Brand Valuation: Compilation by Rajesh Ingle - PHD

Brand Valuation
Compilation by Rajesh Ingle - PhD

27th & 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 Awareness
The Desire The Willingness The Ability
The word brand is derived from old Norse word brandr , meaning burn,
and it was by this method that early man marked is livestock
120 100 80 60 40 20 0 Salt Soft Drink Automobiles Cosmetics Clothing Jewelry Furniture Houses Vacations Haircuts Child Care Television Repair Legal services Root Canal Auto Repair Medical Diagnosis Product = Idea Goods Service
(Most Services)BTL Activities (Most Goods) ATL Activities
Prosperity of Brand
Powerful consumer Insight Understand and anticipate your consumers. Focus People and resources are concentrated where they can add greatest values. Innovation Evolve 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 brand
Big 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.
Decline of brand
Inconsistency- Consumers 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 Fitzgeralds speech)
What went wrong with many brands?
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
Branding possibilities, few examples. Single brand across organisation Endorsed brands House of brands
Source: Davidson H
BRAND PORTFOLIO AND ARCHITECTURE
Brand Relationship Spectrum Types of Brand
Organized Brand IBM Mayo Clinic Harvard University Greenpeace Goldman Sachs Ralph Lauren Microsoft Sony McDonalds
Individual Brand None
Type 1:
Single Brand Across Organization
Brand
Type 2:
Endorsed Brands
Nest e
Polo Windows Play station 2 Big Mac
Type 3: House of Brands

Brand
Procter & Gamble Pfizer Woodruff Arts Center
Pampers Viagra Atlanta Symphony Orchestra
Source: Davidson, H.
Perfumes
FMCG
Consumer Electronics
White Goods
Financial Services
Mobile
Utilities
Brand Value Added BVA varies by sector

100 90 80 70 60 50 40 30 20 10 0
Bulk Chemicals
Source :Brand Finance
Intangibles
have paid 31 billion for but 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 TOTAL27.0 billion
(David Haigh, Brand Finance, Marketing Magazine, 1st April 2005)
Did you know??

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 Caution a)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 UKs 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.
How have other companies done it?

Context for change Business objectives of change What drove the change What actually changed Estimated cost of rebranding
Benefits of change -Brand Value, -Business Value
New position and organisation
New identity and organisation
New beliefs and role
New direction and empathy
New context and direction
New direction And organisation
Did you know??

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.
Brands are key intangibles in most businesses

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 Developed Markets
Marketing intangible Technology intangibles
Brand
Brand Patents
20%
Software
Other Intangible Assets
Intangible assets
Customer relationships Distribution rights
Customer intangible Contract intangibles
55%
Tangible Assets 25%
Assembled workforce Business Goodwill
Tangible assets
Illustrative
Source: Brand Finance
Asset split across selected economies
Asset split across selected economies
Asset Breakdown for the top 10 countries by Enterprise Value (US$ millions, 2008)
26
Inter Techs 5 year performance

Performance (million) Sales Revenue - Cost of goods sold Gross Contribution - Manufacturing overhead - Marketing & Sales - Research & Development Net Profit Return on Sales (%) Assets Assets (% of sales) Return on Assets (%) Base Year 254 135 119 48 18 22 16 6.3% 141 56% 11.3% 1 293 152 141 58 23 23 22 7.5% 162 55% 2 318 167 151 63 24 23 26 8.2% 167 53% 3 387 201 186 82 26 25 37 9.6% 194 50% 4 431 224 207 90 27 24 50 205 48% 5 454 236 218 95 28 24 55 206 45%
11.6% 12.1%
13.5% 15.6% 19.1% 24.4% 26.7%
Why Market Growth Rates Are Important

InterTechs 5 Year Market-Based Performance
Performance (million) Market Growth InterTech Sales Growth (%) Market Share(%) Customer Retention (%) New Customers (%) % Dissatisfied Customers Relative Product Quality Relative Service Quality Relative New Product Sales Base Year 18.3% 12.8% 20.3% 88.2% 11.7% 13.6% +10% +0% +8% 1 2 3 4 5 23.4% 17.6% 34.4% 24.0% 17.9% 17.4% 11.2% 27.1% 16.5% 10.9% 19.1% 18.4% 17.1% 16.3% 14.9% 87.1% 85.0% 82.2% 80.9% 80.0% 12.9% 14.9% 24.1% 22.5% 29.2% 14.3% 16.1% 17.3% 18.9% 19.6% +8% +0% +8% +5% -20% +7% +3% -3% +5% +1% -5% +1% 0% -8% -4%
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.
The Big Question?

