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Brand Valuation
Brand Valuation
Suppliers and especially manufacturers have market power because they have information about a product or a service that the customer does not and cannot have, and does not need if he can trust the brand. This explains the profitability of brands.
Peter Drucker
Contents Stage 3-Brand Valuation Book to Market Model Price Premia Model Capital Market oriented Brand Valuation Model Historical cost Approach Royalty Relief Model Interbrand Model BiblioGraphy Annexure
Brand Valuation
Brand value is defined as the net present value of future earnings generated by the brand alone. Brands influence customer choice, but the influence varies depending on the market in which the brand operates. Intangible assets are crucial to business value and growth and it is important that they are identified alongside the tangible assets and valued as individual components. From a shareholders perspective, the value of a brand is equal to the financial returns that the brand will generate over its useful life. Any financial returns attributed to a brand must be discovered to account for market uncertainty and asset-specific risks. These two principles apply to the valuation of all assets, not just brands. Brand valuation is a powerful process that captures the present and future value of a brand. Brand valuation determines how the brand creates value and aligns with customers drive for purchases. Brand valuation becomes a means of communicating about brand and marketing strategy in shareholder value terms, both internally and externally.
Methodology 2003
Total No. of Shares Share Price Market Cap Book Value(Equity + R&S) Market Value Brand Value(MVBV) Average 6 years value
181558811 9.11 1,65,40,00,768.21 1,17,38,61,000.00 1,65,40,00,768.21 48,01,39,768.21
2004
181558811 9.74 1,76,83,82,819.14 1,23,03,20,000.00 1,76,83,82,819.14 53,80,62,819.14
2005
181558811 9.62 1,74,65,95,761.82 1,27,49,60,000.00 1,74,65,95,761.82 47,16,35,761.82
2006
182675467 14.47 2,64,33,14,007.49
2007
182675492 12.29 2,24,50,81,796.68
2008
182679012 6.10 1,11,43,41,973.20
55,75,94,521.09
Methodology
A sample of 30 people was taken for the purpose of evaluation. The respondents were asked to state the price which they are willing to pay for an unbranded T-shirt, Shirt (Casual), Jeans and Accessory. Then they were asked to quote an amount which they were willing to spend for T-shirt, Jeans, Shirt (Casual) and accessory if a brand name is attached to it. The brands were Levis, UCB, Pepe, Reebok and Spykar. The difference between the amount which a consumer is willing to pay for a branded product and an unbranded product is the price premium which a brand commands.
Data Collection
Out of 30 respondents, 9 were females and 21 were males. The respondents were in the age group of 21-26 years and were the users of T-shirts, Jeans, Casual Shirts and accessories.
Gender
Female 30%
Male 70% Male Female
Age
21 years 22 years 37% 22 years 23 years 24 years 25 years
26 years
Findings T-shirt
Average Price Premium (%) No. of Buyers
Unbranded
173.3
Levis
677.5 2.9 5.0
UCB
769.3 3.4 14.0
Shirt(Casual) Unbranded
Average Price Premium (%) No. of Buyers 260.2
Levis
838.3 2.2 12.0
UCB
964.2 2.7 8.0
Jeans
Average Price Premium (%) No. of Buyers
Unbranded
500.8
Levis
1,736.7 2.5 18.0
UCB
1,675.0 2.3 0.0
Unbranded 125.5
Levis 370.8
2.0 7.0
UCB 414.2
2.3 7.0
334.0
1.7 6.0
T-Shirts
UCB is a strong player in this segment of the apparel business. Out of the 30 respondents, 14 wanted to buy UCB. Spykar came a distant second with 6 respondents. The average price which the respondents were willing to pay for an unbranded t-shirt was Rs. 173.33. The highest number of preemie was commanded by UCB which was 343.85% more than the unbranded price. Although, a greater number of people were willing to buy Spykar as compared to Levis but they were willing to spend more money for a Levis t-shirt than a Spykar one. This shows that the consumers attach more esteem to Levis than Spykar.
Shirts (Casual)
The average price which the consumer is willing to spend for an unbranded casual shirt is Rs. 206.16. This is more than the average price for an unbranded T-shirt. In this category the largest numbers of consumers want to buy Levis i.e. 12/30. UCB came second with 8/20 respondents who wanted to buy UCB. In terms of premium, UCB was the leader with a 270% premium which the consumers were willing to pay. Levis came second with 222% premium over the unbranded one. The respondents consider UCB as a premium brand and therefore they are willing to shelve out more money for it.
Jeans
Levis is a strong player in the denim segment as its USP is denim only. This was evident in our survey as Levis was the clear leader. Out of 30 respondents, 18 chose to buy Levis denim. Spykar came a distant second with 9 respondents. People were willing to pay a 247% premium for Levis which was the highest in this segment. Although, nobody chose to buy UCB yet it commanded a second highest premium of 234%. The reason for such a result might be the low awareness and exposure of the denim business of UCB among the respondents. The high premium can be because of the overall brand image of UCB not denim per
Weighted Avg. Price Weightage T-shirts Shirts(Casual) Jeans Belt 30% 30% 30% 10% Average Price(Unbranded) 173.33 260.166 500.83 125.5
Process
1. We determined an amortizable life for the brand name expenditures based on how long we think the benefits from the expenditure will accrue. In our case this value is 16 years. This period is chosen based on the financial data availability. 2. We collected the data on brand name expenditures each year going back Historicalally, for the amortizable life of the brand name. We collected brand name expenditures for the last 16 years.
