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” . and it was by this method that early man marked is livestock . meaning burn.

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. but foresight. . • 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 .

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.• • • • • • • • • • • Successful brands Have a clear customer benefit Make a promise and keep it Have simplicity. better quality Ref: Professor Malcolm McDonald (Cranfield University) 9th April 2010 .

eg Unilever country soup. more innovative competitors have passed them by. .Forgetting that the brand actually belongs to the consumers.Decline of brand Big five mistakes the company should avoid • • • Arrogance. Complacency –Sitting back and resting on reputation only to discover that faster. Greed-Numerous companies have sought to make their prized assets more and more profitable. hungrier .upgrades and extensions.eg endless cycle of relaunches .

.Decline of brand • Inconsistency. or the customer service standard they expect from a branded service.Consumer’s expectations of consistency extend well beyond the quality of the ingredients they expect to find in a branded product. consumers expect the values of brand to be reflected in every aspect of business behind the brand. Increasingly .

We live in a world of permanent change. Nial Fitzgerald’s speech) .Decline of brand • Myopia. (Ref: Ex Unilever Chairman Mr. Those who fail to Understand the consequences for change for their brands inevitably put those brands at risk.

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 . ‘low fat’.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.

Branding possibilities. few examples…………. Single brand across organisation Endorsed brands House of brands Source: Davidson H .

. 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.

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 .

5 billion . Brand Finance.0 billion (David Haigh.Gillette brand £ 4.0 billion .Intangibles have paid £31 billion for but have bought only £4 billion of tangible assets .Oral B £ 2.Retail and supplier network £10. Marketing Magazine.Duracell brand £ 2.5 billion .0 billion .Gillette innovative capability £ 7. 1st April 2005) .0 billion TOTAL£27.0 billion .Braun £ 1.

• This was a celebration time for VW till they realised……………………………………. • This trade mark was sold to BMW for only USD 73 Millions. • 2/3rd of the amount paid was for Good will.Did you know?? • VW purchased Rolls Royce Motors from Vickers for USD 909 Millions. . • The trademark Rolls Royce belonged to company named Rolls Royce PLC.

2% abv.000 cases. . Production had dropped to an all time low with virtually no exporting. By 1999 UK sales had tripled to 18. Today Plymouth is fast becoming the favorite spirit of mixologists world wide. 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. UK sales went up to 36. Plymouth Gin returned to its traditional strength of 41.Did you know?? In 1996 Plymouth Gin was acquired by private investors led by John Murphy.000 cases and the exports were on the rise. In 2001 Vin & Spirits (the parent company of Absolut) buys 50 % and global distribution was now available. 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.

as this is the perceived value of the brand. . b)Vodafone acquisition of Mannesmann (Germany).5 Billion.Did you know?? Notes of Caution a)Drop in the Hutch brand in India must have resulted in direct loss of USD 6. 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.

changed its name to Consignia. the UK’s Post Office. 2002 the name was changed back to Royal Mail. as it alters the signs on 3. • USD 92.000 was spent on branding exercise and later USD 2million in consigning the Consignia name to history. • On June 13.000 buildings to meet company law requirements. founded in 1635 by Charles I. .Did you know?? • On March 2001.

-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 .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.

More than five times book value? . After Eight.5 billion.6 billion for “goodwill”)? • Nestle bought Rowntree (home for Kit-Kat.9 billion ($ 11. Kravis and Roberts for $30 Billion? • Philip Morris bought Kraft for $12.Did you know?? • RJR Nabisco sold their brand to Kohlberg. Polo…) for $4.

.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 .

2008) 26 .Asset split across selected economies Asset Breakdown for the top 10 countries by Enterprise Value (US$ millions.

6% £194 50% 4 £431 224 £207 90 27 24 £50 £205 48% 5 £454 236 £218 95 28 24 £55 £206 45% 11.Inter Tech’s 5 year performance Performance (£million) Sales Revenue .1% 24.5% 15.3% 1 £293 152 £141 58 23 23 £22 7.4% 26.Cost of goods sold Gross Contribution .6% 12.6% 19.3% £141 56% 11.7% .Research & Development Net Profit Return on Sales (%) Assets Assets (% of sales) Return on Assets (%) Base Year £254 135 £119 48 18 22 £16 6.2% £167 53% 3 £387 201 £186 82 26 25 £37 9.Manufacturing overhead .Marketing & Sales .1% 13.5% £162 55% 2 £318 167 £151 63 24 23 £26 8.

