Brand Related Services

Brand Valuation. The key to unlock the benefits from your brand assets.

Creating and managing brand value

Interbrand Zintzmeyer&Lux

The Interbrand approach to valuation.
Council

Brands create shareholder value.

6

Brand
1. Origin, Orientation, Interpretation Recognition of message 2. Differentiation, Self-realization, Identification Preference building 3. Continuity, Certainty, Confidence Acquisition and retention

d’s unctions

t on the customer)

ence on ation

Communication efficiency

Economies of scale Price premium Higher earnings

IBZ&L 02200700 for NB

Risk mitigation

cial ence

Reduction of investments

Reduction of cost of debt

21.07.2005 Page 12

The value of a brand lies in its economic benefit – brand value is therefore defined as the net present value of future earnings generated by the brand alone. Interbrand’s approach is based on the following three economic functions: 1) the brand’s function to create cost synergies, 2) the brand’s function to generate demand for the products and services, and 3) the brand‘s function to secure future demand and thus reduce operative and financial risks. The method employed to evaluate brands comprises five steps: segmentation, financial analysis, demand analysis, brand strength analysis, and, finally, the calculation of the net present value of brand earnings.

Step five: Calculating the brand's value.

Shareholder value
(higher economic value added)

Interbrand’s approach is based on the three economic functions of a brand: 1) to create cost synergies, 2) to generate demand for the products and services and 3) to secure future demand and thus reduce operative and financial risks. The three economic functions of a brand are assessed in the three analyses.

Segmentation of the brand

Financial Analysis Economic Value Added (EVA)

Demand Analysis Role of Brand Index (RBI)

Strength Analysis Brand Strength Score (BSS)

Brand Earnings

Brand Risk (Discount rate)

Net present value of brand (segment) earnings

700

005 3

Germany Professional Products France Spain Benelux Germany

Brand

Consumer Products

France Spain Benelux Eastern Europe Germany

Segmentation: Consumers’ purchasing behavior 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 homogenous customer group. Apart from this, brand management can only obtain the insights it needs to increase the brand’s value systematically if the brand has been evaluated in all its segments. Financial Analysis: Interbrand’s brand valuation begins with an assessment of the company's 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.

Services

France Spain Benelux

The example above shows a typical segmentation that differentiates the significance of the brand between relevant customer groups in different markets.

L 0700 B

Different for the various brand segments.

2005 11

Quality Innovation Design Value/Money Ease of use Reliability Leadership Product Features 0% 10% 20% 30%

Demand Analysis: In this step, Interbrand analyzes the brand’s value chain and identifies the position of the brand in the minds of customers. To determine the brand’s share of EVA, Interbrand examines what factors influence demand and motivate customers to purchase. These factors are weighted in terms of their bearing on demand and for each, the contributions of the specific associations with the brand are statistically calculated. The sum of these brand contributions on the demand drivers is expressed as the Role of Brand Index (RBI) which, multiplied with the EVA, yields the brand earnings. Brand Strength Analysis: The stronger a brand, the lower is its risk, and thus the more certain are future brand earnings. Interbrand assesses this risk by analyzing the strength of a brand compared with its competitors on the basis of seven factors (i.e. market, stability, brand leadership, trend, brand support, diversification, and protection). In fact, a broad range of measured attributes explains the seven factors and facilitates an all-round diagnosis of a brand’s competitive position. This step results in the Brand Strength Score (BSS). Net Present Value Calculation: The economic value of future brand earnings is inversely correlated with the brand’s estimated risk and this risk is directly linked to brand strength. The transformation of brand strength into brand risk (or into discount rate,) is completed using an S-curve. The 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 strongest brands are discounted with the risk-free rate of the total market while average-strength brands are discounted with the industry WACC (cost of equity in the financial service industry). Discounting the forecast period (present value) and the calculation of an annuity (terminal value) results in the total value of the brand.

0

05

Significance demand drivers (total 100%) Significance of demand brandofIndex sector100) (36%) Role of drivers (Total average Role of the competitive performance Brandof Brand Index (Total 40%) (total 40%) Role strength measures Brand Index of the of Brand industry sector average (36%) Role brand.