There is frequently one line of revenue and dozens of lines for costs. Can this be changed?
Essential Questions

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 companys processes aligned behind the brand? Can employees articulate the answer to question one?
THANK YOU
Section II
1)Reasons for valuation of Brands
2)Brand Equity: Development and Measurement

3)Managing the Brand Portfolio over time
?
Why Value Brands ?
Why Value Brands?

Mergers and Acquisitions
Vendor
Rowntree Pillsbury Trebor Verkade
Acquirer
Nestle Grand Metropolitan Cadbury-Schweppes United Biscuits
Goodwill/ Consideration 83% 86% 75% 66%
Identification of opportunities
Competitive pressures Stock exchange pressures Availability of resources Presence of ambitious management team
Price Negotiation
Rational grounds Knowing the premium , before hand Preparing the finance package Inherent value of the brand
Why Value Brands?

Management Information
Brand Strategy
Projective visionary process based on fact rather than hunch
Resource allocation
Which to milk and which to dispose off
Financial Appraisal
Understanding the revenue producing assets
Brand Extension
International Branding
Modelling tool for the exploration of various what if? option
Internationalisation of brands by identifying key strengths and weakness
Why Value Brands?

Balance Sheet Benefits
Goodwill
IFRS , US GAAP
Borrowing capabilities Lenders are beginning to look at Brands as assets on which to secure borrowings
Gearing Gearing ratios are closely watched by lenders, making it inevitable for Brand valuations
Why Value Brands?

Investor Presentations
Presentation on strength of brand to its share holders and investors community. Undergoing analysis to draw attention to the particular strengths and features of brands
Brand Licensing and Franchising

Royalty rates planned are still largely subjective. Trademark owner still ask for what is attainable Brand valuation can assist to provide the framework for setting the royalty rates
How is brand value created?

Marketing Investment Customer Impact Business Drivers Financial Results
Brand development Innovation Communications
Unique experiences Loyal behaviour Price insensitive
Revenues Value uplift Costs and risks
Profits Future cashflows Returns to investors
Brand Equity Perceived value Preference Loyalty
Brand Power Business impact Leverages drivers Reduces risk
Brand Value Future security of earnings Economic value Royalty rates
Source: Brand Finance
Range of Services
Tax Valuations
Technical Brand Valuations

Balance Sheet Valuations Brand Value Scorecards Return on Brand Investment Dynamic Brand Value Modelling Brand Transitions
Acquisitions Disposals
Investor Realtions
Expert witness
Brand Due Diligence

Initial Public Offerings
Private Equity Transactions
Brand Valuation
Development of Licensing Programmes
Value-Based Marketing
Investor Relations
Advice on Royalty Rates
Due Diligence on trade marks and licensing
Brand Portfolio Review
Brand Licensing
Other current reasons on Brand Valuation 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
Goodwill must be allocated to five classes of intangible assets1)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)
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
ISO 10668 New International Standards on Brand Valuations

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
Requirements of an ISO Compliant brand valuation?

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.
ISO
THANK YOU
Section III
1)Various ways of valuation of brands and the advantages and disadvantages associated with it. 2)Implication of IFRS on Brand valuation
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.

