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Pepsi Brand Tracker

(Project 2 Part 3 Pepsi Brand Valuation)

PRAXIS BUSINESS SCHOOl

A report

Submitted to

Prof. Srinivas Govindrajan

In partial fulfilment of the requirements of the course

Product and Brand Management

On 22/09/09

BY

Apoorva Jain
Gunjan Dugar
Hardik Mishra
Manoj Mani Iyer
PEPSI BRAND VALUATION PRAXIS BUSINESS SCHOOL
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Executive Summary

While considering the models for brand valuation, there were various models based on different
approaches like financial, economic & qualitative. But while choosing models we also had to consider
the amount of data and details of the company’s financial background that was available. For DCF,
Interbrand and other such models we had to have a complete balance sheet of the company which was
not available in our case, thus along with the models like price-premia & royalty method we also
considered a model which was qualitative which was Shafer’s Model.

Model 1: Shafer Model : Out of the various methods available to ascertain the value of a brand, one
such method is the Chip Shafer Model method of ascertaining the brand value. A model developed by
Trajectories Group in Irvine, California. Chip Shafer is the CEO of that firm.

Formula= B = (R + M + V) C, where B equals Brand Valuation, R equals reputation equals momentum

equals vision & C equals connection.

Process for Measuring Brand Value :Respondents were asked questions related to the four
components of this model. A comparative study was done and the brands were assigned scores in each
of the component. Then as per the formula the brand value score was assigned to each of the brand.

Research Methodology : Research Design was descriptive, Sampling technique was Simple random
sampling, Method of data collection was primary data collection method while instrument of data
collection was questionnaire & the sample size was 30 respondents for Shafer model and 20 for royalty
and price-premia method.

Findings : After assigning scores individually for each of brand across the 4 components and assigning
scores as per Shafer model, Thums Up emerged as a leader by a huge margin followed by Sprite, Pepsi,
Coke and Fanta. Thums Up was leader with huge margins in more than one component which clearly
shows the strong grip the brand has on the consumers.

Model 2: Price Premia Model : In the price premia method, the value is calculated as the net
present value of future price premiums that a branded product would command over an unbranded or
generic equivalent. Here, the price premia model is use to calculate the difference between the
perceived prices of beer for different cold drinks brands

Process of Measuring Brand Value : Average Price = Total Price/ No of respondents . Sales(in units) =
(No of users who want to buy a particular beer brand*48). Brand Value (in Rs) = (Average price of beer
of cold drink brand – Average price of unbranded beer)*sales of branded beer
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Assumptions : Monthly usage rate of beer bottles (650 ml) per consumer is 4 (48 bottles per year).
Consumers drink the same beer brand for a year.

Findings : Out of the brands that were compared vis-à-vis the unbranded Cold drinks brand. Thums
Up clearly is the leader and is valued at Rs. 21912.00.Pepsi with Rs. 3117.60 and Coke with Rs. 2308.80
are distant second and third. Sprite comes next and is valued at Rs. 1814.40.Fanta is last with its
valuation coming out to be Rs. 220.80.

Model 3: Royalty Method: A brand has a capability to charge a premium. A Royalty rate represent
the premium a brand is able to charge above it competitive set. In other words, if the company does
not own the brand being valued, the company would have to pay the owner a royalty for the right to
use the brand.

Findings : Royalty rate of Pepsi =61.67% Similarly the royalty rate for Thums Up, Sprite, Coke and
Fanta is 67.36%, 65.48%, 60.42% and 58.33% respectively. Royalty fees that Pepsi can charge is Rs
61.67.Similarly the royalty fees that Thums Up, Sprite, Coke and Fanta can charge is Rs 161.67, Rs
91.67, Rs 48.33 and Rs 23.33 respectively

Recommendations : Pepsi would have to analyse the situation and find the root cause, as there are
various factors which may influence the below average performance despite the fact that all the
brands are priced at same price. It would need to enhance its supply chain thereby increasing its
availability, do aggressive marketing thereby highlighting its brand image. Only then it can survive and
hope to get close to the leader Thums Up.

