. Due to the limitations present in all
models, the brand valuation will be a long road of options and reviews.
Nevertheless a monetary value will be reached and so, we will meet the
requirements that enable to start the negotiations between buyer and seller.
First of all, I have to thank Professor Luis Pedro Krug Pacheco for the
precious guidance and availability throughout the whole period. The numerous
clarifications along with the academic material were of extreme importance to
develop my work. Valuing Zara without his insights would have been not only
harder but also would have turned out with poorer results.
Also, Mr. Indalecio Perez Diaz del Ro, from the Corporate Responsibility
Department of Inditex, has been a wonderful help, always available to answer to
any and all of my questions, as well as to provide me all the data he could. I am
sincerely thankful for.
TABLE OF CONTENTS
LIST OF FIGURES..................................................................................................... 6
LIST OF ABBREVIATIONS....................................................................................... 8
INTRODUCTION........................................................................................................ 9
4
PARTE II METHODS OF BRAND VALUATION .................................................. 40
5. PRESENTATION AND CRITICAL ANALYSIS OF THE SELECTED METHODS ............. 40
5.1. Brand Rating ........................................................................................... 40
5.1.1. Method Presentation.......................................................................... 40
5.1.2. Critical Analysis.................................................................................. 43
5.2. BBDO Brand Equity Evaluator.............................................................. 45
5.2.1. Method Presentation.......................................................................... 45
5.2.2. Critical Analysis.................................................................................. 48
5.3. Interbrand ................................................................................................ 50
5.3.1. Method Presentation.......................................................................... 50
5.3.2. Critical Analysis.................................................................................. 53
5.4. The Choice .............................................................................................. 55
6. ZARA BRAND VALUATION BY INTERBRAND METHOD ............................ 56
6.1. Calculation of Brand Value...................................................................... 56
6.1.1. Segmentation..................................................................................... 56
6.1.2. Financial Analysis .............................................................................. 57
6.1.3. Demand Analysis ............................................................................... 60
6.1.4. Brand Strength Analysis .................................................................... 62
6.1.5. Net Present Value Calculation ........................................................... 64
6.2. Analysis of the Result.............................................................................. 66
7. PROBLEMS AND LIMITATIONS FACED THROUGHOUT ZARAS BRAND
VALUATION ......................................................................................................... 68
REFERENCES......................................................................................................... 71
APPENDICES .......................................................................................................... 77
ANNEXES ................................................................................................................ 79
5
LIST OF FIGURES
Figure 8. Process to Calculate Brand Equity for the Purpose of Acquisition Applying
the BBDO Brand Equity Evaluator................................................................. 46
6
LIST OF TABLES
Table 4. Required Criteria for Brand Valuation Methods in Case of Acquisition .... 31
Table 8. ZARAs Financial Analysis Applying the Interbrand Valuation Method .... 58
Table 9. ZARA Demand Analysis Applying the Interbrand Valuation Method ........ 62
Table 10. The ZARAs Brand Strength Score and their Evaluation Criteria ........... 63
Table 11. ZARAs Brand Value Calculation by Applying the Interbrand Valuation
Method.................................................................................................... 65
Table 13. ZARAs Brand Value by Assuming Different Brand Discount Rates and
Long Term Growth
Rates................67
Table 15. ZARAs Brand Valuation based on Interbrand Model by changing RBI to
40%.....................................78
Table 16. Best Global Brands of Fashion Industry 2010 Rankings ...................... 85
7
LIST OF ABBREVIATIONS
CF Cash flow
cf. compare
No. Number
p. page
pp. pages
PWC PricewaterhouseCoopers
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Catholic University. ZARA: A Case Study about Brand Valuation.
INTRODUCTION
To provide the basis for the work, we will firstly delineate what is
included in the definition of brand, brand equity and brand valuation by
pointing out different visions of various authors. Following that, we will
introduce the ZARAs business to allow a better understanding of the brands
position in the market and its background. A topic that we could not also
forget to mention, for its controversies, is the accounting treatment of the
intangible assets in the balance sheet. To provide a general survey of the
brand valuation subject, we will go back to its origin and consequently
address the different causes for brand valuation. Here, we will determine the
acquisition the appropriate cause of ZARAs valuation and therefore we will
construct a list with special requirements that the brand valuation models
must fulfill. To conclude the first part of the study, called literature review and
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Catholic University. ZARA: A Case Study about Brand Valuation.
Nowadays the list of valuation models is too large (Salinas, 2009) for
we address all of them in this work. Thereby, in the second part of this
dissertation, we will sort out those that gather more consensus about
consistency and are applied more frequently. Additionally, they should meet
largely the requirements established along the work and must be suitable for
the purpose of the valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
We cant start speaking about brand, without first define it. This is
particularly important when there are many different perspectives and
definitions for brands concept. In the following chapter, we will present and
discuss the various definitions and perspectives of brand, brand equity and
brand valuation that are critical for comprehension the present study.