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

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 Revenue =
Effect of Non- Brand Product Characteristics
All Brand Influences

BEM must be >1 for brands to be value enhancing
=
Revenue due to unbranded product
Category Product Promotion Drivers Impact Impact

* Distribution Random Impact Shocks
Brand Equity Multiplier (BEM)
Various Valuation Approach

Sr.No. Approach towards Valuation 1) 2) 3) 4) 5) 6) 7) Cost Approach Income Approach Market Approach Premium Pricing Approach Royalty Relief approach Interbrand's Approach Brand Finance Approach Value in INR (Million) 183.5 657.0 221.19 1105.4 21.9 845.6 1086
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)
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.
Cost Approach
Cost of reproduction
(Computing the cost for producing exact replica of the asset) Good for new asset , may not work for old asset
Identify current cost of similar asset then adjust that cost to functional depreciation , physical depreciation & economic obsolescence
Cost of replacement
(Replacing existing asset with an alternative that provide same future benefits)
Identify the individual cost required to bring an asset to current situation
Case study
Valuation I] Cost method Particulars 0 Direct cost Less: Production cost Cost incurred for brand building 1.8 1.8 1 60.9 42.5 18.4 Year (Historical) 2 73.4 51.3 22.1 3 90.4 62.0 28.4 4 109.6 74.8 34.8 5 132.7 90.4 42.3 (Rs.in Mn)
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 Equity Debt Proportion 0.40 0.60 Cost 20% 13% Wt avg cost 0.08 0.05 0.13
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 arms 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
Case Study
Sr.No. Statement 1) 2) NOPAT (Five years) Value in INR (Mn) 44.23 Brand value (NOPAT *5) 221.19 (Similar category soap brand was sold last year with multiple of 3)
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 buyers characteristics and purpose. 3)Information that would facilitate comparable analysis is simply not available.
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
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
Case Study
Income method Particulars Revenue Estimated growth in revenue Direct Cost 132.7 Year 5 212.6 Years (Estimation) 6 255.1 20% 159.2 187.8 7 301.0 18% 216.0 8 346.2 15% 9 380.8 10% 237.6 10 418.9 10% 261.4 (Rs.in Mn)
Cost as % of revenue
Gross profit Gross margin % Indirect overheads EBITDA Less: Interest PBDT Depreciation PBT Tax PAT 37.7 42.3 2.0 40.3 1.0 39.3 13.3 25.9 25.9 79.9
62%
38%
62%
95.9 38% 39.6 56.4 2.4 54.0 1.0 53.0 18.0 35.0 35.0 41.5 71.6 2.8 68.8 1.0 67.8 23.1 44.8 44.8 113.2
62%
130.2 38%
62%
38% 43.6 86.6 3.3 83.3 1.0 82.3 28.0 54.3 54.3
62%
143.2 38% 45.8 97.4 3.6 93.8 1.0 92.8 31.6 61.3 61.3 48.1
62%
157.5 38% 109.4 3.9 105.5 1.0 104.5 35.5 69.0
Terminal value
Net income
888.6
957.5
Brand Value (Present value) Discount rate Terminal growth rate
657.0 13% 5%
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
Case study
5
BV= (Earnings)i i=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
Simpler way
If Kelloggs 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
Economic substitution analysis

If we didnt 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.
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.
Illustration of valuation approach (Brand Finance)
1. Segmentation
= Total
Business Value Trademark Value
+ Segment B + Segment A
Discounted to present value

2. Due diligence of forecasts
Yr 1
Yr 2
Yr 3
Yr 4
Yr 5
Future Value
Future Cash Flows 4. Risk attached to future earnings
3. Brand contribution to earnings
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.
Royalty Relief model
Royalty rate range

8.0% 7.5% 7.0% 6.5% 6.0% 5.5%
Brand Power Index
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
71
5.0%
Margin analysis and commercial sense checks

Source :Brand Finance
Case Study
(INR mn)
Royalty Relief method 6 Revenue Royalty rate Royalty 255.1 0.0 1.3 7 301.0 0.0 1.6
Years 8 346.2 0.0 1.9
9 380.8 0.0 2.1
10 418.9 0.0 2.3
Terminal value
Cash flow 1.3 1.6 1.9 2.1
29.1
31.4
Brand value Discount rate Terminal growth rate
21.9 13% 5%
Interbrands Approach
To determine a brands 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
Step 1-Identify the factors that may impact a brands value.