3. Using a straight line amortization schedule, we write off a portion (In our case 6.25% over the period of 16 years) of the brand name expenditures from each years expenditures in the subsequent years. As a result, we were able to estimate the total amortization of brand name expenditures in the current year (to be treated like depreciation) and the unamortized portion of the previous years expenditures, which will be now treated as asset (brand name value).
Assumptions
1. We begin by making an assumption about what expenses that a firm incurs are most likely to impact its brand name 2. We assumed that 50% of the selling and advertising expenses each year are associated with building up brand name, with the balance used to generate revenues in that year.
Year
Unamortized Expense
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1,22,65,851.35 2,49,83,602.49 3,64,58,629.22 5,22,91,261.03 9,05,38,122.27 10,45,37,009.30 12,48,09,125.00 15,58,76,500.00 17,57,06,718.75 18,06,89,375.00 18,55,55,218.75 18,22,50,000.00 19,86,56,250.00 22,75,00,000.00 26,85,93,750.00 2,02,07,11,413.17
The cumulated value of the last column i.e. 2,02,07,11,413.17 is the brand value of United Colors of Benetton computed by Historical cost approach.
UCB 1 3 3 4 3 3 4 4 4 4 33
Royalty Range (in %) 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0
Score 0
33
Royalties are a way of showing value brought to a business by a brand, and 50 determining compensation to the brand owner. Such value will often be based on the profitability of the business, together with other factors such as the strength of the brand. An analysis of this profitability can be done on a see through basis through some or all of the supply chain. The resulting see through profit can be attributed to various business functions, but one will be the brand. In the long term royalties relating to this part of the supply chain will be a proportion only of the see through profit. For commercial arrangements to be successful on a long term basis the value brought by the brand will need to be shared by all concerned in bringing it to market.
The growth estimates and discounting factor are similar to that take in for InterBrand Model.
INTERBRAND MODEL
Segmentation
Consumers purchasing behaviour and attitudes towards brands differ from one market sector to another, depending largely on product, market, and distribution related factors. For this reason, the value of a brand can only be determined precisely through the separate assessment of individual segments that represent a homogeneous customer group. Apart from this, brand management can only obtain the insights it needs to increase the brands value systematically if the brand has been evaluated in all its segments.
Financial Analysis
Interbrands brand valuation begins with an assessment of the companys value and then determines the value contributed by the brand. The first step towards isolating brand earnings from other forms of income is to determine the Economic value added(EVA) which tells whether a company is able to generate returns that exceed the costs of Capital Employed. As both value creation and its counterpart, risk, lie in the future, the analysis is based on a five-year forecast of future revenues generated in the brand segment being assessed.
Value
0.94 4.04% 5.52% 9.23%
Rationale
Bloomberg Treasury Rate in Italy BorsaItaliana Bank Statements
The factors were quality, innovation, design, value for money, reliability, leadership, contemporary. The findings for the same are shown below:
Quality Innovation Design Value for Money Reliability Leadership Contemporary Total
Quality Innovation Design Value for Money Reliability Leadership Contemporary Total
Market
6 5 7 6 7 8 8 8 8 6 5 7 5 4
11
Stability
13
Leadership
15
Trend
Consideration Attractiveness
16
Support
14
Diversification
12
Protection
Weightage
Score out of 20 10% 1.1 1.95 3.75 1.6 1.4 3 0.45 13.25
S-Curve
1,903.35
1,872.71
1,873.65
1,874.58
1,875.51
0.93457944 0.87343873 0.81629788 0.76289521 0.71298618 12.59 19.82 24.17 28.08 31.58 116.24
The Brand value Calculated by this model comes up to 677.63 million Euro
No single approach will give all the answers to a correct valuation. The starting point is to understand the purpose of the valuation and what benefits the brand delivers. Provided that information on the assumptions is made available to firms, they can make their own judgments on what the correct value should be. The group tested six models of valuation. The book to market model shows that United Colors of Benetton has a brand value of 557.59 million Euros. This approach has numerous advantages in that it recognizes that it is based on empirical evidence. The shortcomings are that it assumes a very strong state of the efficient market hypothesis (EMH), and that all information is included in the share price, number of shareholders, total equity of the company. The Price Premia Model reflects a valuation of 1542.28 million Euros .The disadvantages of this model are where a branded product does not command a price premium, the benefit arises on cost and market share dimensions. Capital Market Oriented Valuation model shows the brand value of United Colors of Benetton to be 134.88 million Euros. The Historical cost approach throws up brand value to be 427.49 million Euros. This model is based on assumption that all operating expenses that a company makes goes into making a brand value. The Royalty Relief method is based on the notion that a brand holding company owns the brand and licenses it to an operating company. The NPV of all forecast royalties represents the value of the brand to the business. The value from this model comes Upto 427.49 million Euros. In Interbrand model the value comes Upto 677.63 million Euros. The appropriate discount rate is very difficult to determine as parts of the risks usually included in the discount rate have been factored into the Brand Index score. Even the appropriate rate for the capital charge is difficult to ascertain.
15.90%
13.20%
14.36%
13.20%
14.42%
9.47%
13.14%