9% 87.6% 34.2% 80.1% 17. It is obvious that.3% 16.0% 12.2% 27.9% 19.1% 18.4% 11.1% 85.4% 17.3% 14.9% 14. .5% 29.9% 24.6% +8% +0% +8% +5% -20% +7% +3% -3% +5% +1% -5% +1% 0% -8% -4% A quick glance at Table 2.7% 13.9% 80.9% 17.0% 82.4% 17.2% 14.1% 22.1% 16.3% 12. however shows that most market indicators are negative.4% 24.5% 10.9% 19.6% +10% +0% +8% 1 2 3 4 5 23.1% 16.Why Market Growth Rates Are Important InterTech’s 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 18.8% 20.3% 88.2% 11. when market conditions are less benign.3% 18. this company will not last long.0% 17.

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 company’s processes aligned behind the brand? Can employees articulate the answer to question one? .

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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 ? .

before hand Preparing the finance package Inherent value of the brand .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 .

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 .

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? Balance Sheet Benefits Goodwill IFRS .

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 .Why Value Brands? Investor Presentations Presentation on strength of brand to its share holders and investor’s community.

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)

CEO.“ISO 10668 gives brand valuation analysis the Institutional credibility which it previously lacked. Brand Finance Plc © Brand Finance plc 2006 . It professionalises brand management.” David Haigh.

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 © Brand Finance plc 2006 .

ISO 10668 :Module 3 Financial Analysis Conducting a thorough financial analysis ISO 10668 specifies three alternative brand valuation approach: Market. Cost and Income. © Brand Finance plc 2006 .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 © Brand Finance plc 2006 .

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 .

you will not buy it for future economic benefit but you will buy it for pleasure and satisfaction.. .as a collector of old books.Brand Valuation : Difficulties • Future benefits need not be monetary in nature. …….

Brand Valuation: Difficulties 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. it may have far less value . If the same car is owned by private individual for use on private circuit.

Brand Valuation: Difficulties 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) .

5 657.0 221.Various Valuation Approach Sr.19 1105.No.4 21. 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) 183.6 1086 © Brand Finance plc 2006 .9 845.

(Cost of replacement) © Brand Finance plc 2006 . (Cost of reproduction) – “Re Creation” may also be estimated. However.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. there is no such thing called as identical brand so it is difficult to calculate a relevant re-creation number.

• 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. © Brand Finance plc 2006 . where the time period is short and the costs are readily available.Cost approach • Advantage – Works well for tangible assets like plant and machinery – Ideal for a new brand. – Valuing Coca Cola by this method will be an extremely difficult task.

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 © Brand Finance plc 2006 .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 .

3 30.7 90.4 42.8 5 132.in Mn) Compounded value 3.4 62.13 © Brand Finance plc 2006 .2 31.0 28.5 18.4 39.4 42.4 Year (Historical) 2 73.Case study Valuation I] Cost method Particulars 0 Direct cost Less: Production cost Cost incurred for brand building 1.9 36.8 1.3 Brand value 183.8 1 60.6 74.08 0.9 42.05 0.5 Weighted average cost of capital (WACC) Type of capital Equity Debt Proportion 0.40 0.3 (Rs.4 51.60 Cost 20% 13% Wt avg cost 0.3 22.4 4 109.8 34.1 3 90.

General purpose computer software. Vehicles. Liquor Licenses and Franchisees • It however requires following: – There must be a proper market in the assets being valued. Machinery and equipments in general use. – The precise timing of the transaction should be known to allow proper comparison © Brand Finance plc 2006 . • Best suited for Real estate. – Transaction taking place in the market must be at arm’s length – The precise terms of transaction taking place must be known so that valid comparison can be made. Computer hardware.Market Approach • It establishes a value for an asset by identifying those values placed on similar assets in the market place.

Case Study Sr.No. 2)Amount may fluctuate widely according to the buyer’s characteristics and purpose. 3)Information that would facilitate comparable analysis is simply not available. © Brand Finance plc 2006 . Statement 1) 2) NOPAT (Five years) Value in INR (Mn) 44.19 (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.23 Brand value (NOPAT *5) 221.