Market Leadership Stability Market Internationality Trend Support Protection
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 Leadership Stability Market Internationality Trend Support Protection Brand Strength Weighting 25 15 10 25 10 10 5 100
Step 3: Score the brands

Interbrand Factors Leadership Stability Market Internationality Trend Support Protection Brand Strength Weighting 25 15 10 25 10 10 5 100 Brand A 20 12 10 22 7 7 3 81 Brand B 7 7 10 12 5 7 3 51
Step 4: Estimate the amount of earnings attributable to the brand

Brand earnings for Brand A and Brand B $ million Profit after tax (PAT) Deduct overhead costs Deduct profit (Not attributable to brand) Brand earnings Brand A 200 (50) (100) 50 Brand B 150 (50) (50) 50
Multiple
Brand Strength Score Converting Brand Strength into Multiple
Step 5: Value the Brands

Brand values for Brand A and Brand B (USD Million) Brand earnings Multiple Brand earnings Brand A 50 18 900 Brand B 50 11 550
Case Study
Valuing the Brand Brand Earnings Multiple Applied Brand Value (INR mn)
A 52.8 16 845.6
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)
Start with a Branded Business valuation

Branded Business Value
discounted at cost of capital
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
Future Value
Today
FUTURE CASH FLOWS OVER PLANNING PERIOD
PERPETUITY
Time
Split between tangible and intangible assets
Business value - Value tangible assets =
Value intangible assets
Intangible
Tangible
Brand represents a proportion of intangible value
Recipe Trademark Intangible Software Patents
Reconciling the answer

Brand value should be reconciled back to total intangible asset value and to Branded Business Value as a sense check
Recipe
Intangible Branded Business Value Tangible
Trademark Software Patents
%
% %
Illustration of valuation approach

1. Segmentation
= Total
Business Value Trademark Value + Segment B + Segment A
Discounted to present value

2. Due diligence of forecasts
Yr 1
Yr 2
Yr 3
Yr 4
Yr 5
Future Value
Future Cash Flows 4. Risk attached to future earnings
3. Brand contribution to earnings
Flexing the brands economic use

BVA Magnitude of earnings Brand Beta Quality of earnings
Contribution of brand to demand
Resilience of the brand
Increase cash flows levels

Accelerate cash flows
Reduce risk attached to future cash flows
100
10
20
30
40
50
60
70
80
90
Perfumes
FMCG
Consumer Electronics
White Goods
Financial Services
Mobile
Utilities
1 Brand Value Added BVA varies by sector
Bulk Chemicals
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
3 randetaScoring Template
Attribute Time in market Distribution Market share Market position Sales growth rate Price premium Elasticity of price Marketing spend/support Advertising awareness Brand awareness
TOTAL
Score 0 -10 0 -10 0 -10 0 -10 0 -10 0 -10 0 -10 0 -10 0 -10 0 -10
max 100
Outline of Brand Valuation process

Market due diligence Internal due diligence Drivers of demand (BVA)
Market Business Customer
Forecasts
Economic Value Added Discount rate (BrandBeta) Branded Business Value Branded Value
Market Business Customer
Is brand investment creating value?

?
Value creation opportunity C
?
F
Current value of portfolio
A Resources allocation & Management Time

What is driving consumer value?
and understand how we perform against competition

Size
Features Functional delivery Availability Design Exclusivity Image Leadership
10 20 30 40 50 60
Importance Performance Competitors
How do they effect business results?
how does customer economics impact our revenues and profits

Size Features Weight Availability Design Exclusivity Image Coolness
Volume Revenue Pricing Op Profits Cost of sale Costs

10 20 30 40 50 60
Cost of ops Cap employed Capital cost Cost of cap
Ec Profit
Market and intrinsic value often differ
Hidden Value
MV Debt MV Equity
MV Gap Intrinsic Branded Business Value
Market Value
Which links to the valuation model

Brand:
Enterprise valuation
Branded Business Value Branded Business Value Earnings approach - Enterprise Value GBP Year ended 30 September Revenue Drivers Total Market Size Market Share Volume Price Total Sales
growth %
Utilities Brand
Brand Value 3,181,300 Total Brand Value 254,504
Drivers of revenue: market share/ volume/ price premium
Historic 2002 700,000 25% 175,000 8.00 1,400,000 790,906 609,094
2003 833,333 27% 225,000 8.00 1,800,000