Thums Up has got a very good reputation and has been successfully able to make people believe that
the product is standing up to its image and is adhering to its deliverables. Pepsi as a brand has not done
well in reputation and momentum, however in the component Vision, which judges the future of the
brand as per the consumer perception, Pepsi stood second to Coke, indicating that although the brand
is not doing well currently, consumers have got confidence in the brand to do well.

Pepsi has also launched various campaigns in sync with its taglines like “Yeh hai Youngistaan, Meri
Jaan” , Nothing Official about it” and got very good responses from these advertisements and should
continue doing it in future to enhance its brand image adherence.

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TABLE OF CONTENTS

1 BRAND VALUATION INTRODUCTION........................................................................................................................5

1.1 WHY ARE BRANDS VALUABLE? ........................................................................................................................5
1.2 NEED FOR BRAND-VALUATION .........................................................................................................................5
2 REASONING FOR SELECTION OF MODELS ...............................................................................................................6
3 QUALITATIVE METHOD I - SHAFER MODEL ............................................................................................................6
3.1 INTRODUCTION ......................................................................................................................................................6
3.2 BRAND VALUATION FORMULA .........................................................................................................................6
3.3 RATIONALE .............................................................................................................................................................7
3.4 PROCESS OF MEASURING BRAND VALUE .......................................................................................................8
3.5 RESEARCH METHODOLOGY ...............................................................................................................................8
3.6 FINDINGS..................................................................................................................................................................8
3.7 RECOMMENDATIONS ..........................................................................................................................................11
4 QUANTITATIVE METHOD I – PRICE PREMIA MODEL ...........................................................................................11
4.1 INTRODUCTION ....................................................................................................................................................11
4.2 RATIONALE ...........................................................................................................................................................12
4.3 PROCESS OF MEASURING BRAND VALUE .....................................................................................................12
4.4 ASSUMPTIONS ......................................................................................................................................................12
4.5 RESEARCH METHODOLOGY .............................................................................................................................12
4.6 FINDINGS................................................................................................................................................................13
4.7 RECOMMENDATIONS ..........................................................................................................................................14
5 QUANTITATIVE METHOD II -ROYALTY METHOD ................................................................................................14
5.1 INTRODUCTION ....................................................................................................................................................14
5.2 RESEARCH METHODOLOGY .............................................................................................................................14
5.3 PROCEDURE FOR CALCULATING THE ROYALTY RATE.............................................................................15
5.4 FINDINGS................................................................................................................................................................15
6 ANNEXURE .....................................................................................................................................................................16
6.1 SHAFER MODEL QUESTIONNAIRE ...................................................................................................................16
6.2 PRICE-PREMIA MODEL QUESTIONNAIRE ......................................................................................................18
6.3 ROYALTY METHOD QUESTIONNAIRE ............................................................................................................18
7 BIBLIOGRAPHY .............................................................................................................................................................19

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1 BRAND VALUATION INTRODUCTION

1.1 WHY ARE BRANDS VALUABLE?

Brand is the medium through which the consumers identify their experiences with the product
offerings of a company. The name of the company is forgotten, but the brand name remains in the
mind of the consumer. And this brand name, along with its associations, initiates future purchases.
So, logically, one can conclude that the consumer's behaviour and perception about a company's
brands reflects in the company's bottom line

1.2 NEED FOR BRAND-VALUATION

Although public perceptions of brand valuation are often focused on balance sheet valuations, the
reality is that the majority of valuations are now actually carried out to assist with brand
management and strategy. Companies are increasingly recognising the importance of brand
guardianship and management as key to the successful running of any business. Brand valuation has
gained a lot of importance due to the following reasons:

 Building of brands takes years; most of the famous brands are even 100 years old but the value of the
brands needs to be maintained continuously as it is not something that is consistent or permanent, the
value changes with the changing environments
 A full-fledged brand valuation exercise can help a company strengthen its inter-departmental
communication and also develop a reliable information system
 It indicates the strengths and weaknesses of the company's brands and is a useful tool in devising
brand management strategy
 The company can identify its most resourceful brands and can thus differentiate between strong
brands and brands which are only glamorous and not that strong, and thereby aid in resource
allocation to maximise shareholder returns
 The recent trend of acquiring established brands to ensure growth amid tough competition has led to
the wide acclaim of the brand valuation concept in negotiating the transaction price
 Brand valuation can also help in identifying brands to be included in the portfolio

The value of a brand reflects not only what earnings it is capable of generating in the future, but also
the likelihood of those earnings actually being realised.