1.1. Brand
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Catholic University. ZARA: A Case Study about Brand Valuation.
of the seller(s) and differentiate them from the goods of competitors (as cited
in Keller, 1998). Similarly to this consideration is The American Marketing
Association definition, which defined a brand as a name, term, sign, symbol,
or design, or a combination of them, intended to identify the goods and
services of one seller or a group of sellers and differentiate them from those
of competitors (as cited in Wood, 2000). On the same line of perception is
the concept of the Marketing Science Institute that defined brand as the
strong, sustainable and differentiated advantage with respect to competitors
that leads to a higher volume or a higher margin for the company compared
with the situation it would have without the brand. The differential volume or
margin is the consequence of the behavior of the customers, distribution
channels and the companies themselves.
To sum up, there are different definitions for brand however; all of
them converge on the issue of brand providing identity and/or difference
between competitive offerings.
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Catholic University. ZARA: A Case Study about Brand Valuation.
delivery costs, that is realized because of the impact of its branding. With the
same point of view are Simon and Sullivan (1993) that defined brand equity
as the incremental cash flows which accrue to branded products over and
above the cash flows, which would result from the sale of unbranded
products2. In this perception the profit results from the differential revenue
between a branded and a generic product (Salinas 2009, p.14).
2
The incremental cash flows are based on the value consumers place on branded products
and on cost savings brand equity generates through competitive advantages (Simon and
Sullivan 1993).
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Catholic University. ZARA: A Case Study about Brand Valuation.
Following this, the perspective that we will adopt in this case study is
the integrative perception including both, the financial and the consumers
perspective. For Kartano and Rao (2005) this integrative perspective of
measuring and managing brand equity will not only have significant
implications for firms attempting to improve the equity of their brands on both
fronts, but will also be useful in developing a more complete picture of the
brand equity concept. Some researchers such as Aaker and Jacobson
(1994, 2001) and Kim, Kim, and An (2003) have also shown the existence of
a relationship between measures of consumer brand perceptions and the
brands financial performance (as cited by Kartano and Rao 2005). Therefore
brand equity not derived merely from the market performance and does not
only consider the consumers estimation. Brand equity provides all the
mindsets and actions of consumers what we carry around in our heads
about the brand (Ambler as cited in Glynn and Woodside 2009, p.274) and
simultaneously makes possible to evaluate a monetary value.
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
H&M is a Swedish fashion retailer, known for its fast fashion clothing
offerings for women, men, youths and children. H&M has about 87,000
employees and more than 2,200 stores in 40 markets (H&M website). Since
2007, with the aiming of increase market share, H&M has launched and
acquired new companies in the same field of business (annex 1).
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Catholic University. ZARA: A Case Study about Brand Valuation.
vision of the group, coordinated the activities of the concepts, and provided
them with administrative and various other services.
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Catholic University. ZARA: A Case Study about Brand Valuation.
for design and three months for manufacturing (Ghemawat and Nueno,
2006).
The store is where the ZARAs specific business model begins and
ends (Inditex Annual Report 2009). The costumers desires meet the offers of
the design teams in the stores but is also in the stores that the costumers
feedback arrived every day. From September 2010 ZARA launched its online
store and at the end of the year the system was operating in eleven
countries.
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
implying longer lead times and spend more money on advertising. The H&M
prices also tended to be slightly lower than ZARA. However, both brands
have important similarities; they are European based companies, in a
segment of fashion forward at lower prices and have a strong international
expansion strategy. Regarding this last point, is important refer that H&M had
been quicker to internationalize, generating more than half its sales outside
its home country by 1990, 10 years earlier than Inditex (Ghemawat and
Nueno 2006, p.5).
The Gap had been founded in 1969, in San Francisco and had
achieved stellar growth and profitability through the 1980s and 1990s with
what was described as an unpretentious real clothes stance. Its store
operations ere essentially U.S.-centric and in 1987 when Gap had begun its
international expansion, they faced certain difficulties in finding locations in
some markets, in adapting to different costumer sizes and preferences, and
in dealing with more severe pricing pressures than in the United States. By
the end of the 1990s, supply chains that were still too long, market
saturation, imbalances and inconsistencies across the companys store
chains and the lack of a clear fashion positioning had started to take a toll
even in the U.S. market. In 2001 a failed attempt to reposition to a more
fashion-driven assortment, a massive decline in The Gaps stock price and
the departure, in 2002, of its long-time CEO, Millard Drexler (Ghemawat and
Nueno 2006, p.5) caused a Gaps loss of competitiveness among its main
competitors and simultaneously Gaps brand value is decreasing
substantially over the last years.