29%
2004 925,147 29% 268,293 8.20 2,200,000

22%
Forecast 2005 944,138 31% 292,683 8.20 2,400,000

9%
2006 986,717 31% 305,882 8.50 2,600,000

8%
2007 1,029,412 32% 329,412 8.50 2,800,000

8%
Total Direct Costs

growth %
1,200,000
52%
1,350,000
13%
1,500,000
11%
1,600,000
7%
1,700,000
6%
Gross Profit
margins %
600,000
33%
850,000
39%
900,000
38%
1,000,000
38%
1,100,000
39%
Drivers of direct cost: supplier costs/ trade discounts
Which links to the valuation model

Salaries
growth %
294,000
#DIV/0!
300,000
2%
308,000
3%
316,000
3%
325,000
3%
Marketing
growth %
46,000
#DIV/0!
50,000
9%
52,000
4%
53,000
2%
55,000
4%
Other overheads
growth %
112,000
#DIV/0!
118,000
5%
124,000
5%
130,000
5%
135,000
4%
Total administrative expenses

growth %
595,901 13,193 30.0% 3,958 9,235
452,000
-24%
468,000
4%
484,000
3%
499,000
3%
515,000
3%
Profit Before Interest and Tax

growth %
148,000
1022%
382,000
158%
416,000
9%
501,000
20%
585,000
17%
Tax Rate Tax Charge Profit After Tax Discount Rate Discount Factor Discounted Profit After Tax
30.0% 44,400 103,600 12.5% 1.13 92,062
30.0% 114,600 267,400 12.5% 1.22 219,632
30.0% 124,800 291,200 12.5% 1.37 212,543
30.0% 150,300 350,700 12.5% 1.54 227,464
30.0% 175,500 409,500 12.5% 1.74 236,021
Drivers of internal cost: staff costs/ productivity
Drivers of financial cost: cost of debt/ cost of equity/ gearing = WACC
Brand Finance Approach

Reporting Unit: Brand: Market: EARNINGS APPROACH Branded Business Value Value in Perpetuity Value - Years to 2010 Soap Total Rs. 1,086 843 243 m 128 100 29 Enterprise Valuation (Rs. In Crores) Year ended 31st March Revenues % Growth Cost of Goods Sold ( Variable Overheads) % Growth % Margin Gross Profit % Growth % Margin Advertisement & Promotions % Growth % sales Fixed Overheads % Growth % Margin EBIT % Growth % Margin Taxation Tax rate Net Operating Profit After Tax (NOPAT) % Growth Discount Rate Discount Factor Discounted NOPAT 14 0 0.0 % (0) (0.3%) (33) (27.0%) 14 11.9 % (73) (60.8%) 47 Historic 2008 176 20.8 % (110) 21.2 % (62.2%) 67 20.0 % 37.8 % (0) 0.0 % (0.2%) (36) 5.0 % (20.4%) 30 45.2 % 17.1 % 0 0.0 % 21 44.4 % 0.0 % 30 45.2 % 42 38.4 % 42 38.4 % 19.7 % 0 0.0 % (38) 5.0 % (17.7%) Forecast 2013 381 10.0 % (237) 9.7 % (62.3%) 144 10.4 % 37.8 % (0) 0.0 % (0.1%) (46) 5.0 % (19.8%) 98 13.2 % 25.6 % (37) 0.0 % 55 20.8 % 9.9% 1.21 37 41 1.33 42 0.0 % 61 11.7 % 9.9% 1.46 43
2006 121
2007
2009 213 20.7 % (133) 21.1 % (62.4%) 80 20.2 % 37.6 % (0) 0.0 % (0.2%)
2010 255 20.0 % (159) 20.0 % (62.2%) 96 20.0 % 37.6 % (0) 0.0 % (0.2%) (40) 5.0 % (20.6%) 56 33.7 % 21.9 % (21) 0.0 % 35 (16.5%) 9.9% 1.10 32
2011 301 18.0 % (188) 18.0 % (62.3%) 113 18.0 % 37.6 % (0) 0.0 % (0.1%) (42) 4.8 % (19.6%) 71 27.5 % 23.7 % (26) 0.0 % 45 29.2 % 9.9%
2012 346 15.0 % (216) 15.0 % (62.3%) 130 15.0 % 37.6 % (0) 0.0 % (0.1%) (44) 5.1 % (19.3%) 86 20.9 % 24.9 % (32)
2014 419 10.0 % (261) 10.1 % (62.3%) 158 9.8 % 37.7 % (0) 0.0 % (0.1%) (48) 5.0 % (19.6%) 109 12.1 % 26.1 % (40) 0.0 % 69 14.0 % 9.9% 1.60
2015 461 10.0 % (285) 9.2 % (62.3%) 176 11.4 % 38.2 % (0) 0.0 % (0.1%) (50) 4.0 % (19.6%) 126 14.7 % 27.2 % (42) 0.0 % 83.50 20.3 % 9.9% 1.76 47
146 20.7 % (90) 23.2 % (62.0%) 55 16.9 % 38.0 % (0) 0.0 % (0.3%) (34) 4.9 % (23.5%) 21 44.4 % 14.3 % 0
Brand Scorecard Framework