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. trademarks . copyrights. • 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. Franchisees. securities and Business enterprises © Brand Finance plc 2006 . Licenses and Royalty agreements. Patents.

distribution etc. 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.Cash Flow/ Income approach • Challenges – Quantification of future cash flows: The future cash flows could be impacted with market circumstances. – 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 © Brand Finance plc 2006 . outside the control of owners.

6 10 418.3 28.9 10% 261.2 38% 62% 38% 43.4 54.5 Brand Value (Present value) Discount rate Terminal growth rate 657.6 2.0 92.0 54.9 62% 38% 62% 95.6 93.2 38% 45.0 Terminal value Net income 888.2 187.1 62% 157.8 68.4 2.5 71.0 41.3 62% 143.2 62% 130.9 79.4 3.3 48.3 61.0 67.3 83.8 31.0 40.5 38% 109.0 8 346.0 82.8 1.8 97.8 10% 237.8 1.7 Year 5 212.3 1.0 53.3 54.4 (Rs.8 44.0 35.8 113.0 104.0 1.5 1.6 56.3 1.6 61.3 25.6 3.3 2.Case Study Income method Particulars Revenue Estimated growth in revenue Direct Cost 132.0 35.0 18% 216.7 42.8 7 301.9 105.5 69.2 15% 9 380.8 23.1 20% 159.9 38% 39.in Mn) Cost as % of revenue Gross profit Gross margin % Indirect overheads EBITDA Less: Interest PBDT Depreciation PBT Tax PAT 37.1 44.0 18.4 3.6 957.6 86.0 13% 5% © Brand Finance plc 2006 .3 13.5 35.6 Years (Estimation) 6 255.9 25.0 39.

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. – 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 . However premium pricing can serve as an indication of brand strength and may therefore play an important part in a valuation © Brand Finance plc 2006 .term tactical factors. • Challenges: – The rise of private label makes it difficult to identify a generic.(eg Mars bar) – Selling prices are often related to short. • Hence this cannot be a way of understanding brand value.

13 (Earnings)I = Earnings of the ith year growth earnings =15% Hence Brand Value is 1105.Case study 5 • BV= ∑ (Earnings)i i=1 (1+K)I Where k= opportunity cost of capital which is equal to WACC= 0.4 Mn © Brand Finance plc 2006 .

Volume X Price premium = Brand Value © Brand Finance plc 2006 .Simpler way If Kellogg’s 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.

© Brand Finance plc 2006 .Economic substitution analysis • If we didn’t 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.

© Brand Finance plc 2006 . These are the excess earnings attributable to all the intangible assets of the business. This involves four principal steps. 2) The second step is to forecast the economic earnings of the branded business earnings within each of the identified segments. 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.Earnings Split Approach • Under an earnings split approach we attribute earnings above a break-even economic return to the intangible capital. 1) Appropriate segmentation of the market to ensure that we study the brand within its relevant competitive framework. 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.

Due diligence of forecasts Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Future Value Future Cash Flows 4.Illustration of valuation approach (Brand Finance) 1. Segmentation = Total Business Value Trademark Value + Segment B + Segment A Discounted to present value 2. Risk attached to future earnings 3. Brand contribution to earnings © Brand Finance plc 2006 .

© Brand Finance plc 2006 . If a brand has to be licensed from a third party a royalty rate turnover will be charged. • This is the most frequently used method of valuation because it is highly regarded by tax authorities and courts.Royalty Relief model • Royalty relief assumes that a company has no brand and needs to license one. largely because there are a lot of comparable licensing agreements in the public domain. hence royalty relief. It is relatively easy to calculate a specific percentage that might be paid to the trademark or brand owner. • Ownership therefore relieves the company from paying a license.

databases.5% Brand Power Index • Determine a royalty rate range in each sector  Comparable licensing agreements  Industry norms.0% 6.0% 5.5% 6. 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% 7.5% 7.0% • Margin analysis and commercial sense checks Source :Brand Finance © Brand Finance plc 2006 .Royalty Relief model • Royalty rate range 8.

6 Years 8 346.1 0.1 29.8 0.0 0.3 7 301.0 2.Case Study (INR mn) Royalty Relief method 6 Revenue Royalty rate Royalty 255.4 Brand value Discount rate Terminal growth rate 21.6 1.0 1.9 2.1 10 418.2 0.1 31.9 9 380.9 13% 5% © Brand Finance plc 2006 .0 1.0 2.9 0.0 1.3 Terminal value Cash flow 1.3 1.