Benetton is one of the three brands the least that competes with
ZARA. Benetton, incorporated in 1965 in Italy, emphasized brightly colored
knitwear. It achieved prominence in the 1980s and 1990s for its controversial
advertising and as a network organization that outsourced activities that were
labor-intensive or scale-insensitive to subcontractors and sold its production
through licensees. While Benetton was fast at certain activities such as
dyeing, it looked for its retailing business to provide significant forward order
books for its manufacturing business and was therefore geared to operate on
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Catholic University. ZARA: A Case Study about Brand Valuation.
3
Interbrand evaluates brand value on the basis of how much it is likely to earn for the
company in the future. Interbrand uses a combination of analysts projections, company
financial documents, and its own qualitative and quantitative analysis to arrive at a net
present value of those earnings (Bloomberg Business Week).
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Catholic University. ZARA: A Case Study about Brand Valuation.
Furthermore, H&M takes responsibility for the integrity of its operation chain,
from employees to materials. The Gaps value was at No. 84, having fallen of
position No. 78 that ranked in 2009. As a curiosity, the last time that Benetton
belonged to the Interbrand rank about best global brands by value was in
2001, occupying the position No.100.
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Nestl Rowntree 83
Beyond that, other acquisitions have shown that brands can create
value and justify high market to book multiples. Thats what happened with
the Nestl deal to Rowntree. In 24 June 1988, The New York Times
announced that Rowntree P.L.C. today accepted the 2.55 thousand millions
of dollars buyout offer from Nestl S.A., ending a months-long takeover fight
for the British confectioner, the maker of Kit Kat chocolate bars. This was the
largest foreign takeover ever of a British company. This acquisition was aim
of considerable attention around the world, since various bids to acquire
Rowntree were refused. On this subject, Kenneth Dixon (Rowntree's
chairman in 1988) clarified that the bids were too low for its valuable and
well-recognized brands. In the end, Rowntree was acquired by Nestl by two
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and a half times the pre-bid price and eight times the net asset value of the
company.
The overall trend was that acquisition prices for companies with strong
brands were consistently higher than the value of their net tangible assets
(Salinas 2009, pag.34). The Ford Company, for instance, paid 6.2 thousand
millions of euros for the Jaguar brand. Such a high brand value can only be
explained by the existence of knowledge structures that can be efficiently
tapped, i.e. a brand identity that motivates consumers to accept a higher
price, remain loyal to the brand, buy it again and again and recommend it to
others (Zimmermann et al. 2001, p.13). In such cases, the difference
between market value and book value is called goodwill, and could represent
different types of intangible assets, among which the brand seems to be the
most valuable.
There are different purposes to value a brand and every purpose can
be classified by its internal or external scopes of application (Soto 2008,
p.27). According to Salinas (2009, pag.50 based on Haigh and Knowles
2004), we can group them in three distinct applications: valuations for brand
management purposes, valuations for accounting purposes and valuations
for transactional purposes.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Scopes of
Purposes Reasons for Brand Valuation
Application
Brand strategy
Brand Management Internal
Budget allocation
Performance evaluation
Incentive system for managers
Internal
Trademark-backed securitization
Transactional
Tax planning
External
Acquisition of a company
Mergers of companies
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
acquired brands must be included in the balance sheet (Salinas 2009, p.52).
For this actual regulation, brand valuation is indispensable, which contradicts
with the older practice of recording the purchase price in excess of the net
acquired assets as a single figure under goodwill (Salinas 2009, p.52).
The main objectives for value a brand in internal transactions are the
trademark-backed securitizations and the tax planning (Salinas 2009, p.53).
In trademark securitization, funds are collected in exchange for collateral
based on future revenues generated by licensing the trademark, i.e.
trademark licensing royalties (Salinas 2009, p.53 based on Eisbruck, 2007).
In this context, brand value is an important indicator of the royalty rates to be
paid from the licensee to the brand holder. Furthermore, brand valuation may
also be used for tax purposes. Usually, subsidiaries transfer brand and other
intellectual property assets to a centralized holding company, which charges
operating companies royalties for the use of this assets, such that a portion
of the operating companies profits may evade local taxes (Salinas 2009,
p.53). Is in this sense that fiscal authorities ask for clarifications of the brand
value, to ensure that local taxes (i.e., fiscal obligations) have been met.
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Additionally, Soto (2008, p.25) points out that a brand that posse a
monetary brand value will be regarded as an investment which creates
futures cash flows. By way of example, for Hennes & Mauritz take over
ZARA worth more than if it would acquire a food company, since it will
eliminate a competitor. However is important refer that brand valuation will
only ever be credible if they were based on reliable forecasts, and reliable
forecasts must be informed with statistical valid historical data relationships
(Haigh 1999, p.29). It means that to represent a complete picture of the
brands potential success, we must consider past, present and future data.
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Catholic University. ZARA: A Case Study about Brand Valuation.