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2 REASONING FOR SELECTION OF MODELS

Brand Valuation can be done by various methods. Few of them are Discounting Cash Flow, Interbrand
Method, Cost based approach, Book to Market and Cost of Certainty Model. These methods require the
financial data of the company like Book value, Market capitalization, Value of intangible assets,
Advertisement costs, Income statement, Balance sheet and other such data. Few of the other methods
are Price Premia Method, Royalty Method, Shafer’s Model and other such methods wherein the
financial data of the company is not required.

For selection of the method for brand valuation of Pepsi we have chosen Price Premia, Royalty and
Shafer’s Method. The other methods could not be chosen due to the non availability of the financial
data. Though PepsiCo is a listed company and the international financials are available but specific
financial data for Pepsi cola segment is not available and valuing brand considering all the segments
would not give a true picture for the brand value of Pepsi cola.

3 QUALITATIVE METHOD I - SHAFER MODEL

3.1 INTRODUCTION
Out of the various methods available to ascertain the value of a brand, one such method is the Chip
Shafer Model method of ascertaining the brand value. A model developed by Trajectories Group in
Irvine, California. Chip Shafer is the CEO of that firm. According to Shafer, only a third of Fortune
500 company market value can be accounted for by shareholders’ equity (assets - liabilities + earnings).
The rest is called “intangible assets,” which consists of such things as patents, intellectual property,
goodwill and brands. Shafer estimates only about 5% of these intangibles are quantifiable assets such as
patents and intellectual property. The vast majority of this value, he says, has more to do with
perceptions and expectations about how a company will perform in the future. In other words, it’s
the brand expectation people have about your enterprise.

3.2 BRAND VALUATION FORMULA

Formula: B = (R + M + V) C, where

 R equals reputation

 M equals momentum

 V equals vision

 C equals connection

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This brand valuation has been broken into

these four components, that largely have to
do with what you’ve done in the past, what
you’re doing right now, what we can

REPUTATION
expect you to do in the future and how
familiar we are with your brand.

CONNECTION
The past performance section deals
primarily with things that have been done
to build trust in your brand. Do we like
MOMENTUM VISION
you? Do you offer high quality? Do you
deliver on your promises? Are your
customers satisfied? As Shafer points out, reputation is mostly a measure of trust, and trust is a
fundamental necessity in all human and business interactions.

The present performance component attempts to determine your momentum in the

marketplace. Shafer refers the old physics law of mass x speed = momentum. Big companies don’t have
to move too fast to have huge momentum, whereas fast-moving companies don’t have to be big to make
sizable gains in market position. The objective in this section is to determine how well you are
implementing your game plan.

The future, or vision component, looks not only at measures of whether customers and prospects regard
you as a forward-thinking company, but more importantly, whether they think you have the credibility to
pull off your vision of the future. “Having a clear, compelling vision based on a deep understanding of
customer dynamics is incredibly important,”

The fourth area concerns connection to the marketplace. It’s more than simple awareness because it
deals with familiarity, understanding of company values and the likelihood of doing business with your
company. As you can see from the formula, if you score well in all three basic performance areas (past,
present and future) but fail to show connectedness to customers and prospects, your brand score will
suffer accordingly.

3.3 RATIONALE
Since the product dealt was Cold Drinks, where all the brands are priced similarly, the brands charging
premium would be hypothetical, thus it was a clear case of brand name contributing towards incremental
sales in volumes by giving access to customers.

Thus along with the tried and tested models like DCF, Interbrand, Royalty relief & Price premia, we also
had to chose a model which is basically qualitative in nature, which is able to capture the intangible
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factor which makes the brand, the brand it is. The Shafer model basically aims at capturing the past,
present & future of the company and then a relation in terms of the connection every customer has with
the brand.

3.4 PROCESS OF MEASURING BRAND VALUE

 Respondents were asked questions related to the four components of this model.

 A comparative study was done and the brands were assigned scores in each of the
component.

 Then as per the formula the brand value score was assigned to each of the brand.