– Market growth Industry Concentration Satisfaction Customer Loyalty Market share Awareness Consideration Attractiveness Share of advertising Identity Geographic diversification Offer-related diversification Date of registration Legal coverage and monitoring
-5

Average Brand Strength
3 3 -2

+ Market

Stability

5

Leadership
12

1 3 9 10 3 -1 4 5

Trend

Support

Diversification

Protection

Performance of the strength attributes in comparison with the industry average (Brand Strength Score 54%) IBZ&L 02200700 for NB
Risk-free rate e.g. 3% Discount rate for brand earnings e.g. 9%

Product.

28.12.2005 Page 8

Brand risk

Industry WACC e.g. 10%

Since this procedure focuses on value creation, it is independent of potential and probable changes in organizational structure. The total value of the brand is calculated as the sum of its segment values (sum-of-the-parts).
Year 2003 440 (357) 83 (22) 61 110 (11) 50 2004 480 (390) 90 (24) 66 120 (12) 54 2005 500 (407) 94 (25) 69 130 (13) 56 2006 520 (423) 97 (26) 71 130 (13) 58 23 2007 550 (447) 103 (27) 76 140 (14) 62 25 2008 580 (472) 108 (29) 79 150 (15) 64 26 2009 620 (503) 117 (31) 86 160 (16) 70 28 2010 650 (528) 122 (32) 90 160 (16) 74 29

Max. risk 0 20 40 54 Brand Strength Score (BSS) 80 100

The Brand Strength Score, which measures the competitive strength of the brand, is transformed into a discount rate on the basis of the S-curve. The Industry WACC (cost of equity in the financial service industry), which ideally comprises the same competitors assessed in the Brand Strength Analysis, is used as the benchmark for the company’s overall risk.

Branded revenue Operating costs EBIT Tax 26% NOPAT Operating assets WACC 10% Economic Value Added (EVA) RBI 40% (Brand earnings) Discount rate 9% Discount factor Discounted earnings

1.09 21 101 277 378

1.19 21

1.30 20

1.41 20

1.54 19

Value until the year 2010 Terminal value (growth = 2%) Net present value of the brand segment

Origin and performance record.

A systematic approach to brand valuation was jointly developed by Interbrand and the London Business School in 1988. The method was partially revised in 1993. Since then, Interbrand has evaluated some 3500 brands for nearly 400 companies. These assessments comprise corporate and product brands, complex brand systems, and simple "homogeneous" brands. Depending on their purpose, evaluations can be broadly divided into two categories: 1. Evaluations for financial transactions in connection with mergers & acquisitions, internal licensing and fiscal issues, as well as reporting or financing questions. 2. Evaluations for specific brand management purposes with a view to optimization of brand investments, long-term controlling, internal and external communication and sustainable increases in brand value. The Interbrand model is one of the most frequently referenced methods in the international market. It is effectively the only method that has gained consistent global acceptance during the past ten years: valuations based on the Interbrand method have been used by, among others, the US Internal Revenue Service and the tax authorities of many other countries, by the Monopolies and Mergers Commission in Great Britain, by the European Antitrust Committee, and by judicial courts in the USA, Germany, Austria, Great Britain, Ireland, France, and Hong Kong. The Interbrand method of brand valuation has been assessed by all the world’s leading auditing firms in conjunction with numerous balance sheet projects. In countries such as Australia, France, Great Britain, and New Zealand, the capitalization of acquired brands has been permissible for years. The Interbrand method is based on formulae and procedures considered standard in general business management as well as in financial and marketing theory. The method is therefore absolutely transparent. Since input data are generally obtained through primary studies, the brand values derived from them are objective and highly reliable. Moreover, the economic functions of the brand are also included entirely and individually as part of the analyses described above and are thus expressed as part of the company's value. Brand valuation thus blends in seamlessly with conventional corporate strategic thinking and procedures. As a result, the integration of value-oriented brand management into value-oriented corporate management is effortless. Interbrand is a member of various national bodies whose central concerns include the regulative, normative and communicative promotion of brand value. In Germany, we play a significant role in the activities of the DIN (Deutsches Institut für Normung e. V.) and the Brand Valuation Forum (a work group set up by Germany's GEM), which focuses specifically on communicative functions. Our involvement on these boards is coordinated within the Interbrand network and creates a foundation on which the standardization and reporting of companies with regard to brand value can be based.

The Interbrand method has been used worldwide in numerous value-related purposes for brand management, balance sheet capitalizations, licensing, litigation, asset-backed securitization, business combinations, brand migrations, etc.