The table bellow shows a checklist with the requirements that brand
valuation methods must to fulfill to be suitable for the case of acquisition,
especially regarding to Hennes & Mauritz take over ZARA. To provide a
simplified overview, the requirements will be grouped into three categories:
methodical requirements, covering content and relevance of results.
Categories Requirements
Validity
Methodical Requirements Reliability
Objectivity
Cost-Efficiency
Covering Content Transparency
Feasibility
Past oriented-results
Present oriented-results
Relevance of Results Future oriented-results
Complete Picture
Financial Figure
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Catholic University. ZARA: A Case Study about Brand Valuation.
4
Commercial brand is defined as a product or a service Brand, as opposed to corporate
brand (Salinas 2009, p.57).
5
Approach refers to the general ways in which any kind of asset can be valued (Salinas
2009, p.57).
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Catholic University. ZARA: A Case Study about Brand Valuation.
4.1.1. Financial
The financial approach can be also subdivided into cost, market and
income approaches, as we can see by the following figure.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Financial
Approaches
6
The International Organization for Standardization (ISO) is one of the worlds biggest
developers and publishers of international standards, that published, in 2010, a model
designated BSI ISO: 10668: Brand Valuation: Requirements for monetary brand valuation.
The document specifies a framework for brand valuation, including objectives, bases of
valuation, approaches to valuation, methods of valuation and sourcing of quality data and
assumptions. It also specifies methods for reporting the results of such valuation (ISO
website).
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Catholic University. ZARA: A Case Study about Brand Valuation.
what other purchasers in the market have paid for assets that can be
considered reasonably similar to those being valued. The application of the
market approach shall result in an estimate of the price reasonably expected
to be realized if the brand was to be sold.
However, the methods of the financial approach are not out of some
drawbacks. The result produced by all these models is the brands monetary
value from an accounting perspective. Because they ignore the consumers
role in the generation of brand value, some important information is lost, or
rather it is not even recorded in the first place (Zimmermann at al. 2001,
p.21). In the Zara case, for example, the brand has become, in a short time,
one of the most valuable brands worldwide. So, it seems to be very important
to include in the brand valuation some past variables and the reasons for the
brand fast rise.
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Catholic University. ZARA: A Case Study about Brand Valuation.
These models set out to explain what goes on in the hearts and
minds of consumers. In contrast to the financially focused models, they
provide those responsible for brand management with an understanding of
where the value of a brand actually comes from. This way, they paint a
precise picture of how brand strength is generated. The information they
provide helps to identify reasons for a loss or gain in value and to track
brand-value trends, making them much more suitable for brand management
than their counterparts based on business finance (Zimmermann et al. 2001,
p.22).
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
The first method that we will analyze in the following part of this study
is the Brand Rating. It is a method with a high acceptability because beyond
take into account the financial and the consumers perspective it also reflects
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Catholic University. ZARA: A Case Study about Brand Valuation.
the brand future potential. In practical terms, Brand Rating is an easy method
to use and understand.
The third and final method that we will analyze is the Interbrand
Model. It is the most popular brand valuation method worldwide and its brand
consultancy was the first, in the world, to achieve, the ISO 10668 certification
(in 2010). As mentioned in chapter 4.4.1, ISO 10668 is the international norm
that sets minimum standard requirements for the procedures and methods
used to determine the monetary value of brands.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Over this part of the work, we will theoretically present the three
selected methods of brand valuation, the Brand Rating, the BBDO Brand
Equity Evaluator and the Interbrand for subsequently analyze them in a
critical way. The objective is to choose from the different methods studied the
one that seems preferable to value ZARAs brand.
The final chapter, as the name suggests, reports the problems and
limitations faced throughout the valuation.
The Brand Rating model was designed, in 2000, by the Icon Added
Value and Dr. Wieselhuber & Partner consultancies. Following the model
development, they founded a company with the same name.
7
Some authors make a different division of analysis of the Brand Rating model. For
example, Salinas 2009 (pp.158-164) divides the Brand Rating brand valuation method in six
modules. In this study, we adopted the BBDO (Zimmernann et al. 2001) division because is
more clear to perceive. However, at final, the components analyzed are the same
independently of the methodology used.
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Catholic University. ZARA: A Case Study about Brand Valuation.
The icon iceberg analysis is based on the Icon Brand Trek approach
that is purely based on the principles of behavioral science. It is often
represented by the image of an iceberg, because the process followed to
value a brand uses an analogy to the iceberg.
Brand awareness
Subjective perception of
advertising pressure
Memorability of advertising
Brand uniqueness
Clarity of internal image
Attractiveness of internal
image
Brand appeal
Trust in brand
Brand loyalty
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Catholic University. ZARA: A Case Study about Brand Valuation.