3.5 RESEARCH METHODOLOGY

The research methodology used to collect data and develop a model was:

Research design Descriptive

Sampling technique Simple random sampling

Sample size 30 respondents

Method of data collection Primary data collection method

Instrument of data collection Questionnaire

3.6 FINDINGS

Reputation
300
252
250 234
209
194
200 174

150
Reputation
100

50

0
Pepsi Thums Up Sprite Coke Fanta

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On the component reputation which was to measure the past performance of the brand which included
questions judging the brand on its attribute taste and the ability to adhere to the brand image it has been
striving to create, Thums Up was the leader with Thums Up scoring 252 points followed by Sprite with
234 points , Coke with 209 points, Pepsi with 194 points and Fanta with 174 points.

Momentum
70
62
60

50 45

40
31
30 Momentum
20
12 10
10

0
Pepsi Thums Up Sprite Coke Fanta

On the component Momentum, Thums up managed to be the leader again with a big margin scoring 62
points, followed by Sprite, Pepsi, Coke & Fanta.

For this particular question we asked respondent to assume the bottle size to be 200ml and asked how
many bottles of each brand do they consume each week and then arrived at the score applying the
formula of Mass * Speed = Momentum. This component was included to have an idea of how strong the
brand is doing in terms of actual and potential sales in volumes.

Vision
250

193 198
200 183 184
154
150

100 Vision

50

0
Pepsi Thums Up Sprite Coke Fanta

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On the Component Vision almost all the brands are showing potential, this component included
questions like brand’s ability to innovate and keep consumers interested and anxious to have something
new and their willingness to recommend this brand to family and friends. Here Coke emerged as the
leader with 198 points, followed very closely by Pepsi with 193 points followed by Sprite, Thums Up
and Fanta.

Connection
45 41
40 36 36
34
35
30
30
25
20 Connection
15
10
5
0
Pepsi Thums Up Sprite Coke Fanta

This was the last component to judge the familiarity the consumers had with the brand and the
willingness to get associated with the brand, this was to basically judge the kind of trust the consumers
showed on the brand and the level of knowledge the consumers had about the brand. Here also Thums
Up emerged as the leader of the pack with 41 points followed by Sprite and Pepsi both at 36 points and
then Coke with 34 points and lastly Fanta with 30 points.

Total Score
25000
20377
20000
15048 16668
15000 14246
10000 10140
5000 Total Score

0
Pepsi Thums
Sprite Coke
Up Fanta

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After assigning scores individually for each of brand across the 4 components and assigning scores as
the Shafer model, Thums Up has emerged as a leader by a huge margin followed by Sprite, Pepsi, Coke
and Fanta. Thums Up was leader with huge margins in more than one component which clearly shows
the strong grip the brand has on the consumers.

3.7 RECOMMENDATIONS
In all the components Thums Up is either the leader by huge margin or a close second, Thums Up has
got a very good reputation and has been successfully able to make people believe that the product is
standing up to its image and is adhering to its deliverables. As a result of such a strong reputation Thums
Up is the leader in the component momentum which judges the current sales happening.

Pepsi as a brand has not done well in reputation and momentum, however in the component Vision,
which judges the future of the brand as per the consumer perception, Pepsi stood second to Coke,
indicating that although the brand is not doing well currently, consumers have got confidence in the
brand to do well.

Pepsi has also launched various campaigns in sync with its taglines like “Yeh hai Youngistaan, Meri
Jaan” , Nothing Official about it” and got very good responses from these advertisements and should
continue doing it in future to enhance its brand image adherence.

Pepsi would do well if it considers some mass marketing strategy, to highlight the attribute which
consumers like and which they find in Thums Up and Sprite which is taste, highlight its brand image
which would enhance the reputation of the brand as a brand which is delivering or promising to deliver.

4 QUANTITATIVE METHOD I – PRICE PREMIA MODEL

4.1 INTRODUCTION
In the price premia method, the value is calculated as the net present value of future price premiums that
a branded product would command over an unbranded or generic equivalent.

One of the models used by us for brand valuation is price premia. This method is used to determine the
price of various brands in a particular category in the market and the differentiation that exists between
them. The prices of the different brands are compared and it is found out that what is the difference
between the prices of these brands vis-à-vis each other. This difference is the premium that each brand
commands over the other brands. Here, the price premia model is use to calculate the difference between
the perceived prices of beer for different cold drinks brands.