Marketing Actions Perceptions Behaviour Market & Financial Performance
Awareness
Familiarity Salience
Quality perceptions
Value perceptions Image perceptions Preference
Trial
Frequency Loyalty
Marketing Investment & Performance Scorecard

Activity measures Brand equity measures Behavioural measures Performance & Financial measures
106
Brand Value Added ($ million)

$15 $20 $25 $10 $5 $0 -$5 -$10 -$15 -$20 -$25
Brand Equity Index

100 80 90 70 60 50 40 30 20 10 0
Brand Performance Score

80 70 60 50 40 30 20 10 0 90 100
Note: Measures have to be customised to each business model. Those shown above are for illustrative purposes. (Brand Finance) 107
Summary
Various Valuation Approach

Sr.No. Approach towards Valuation
1) 2) 3) 4) 5) Cost Approach Income Approach Market Approach Premium Pricing Approach Royalty Relief approach
Value in INR (Million)

183.5 657.0 221.19 1105.4 21.9
6) 7)
Interbrand's Approach Brand Finance Approach
845.6 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.

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 brands position.

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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Brand Valuation: Compilation by Rajesh Ingle - PHD

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Brand Valuation

Compilation by Rajesh Ingle - PhD

What cannot be measured cannot be managed Jack Welch

What went wrong with many brands?

What went wrong with many brands

BRAND PORTFOLIO AND ARCHITECTURE

Brand Relationship Spectrum Types of Brand

Individual Brand None

Polo Windows Play station 2 Big Mac

Type 3: House of Brands

Procter & Gamble Pfizer Woodruff Arts Center

Pampers Viagra Atlanta Symphony Orchestra

Brand Value Added BVA varies by sector

Source :Brand Finance

Did you know??

Did you know??

Did you know??

Did you know??

How have other companies done it?

Benefits of change -Brand Value, -Business Value

New position and organisation

New identity and organisation

New beliefs and role

New direction and empathy

New context and direction

New direction And organisation

Did you know??

Did you know??

Harley Davidson has patented the thumping sound of its engine.

Brands are key intangibles in most businesses

Other Intangible Assets

Customer relationships Distribution rights

Customer intangible Contract intangibles

Assembled workforce Business Goodwill

Asset split across selected economies

Asset split across selected economies

Inter Techs 5 year performance

13.5% 15.6% 19.1% 24.4% 26.7%

Why Market Growth Rates Are Important

The Big Question?

2)Brand Equity: Development and Measurement

Why Value Brands?

Goodwill/ Consideration 83% 86% 75% 66%

Why Value Brands?

Understanding the revenue producing assets

Modelling tool for the exploration of various what if? option

Internationalisation of brands by identifying key strengths and weakness

Why Value Brands?

Why Value Brands?

Brand Licensing and Franchising

How is brand value created?

Brand development Innovation Communications

Unique experiences Loyal behaviour Price insensitive

Revenues Value uplift Costs and risks

Profits Future cashflows Returns to investors

Brand Equity Perceived value Preference Loyalty

Brand Power Business impact Leverages drivers Reduces risk

Brand Value Future security of earnings Economic value Royalty rates

Source: Brand Finance

Technical Brand Valuations

Brand Due Diligence

Private Equity Transactions

Due Diligence on trade marks and licensing