The second module will validate the iceberg analysis through the
calculation of the discounted price differentials, or price premium. The price
differential p can be measured by comparing the price of a branded product
with that of an unbranded one that is in the same category. According to
Brand Rating, the central task in determining the price bonus is to identify a
suitable benchmark product or group of products, compared to which the
price differential can be measured (Biesalski and Sokolowski, 2008 p.6 as
cited by Salinas 2009, p.160). To avoid distortions, the value of the price
differentials is an average of the past three years. The achieved price
differential arrived at by price analysis in the target market is then validated
against the perceptions of the target group or perceived price differential. The
price differential p is then multiplied by the number of units sold q (Salinas
2009, pp.160-161) to obtain the cumulative sales premium and discounted
using an interest rate i that accounts the industry-specific risk premium, as
well as the brand-specific risk (Salinas 2009, p.161). The final value
obtained represents the earning-capacity value of the brand, i.e., the brand
added value.
The following and last step is the brand future score and according to
Zimmernann et al. 2001 (p. 61) it reflects future values and quantify curves.
The Brand Rating determines an index that describes the brand potential (for
example, in terms of its capacity to access new distribution and expand into
new segments) and represents the existing brand protection. Thus, the brand
future score allows one to forecast the brand added value into future periods
(Salinas 2009, p.161).
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Catholic University. ZARA: A Case Study about Brand Valuation.
Other positive aspects are related the fact that strategic brand
potential and industry-specific risk premium are taken into account. In
addition, the price-premium is determined based on a three-year average,
avoiding upward or downward distortions. On the other hand, and this time
out as a disadvantage is the fact of being required an unbranded product for
every category of products that we want to evaluate.
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Catholic University. ZARA: A Case Study about Brand Valuation.
An arguable statement was in the Brand Rating website, that says that
brand value originates and evolves in the heads and hearts of the target
group. Brand value is therefore independent from current cost structures and
corporate revenue (as cited by Salinas 2009, p.163). This means that Brand
Rating assumes interdependence between brand image and brand assets
and consequently they should not be combined in the determination of brand
value. This assumption can became the model unfeasible, for example, if the
brand image indicators offset the brand asset ones.
Validity
Methodical Requirements Reliability
Objectivity
Cost-Efficiency
Covering Content
Transparency
Feasibility Limited
Past oriented-results
Present oriented-results
Relevance of Results Future oriented-results
Complete Picture Limited
Financial Figure
Table 5. Fulfilled Criteria by Brand Rating Brand Valuation Method
Source: (author).
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Figure 8. Process to Calculate Brand Equity for the Purpose of Acquisition Applying the
BBDO Brand Equity Evaluator
Source: BBDO Brand Equity Excellence Vol. 2 (Zimmernann et al. 2002, p.23).
The BEE model references four brand equity determinants, that are:
the market quality, the dominance of the relevant market, the international
orientation and the brand status. The market quality component describes
the environment in which a brand operates. Depending on the brand type,
this includes the brands industry and/or relevant market. This factor is
gauged by means of the following indicators for each industry, or other
relevant market defined on a different scale: sales performance, net
operating margin and degree to which sector is brand-driven (Zimmermann
et al., 2002, p.17). The second determinant is the market dominance that
analyze which market is more important for the brand, that all local and
foreign markets. This factor refers to the brands sales strength relative to
competing companies in the same sector and the resulting value can be
interpreted as an indicator of the brands potential for dominance of the
relevant market (Zimmermann et al. 2002, p.17). The international orientation
is defined as the brand sales at foreign markets relative to the total sales of
the brand and is interpreted as an indicator of the brands potential for
international development. The last component is the brand status and is
expressed as the brand strength and attractiveness perceived by consumers.
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Catholic University. ZARA: A Case Study about Brand Valuation.
To determine the brand status, the BEE uses the BBDO Five-level Model
(illustrated in figure 9) however, no distinction is made between industries. At
the end of the analysis, the four components are fused into a weighting
factor.
Figure 9. The BBDO Five-level Model
Source: BBDO Brand Equity Excellence Vol. 2 (Zimmernann et al. 2002, p.19).
The BBDO Five-level Model assumes that a brand with strength will
ascend to higher developmental levels in the model. Accordingly, a brand
must first pass through a lower development level to reach the next highest
level8 (Zimmermann et al., 2002, p.17).
The analytical process of the BEE method starts with the calculation of
the cash flow (formula for cash flow computation in annex 3). Since the
acquisition is the purpose of our valuation, the BEE determined that this
analysis should be based on forecast gross cash flow values for a planning
horizon of three years a period within can be determined in a higher rate of
precision9.
8
Exceptions to this rule are, of course, possible: A brand may on occasion skip a level in
the brand development process and make up for it later (Zimmermann et al., 2002, p.19).