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4.2 RATIONALE
 The price of cold drinks is same for all brands (across all bottle sizes). The customers are also
aware of the price of the cold drinks.

 Beer is a near similar product to cold drink in product composition.

 In case of beer the biggest differentiating factor is the brand name associated with it.

In this model a sample size of 20 respondents who consume beer regularly was taken and was asked two
questions which helped us to calculate the value of the brand vis-à-vis unbranded brand.

4.3 PROCESS OF MEASURING BRAND VALUE

 Average Price = Total Price/ No of respondents

 Sales(in units) = (No of users who want to buy a particular beer brand*48)

 Brand Value (in Rs) = (Average price of beer of cold drink brand – Average price of unbranded
beer)*sales of branded beer

4.4 ASSUMPTIONS
 Monthly usage rate of beer bottles (650 ml) per consumer is 4 (48 bottles per year).

 Consumers drink the same beer brand for a year.

4.5 RESEARCH METHODOLOGY

Research design Descriptive

Sampling technique Simple random sampling

Sample size 20 respondents

Method of data collection Primary data collection method

Instrument of data collection Questionnaire

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4.6 FINDINGS

Brand No. of Users Average Price Sales in Units

Unbranded 1 36.75 48
Pepsi 3 58.4 144
Thums Up 11 78.25 528
Sprite 2 55.65 96
Coke 2 60.8 96
Fanta 1 41.35 48

Brand Value
Price Premia
Unbranded Pepsi Thums Up Sprite Coke Fanta

21912.00

3117.60 2308.80
1814.40
0.00 220.8

Unbranded Pepsi Thums Up Sprite Coke Fanta

Out of the brands that were compared vis-à-vis the unbranded Cold drinks brand:

 Thums Up clearly is the leader and is valued at Rs. 21912.00

 Pepsi with Rs. 3117.60 and Coke with Rs. 2308.80 are distant second and third.

 Sprite comes next and is valued at Rs. 1814.40

 Fanta is last with its valuation coming out to be Rs. 220.80.

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4.7 RECOMMENDATIONS
Even in this model the brand Thums Up has emerged as a clear leader as far as overall brand valuation is
concerned, as per the above table Thums Up is valued at Rs. 21912.00 and the second best brand which
is Pepsi is valued at Rs. 3117.60 followed closely by Coke & Sprite.

Pepsi would have to consider this as an opportunity to start reposition itself as the second best available
brand and work towards increasing the brand image and overall perception consumers has got about the
brand.

Pepsi is followed closely by other brands like Sprite & Coke, Infact Sprite is second in the component
momentum, thus Pepsi would have to analyse this situation and find the root cause, as there are various
factors which may influence this despite the fact that all the brands are priced at same price. It would
need to enhance its supply chain thereby increasing its availability, do aggressive marketing thereby
highlighting its brand image. Only then it can survive and hope to get close to the leader Thums Up.

5 QUANTITATIVE METHOD II -ROYALTY MEHTOD

5.1 INTRODUCTION
A brand has a capability to charge a premium. A Royalty rate represent the premium a brand is able to
charge above it competitive set. In other words, if the company does not own the brand being valued, the
company would have to pay the owner a royalty for the right to use the brand.

We have tried to calculate the royalty rate of Pepsi and its competitors. A questionnaire was designed to
know the royalty rate of Pepsi.

5.2 RESEARCH METHODOLOGY

Research design Descriptive

Sampling technique Simple random sampling

Sample size 20 respondents

Method of data collection Primary data collection method

Instrument of data collection Questionnaire

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5.3 PROCEDURE FOR CALCULATING THE ROYALTY RATE

In question no 2 to 4 a yes would give one point and a no would give zero point. In the next question
(Question 5) the maximum a brand can score is 9 points (3 features*3 points).Hence a maximum a brand
can score is 12 points.

So royalty rate of a brand = percentage of Points scored/Total Points.