9
According to Zimmermann et al. (2002, p.22), forecasts of cash flow over longer periods
are subject to extreme uncertainty; even experts with far reaching knowledge of their
industries are not in a position to make concrete, well grounded forecasts for such an
extended timeframe. This is particularly true of brands in fast-evolving sectors.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Due to the existence of time value of money, the gross cash flow
calculated from the brand in different moments in time must be discounted at
the moment of its valuation. Therefore, the next stage consists in determine
the discount rate through the CAPM (Capital Asset Pricing Model)10.
Finally, the last step consists in multiply the discounted gross cash
flow value (the monetary basis) by the weighting factor to have the brands
value.
The first factor that awoke me interested for choosing this method was
its adaptability to the purpose of the valuation, which make it a more
objective method. Once we will determine the ZARAs brand value for H&M
consider the possibility to acquiring it, this method determines the ZARAs
brand monetary value taking into account the financial data, the consumers
opinions about the brand, the environment in which the brand operates as
well as its future development. That means that BEE regards the brand in a
long-term context, considering the past, the present and the future strength
of a brand.
10
CAPM: re = rf + (Rm rf ) * e , where re is the return required by the shareholder, rf is
the risk-free interest rate (generally flat yield), Rm is the expected market return, and e is
the beta factor, i.e., the stocks sensitive to market movements.
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Catholic University. ZARA: A Case Study about Brand Valuation.
The following table gives a final overview of the requirements that the
BBDO BEE fulfills and not, in accordance with its objectives set out in section
3.3.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Validity Limited
Methodical Requirements Reliability
Objectivity
Cost-Efficiency
Covering Content
Transparency
Feasibility Limited
Past oriented-results
Present oriented-results
Relevance of Results Future oriented-results
Complete Picture Limited
Financial Figure
Table 6. Fulfilled Criteria by BBDO Brand Equity Evaluator Brand Valuation Method
Source: (author).
5.3. Interbrand
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Catholic University. ZARA: A Case Study about Brand Valuation.
the brands function to secure future demand and thus reduce operative and
financial risks (Interbrand Zintzmeyer & Lux, p.2).
11
Interbrand, in its commercial literature, used synonymously the terms "EVA, intangible
earnings and economic profit.
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Catholic University. ZARA: A Case Study about Brand Valuation.
To determine the brand risk profile, i.e., the brand discount rate, we
need to transform the BSS into an S-curve (see figure 11). According to
Salinas (2009, p.228), the model assumes a relationship between brand
strength and discount rate, the higher the brand strength score, the lower the
discount rate, ceteris paribus. Interbrand Zintzmeyer & Lux (p.3) added that
the S-curve procedure reflects the dynamism of the market, where brands at
the extreme ends of the scale react differently from brands in the middle
range as regards changes in their strength.
The value of the brand is then the future brand earnings discounted at
present value (by the brand discount rate) and an annuity or perpetuity is
added as a terminal value. Note that this is the value of the brand segment.
To conclude the valuation, we will need to sum all of brand segments values.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Brand Risk/
Discount Rate
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Catholic University. ZARA: A Case Study about Brand Valuation.
Validity
Methodical Requirements Reliability
Objectivity Limited
Cost-Efficiency
Covering Content
Transparency
Feasibility
Past oriented-results
Present oriented-results
Relevance of Results Future oriented-results
Complete Picture Limited
Financial Figure
Table 7. Fulfilled Criteria by Interbrand Brand Valuation Method
Source: (author).
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Catholic University. ZARA: A Case Study about Brand Valuation.
Throughout the next chapter, in section 6.1, we will value ZARA brand
applying the Interbrand model and thereafter, in 6.2, we will analyze the
results obtained and test its sensitivity to (some) input variables.
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Catholic University. ZARA: A Case Study about Brand Valuation.
6.1.1. Segmentation
After brand valuation has been made for each segment, the overall
value of a brand is the sum of the different segment values. In this
particularly case of ZARA brand valuation, we cannot consider the market
segmentation because we will not have access to the necessary detailed
information. Thus, we will just value ZARA brand as a whole.
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Catholic University. ZARA: A Case Study about Brand Valuation.
France
Women Portugal
etc.
France
Men Portugal
etc.
Brand
France
Trafaluc Portugal
etc.
France
Kids Portugal
etc.
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Catholic University. ZARA: A Case Study about Brand Valuation.
The figure operating costs are not described in Inditex Annual Report
but we can deduce it from subtracting to the branded revenues the earnings
before interest and taxes (EBIT).