Royalty fees= Royalty rate as a percentage of total sales

For Example: If Pepsi scores 8 points then the royalty rate = (8/12)*100 = 66.66% and if 5 respondents
prefer to buy Pepsi and Pepsi bottle (500 ml) costs Rs 22 then total sales is 110 hence it can charge a
royalty fees of Rs 73.326 (66.66% of 110)

5.4 FINDINGS
Brands No of Users Points Total Points Royalty Rate (%)
Pepsi 5 37 60 61.67
Thums Up 12 97 144 67.36
Sprite 7 55 84 65.48
Coke 4 29 48 60.42
Fanta 2 14 24 58.33

 Out of the 30 respondents, 5 of them preferred Pepsi over other brands. The maximum points that an
individual can give is 12. Therefore the maximum score Pepsi can that Pepsi can obtain is (5*12) 60.
 Therefore royalty rate of Pepsi = (37/60)*100 =61.67%
 Similarly the royalty rate for Thums Up, Sprite, Coke and Fanta is 67.36%, 65.48%, 60.42% and 58.33%
respectively.

Brands No of Users Royalty Rate (%) Royalty Fees

Pepsi 5 61.67 61.67
Thums Up 12 67.36 161.67
Sprite 7 65.48 91.67
Coke 4 60.42 48.33
Fanta 2 58.33 23.33

5 people purchase Pepsi. The price of a 500 ml bottle of Pepsi costs Rs 20. Therefore the sales of Pepsi
would be Rs 100. Hence the Royalty fees that Pepsi can charge is 61.67% of 100 i.e. Rs 61.67. Similarly
the royalty fees that Thums Up, Sprite, Coke and Fanta can charge is Rs 161.67, Rs 91.67, Rs 48.33 and
Rs 23.33 respectively

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6 ANNEXURE

6.1 SHAFER MODEL QUESTIONNAIRE

1) Rate the following brands in terms of the attribute taste ? (5 being the highest and 1 being
the lowest) {Reputation}

Name Pepsi Thums Up Sprite Coke Fanta

Rating

2) Rate the following brands on adherence to its brand image ? (5 being the highest and 1
being the lowest) {Reputation}

Name Pepsi Thums Up Sprite Coke Fanta

Rating

3) How many bottles of the following brands do you consume in a week ? (bottle size 200 ml)
{Momentum}

Name Pepsi Thums Up Sprite Coke Fanta

Quantity

4) Rate the following brands on innovation in terms of product variety ? (5 being the highest
and 1 being the lowest) {Vision}

Name Pepsi Thums Up Sprite Coke Fanta

Rating

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5) I would recommend this brand of cold drink to my friends and relatives {Vision}

1 Strongly Disagree
2 Disagree
3 Neither Agree nor Disagree
4 Agree
5 Strongly Agree

Name Pepsi Thums Up Sprite Coke Fanta

Rating

6) If you are offered the dealership with any of these brands which one you would prefer ?

Name Pepsi Thums Up Sprite Coke Fanta

Preference

7) Identify the brands from the taglines mentioned below? {Connection}

Sl. No. Taglines Brands

1 Aap muskurayenge, bulbule gungunayenge
2 Yeh hai youngistaan meri jaan
3 Seedi Baat, No bakwaas, Clear hai
4 Taste the thunder
5 ______ ka Signal loud, Bunking is allowed

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6.2 PRICE-PREMIA MODEL QUESTIONNAIRE

1) How much are you ready to pay for the beer bottle of the following brand ? (750 ml)?

Name Pepsi Thums Up Sprite Coke Fanta Unbranded

Preference

2) Which beer brand would you prefer to buy ?

Name Pepsi Thums Up Sprite Coke Fanta Unbranded

Preference

6.3 ROYALTY METHOD QUESTIONNAIRE

1) Which of the following is a brand that you buy?

Name Pepsi Thums Up Sprite Coke Fanta

Preference

Questions related to the brand that is purchased

2) Would you continue to buy the brand even if it is not easily available?
Yes/ No

3) Would an increase in price become a barrier in purchase?

Yes/No

4) Would a reduction in promotions of your brand affect your purchase consideration?

Yes/No

5) On a scale of 1-3, how would you rate your brand of coldrink on the following parameters?

Parameters Points
Taste
Innovation
Leadership

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7 BIBLIOGRAPHY
Books Referred

KOTLER & KELLER MARKETING MANAGEMENT

Sites Referred

www.brandxpress.net/2006/04/4-brand-valuation-methods

www.allbusiness.com/company...branding/5736607-1.html

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