For predict the EBIT from 2011 to 2014, we assumed the EBIT margin
average for the past years, which was 17%.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Reports 2007, 2008, 2009 and 2010; p.257, p.278, p.221 and p.193,
respectively). Therefore, a charge from the capital employed, based on the
cost of capital is subtracted to NOPAT, to arrived at EVA.
u - is the assets beta factor, i.e., the stocks sensitive to market movements.
as the risk free rate the Germany 10-year Government Bonds issued on
September 5th 2011, which was 2,2% (Financial Times Markets Data). The
long-term equity risk premium was based on the London Business School
study of Dimson et al. 2006 (p.19) about equity risk premium. The value
6,08% is an average of an arithmetic mean of historical equity premium
relative to bonds for 17 countries from 1900-2005. The ZARAs adjusted beta
(0,67) was taken from Damodarans European database, which as been the
last updated on January 2011.
E (re) = 6,2%
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
To date, Interbrand does not reveal how the index could be exactly
calculated, which will make our valuation more subjective from this point.
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Catholic University. ZARA: A Case Study about Brand Valuation.
the quick delivery infrastructure under 48 hours from the distribution centre
to the stores (Inditex Annual Report 2009, p.16), the innovation, for example,
when in 2009 developed applications for iPhone and other smartphones,
the excellent costumer service and the rapid response to market needs. In
this sense, we can deduce that ZARAs brand contribution to demand is only
one important factor compared with others intangibles figures. For this
reason, and for be possible to continue with ZARAs brand valuation we will
assume that RBI is 30%. It should be stressed that this is a very subjective
value, which in turn will have a large impact on brand value, as we will
analyze in the chapter 6.2.
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Catholic University. ZARA: A Case Study about Brand Valuation.
that these procedures require a lot of information about the brand, at which
Interbrand has access but we (for obvious reasons) dont have.
In this step, we will compare the brand against a notional ideal and
score it against common factors of brand strength (Interbrand 2008, p.33).
The following table shows the seven brand strength factors and their
evaluation criteria, as well as their maximum score and ZARAs brand score.
Table 10. The ZARAs Brand Strength Score and their Evaluation Criteria
Source: on the basis of (Salinas 2009, p.228 and Fernndez 2001, p.14).
The maximum score that can be reached is 100 points. The ZARAs
brand scores are differently weighted as different maximum scores for each
of them are given.
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Catholic University. ZARA: A Case Study about Brand Valuation.
The brand value is the net present value (NPV) of the forecast brand
earnings, discounted by the brand discount rate (Interbrand 2004, p.7).
To get the brand discount rate, Interbrand Zintzmeyer & Lux (p.3)
suggest to use the industry WACC as the benchmark for the companys
overall risk however, and accordingly to our assumption in section 6.1.2, we
will apply the unleverd CAPM, and so, the brand discount rate is 6,2%. The
brand strength score (BSS) can also be transformed into a discount rate
using an S-curve (see figure 11 in section 5.3.1). Following this, note that the
discount rate expresses the brand risk and the higher is the BSS, the lower is
the discount rate, ceteris paribus.
The NPV calculation comprises both the forecast period and the
period beyond, reflecting the ability of brands to continue generating future
earnings (Interbrand 2004, p.7). The table below shows the final step of the
brand valuation.
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Catholic University. ZARA: A Case Study about Brand Valuation.
Table 11. ZARAs Brand Value Calculation by Applying the Interbrand Valuation Method
Source: on the basis of (Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
N
CFt
NPV = " t
t =1 (1+ i)
were
!
N - total time of the calculation (forecast of the cash flow)
t - time of the cash flow (the year)
CF - cash flow (the brand earnings)
i - discount rate (brand discount rate)
Although the brand value has an infinite life, the cash flow forecast cannot be
infinite. According to our assumptions, a five-year forecast will be assumed
(N=5), i.e., the present year 2010 and the four following years.
# 1+ g &
CFN % (
$ i " g'
NPVbeyondyearsN =
(1+ i) N
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Catholic University. ZARA: A Case Study about Brand Valuation.
As a final step, to get the brand value, we need to add the two
expressions above. The complete formula to calculate the net present value
is as follows:
$1+ g '
t =N CFN& )
CFt %i # g(
NPV = " t +
t =1 (1+ i) (1+ i) N
!
6.2. Analysis of the Result
Years 2010
12
3,6% = 1 - (7.197 / 7.468) x 100
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Catholic University. ZARA: A Case Study about Brand Valuation.
to reach a result. The role of branding index and the brand strength score
were not totally revealed by Interbrand and a small change in the value of its
figures would lead to a very different result from that obtained. For example,
a change of the role of branding index from 30% to 40% increases the
ZARAs brand value from 6.172 to 8.229 thousands of euros (appendix 2).
Following this, we can better understand why several authors pointed out as
the first drawback of Interbrand valuation model the higher subjectivity of
some parameters, especially those regarding to consumers view (section
5.3.2).
In the same way, we highlight the impact that the estimated variables,
brand discount rate and long term growth rate, have on brand value. For this,
we construct the following table that gives a short overview of how the
ZARAs brand value can vary if both variables had assumed slightly different
values.
Table 13. ZARAs Brand Value by Assuming Different Brand Discount Rates and Long
Term Growth Rates
Source: (author).
The processes of estimating the brand discount rate and the cash
flows growth rate in perpetuity are rather uncertain and subjective however,
as we can understand by the impact that they have on ZARAs value, they
are an important part on brand valuation, especially when its purpose is the
acquisition.
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Catholic University. ZARA: A Case Study about Brand Valuation.
In fact, valuing ZARAs brand was a long road of options and reviews.
The first problem encountered soon began with the fact that there are no
standardized definitions neither perspectives for brand and brand equity.
After an exhaustive research of the different approaches, we chose one that
seemed to be more objective and appropriate to this case study, the
integrative approach, which considers in simultaneously the financial
perspective and the consumers vision about the brand.
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Catholic University. ZARA: A Case Study about Brand Valuation.
After selecting three valuation models, each one for its reason, we
present them theoretically and then we analyze them in a critical way,
exposing its main advantages and disadvantages. Following this, we
concluded that all methods have their own limitations. Despite the BBDO
Brand Equity Evaluator takes into consideration the purpose for which the
brand valuation is performed, this method together with the Brand Rating and
Interbrand methods still have lack of adaptation according to the purposes of
its applications. For example, none of the methods takes into consideration
the elimination of one competitor with the acquisition. This seems to be
extremely important for our case, since H&M by acquiring ZARA will
eliminate its biggest competitor. Will be ZARAa value to H&M the same as
for a company in a different sector, for example, in the food industry?
Another common limitation is that all methods are very opaque. The
information collected about the consumers view as well as the way it is
handled and incorporated in the model represent a high degree of complexity
and lack of transparency. In addition, is important to include the brand future
earnings in its calculation however, its determination is rather speculative.
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Catholic University. ZARA: A Case Study about Brand Valuation.
CONCLUSION
The way up here was long, often we did not know what the best route
we should go through to get the final result. In fact, as we have stand out
throughout this paper, there is no way to be sure about the final number,
since we had to adopt some assumptions to confront limitations found thus
far. Nevertheless, we are confident about the final outcome as we tried to be
as consistent as possible.
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Catholic University. ZARA: A Case Study about Brand Valuation.
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Dimson, E., Marsh, P. and Staunton, M. (2006) - The Worldwide Equity Premium: A
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Ferdows, K.; Lewis, M. and Machuca, J. (2004) - Zara's Secret for Fast Fashion.
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Fernndez, P. (2007) A More Realistic Valuation: APV and WACC with Constant
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Frieder, L.; Subrahmanyam, A. (2004) - Brand Perceptions and the Market for
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Ghemawar, P. and Nueno, J.L. (2003) - Zara: Fast Fashion. Case Study, 9-
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IFRS Class (2011) International Accounting Standard (IAS) 38. Available at:
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Interbrand Zintzmeyer & Lux (n.d.) - Brand Valuation. The Key to Unlock the
Benefits from your Brand Assets. Available at: http://www.fym.cl/estudio
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Klock, M. & Megna, P. (2000) - Measuring and Valuing Intangible Capital in the
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Kotler, P. (2002) - Marketing Management Text and Cases. New Delhi: Prentice Hall.
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Sattler, H.; Hgl, S. and Hupp, O. (2002) Evaluation of the Financial Value of
Brands. Working Paper. University of Hamburg, Germany.
Stegink, R.; Schauten, M. and Graaff, G. (2007) - The discounted rate for
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Wood, Lisa (2000) - Brands and brand equity: definition and management.
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Catholic University. ZARA: A Case Study about Brand Valuation.
APPENDICES
Appendix 1
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Catholic University. ZARA: A Case Study about Brand Valuation.
Appendix 2
Table 15. ZARAs Brand Valuation based on Interbrand Model by changing RBI to 40%
Source: author (on the basis of Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
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Catholic University. ZARA: A Case Study about Brand Valuation.
ANNEXES
Annex 1
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Catholic University. ZARA: A Case Study about Brand Valuation.
Annex 2
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Catholic University. ZARA: A Case Study about Brand Valuation.
United
32 32 Financial Services 11,561 10%
Kingdom
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Catholic University. ZARA: A Case Study about Brand Valuation.
82
Catholic University. ZARA: A Case Study about Brand Valuation.
United
74 NEW Financial Services 4,218 N/A
Kingdom
83
Catholic University. ZARA: A Case Study about Brand Valuation.
United
89 84 Alcohol 3,624 -2%
Kingdom
United
92 NEW Alcohol 3,557 N/A
Kingdom
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Catholic University. ZARA: A Case Study about Brand Valuation.
United
100 98 Luxury 3,110 0%
Kingdom
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Catholic University. ZARA: A Case Study about Brand Valuation.
Annex 3
Cash Flow Computation
86