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 © Brand Finance plc 2006 .Interbrand’s Approach • To determine a brand’s value.

• Step 1-Identify the factors that may impact a brand’s value.        Market Leadership Stability Market Internationality Trend Support Protection © Brand Finance plc 2006 .

Interbrand Factors Leadership Stability Market Internationality Trend Support Protection Brand Strength Weighting 25 15 10 25 10 10 5 100 © Brand Finance plc 2006 .Interbrand’s Approach • Step 2-Decide the relative importance of each factor. so Interbrand has weighted them appropriately by giving each one a different maximum score. Since the mentioned seven factors are of equal importance .

Interbrand’s Approach • 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 © Brand Finance plc 2006 .

Interbrand’s Approach • 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 © Brand Finance plc 2006 .

Interbrand’s Approach Multiple Brand Strength Score Converting Brand Strength into Multiple © Brand Finance plc 2006 .

Interbrand’s Approach • 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 © Brand Finance plc 2006 .

6 © Brand Finance plc 2006 .Case Study Valuing the Brand Brand Earnings Multiple Applied Brand Value (INR mn) A 52.8 16 845.

Demand Drivers Brand Value Added Index and Risk Factors (Brand Beta) © Brand Finance plc 2006 . Branded business 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).Brand Finance Approach • This approach seeks to forecast future brand earnings. • It uses Financial forecast.

1 Yr. 5 Future Value Today FUTURE CASH FLOWS OVER PLANNING PERIOD PERPETUITY Time © Brand Finance plc 2006 . 2 Yr. 3 Yr.Start with a ‘Branded Business’ valuation Branded Business Value discounted at cost of capital Yr. 4 Yr.

Split between tangible and intangible assets Business value .Value tangible assets = Value intangible assets Intangible Branded Business Value % Tangible % © Brand Finance plc 2006 .

Brand represents a proportion of intangible value Recipe Trademark Intangible Software Patents © Brand Finance plc 2006 .

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 % % % % © Brand Finance plc 2006 .

Segmentation = Total Business Value Trademark Value + Segment B + Segment A Discounted to present value 2.Illustration of valuation approach 1. Risk attached to future earnings 3. Brand contribution to earnings © Brand Finance plc 2006 . Due diligence of forecasts Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Future Value Future Cash Flows 4.

Flexing the brand’s 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 © Brand Finance plc 2006 .

100 10 20 30 40 50 60 70 80 90 0 © Brand Finance plc 2006 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

© Brand Finance plc 2006

3 ßrandßeta®Scoring 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
© Brand Finance plc 2006

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

© Brand Finance plc 2006

Is brand investment creating value? ? Value creation opportunity C D E ? F Current value of portfolio B Branded Business Value A Resources allocation & Management Time © Brand Finance plc 2006 .

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 © Brand Finance plc 2006 .

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 © Brand Finance plc 2006 .

Market and intrinsic value often differ Hidden Value MV Debt MV Equity MV Gap Intrinsic Branded Business Value Market Value © Brand Finance plc 2006 .

000 39% Drivers of direct cost: supplier costs/ trade discounts © Brand Finance plc 2006 .717 31% 305.800.Which links to the valuation model Brand: Enterprise valuation Branded Business Value Branded Business Value Earnings approach .200.000 33% 850.20 2.000 52% 1.000 13% 1.000 29% 2004 925.000 38% 1.000 790.200.Enterprise Value GBP Year ended 30 September Revenue Drivers Total Market Size Market Share Volume Price Total Sales growth % Utilities Brand Brand Value 3.800.000 9% 2006 986.00 1.138 31% 292.000 6% Gross Profit margins % 600.333 27% 225.029.000 8% Total Direct Costs growth % 1.504 Drivers of revenue: market share/ volume/ price premium Historic 2002 700.000 39% 900.50 2.000.600.000 22% Forecast 2005 944.50 2.000 25% 175.20 2.400.000 8% 2007 1.683 8.181.00 1.000 8.400.147 29% 268.100.600.000 8.000 11% 1.700.094 2003 833.500.906 609.412 32% 329.300 Total Brand Value 254.000 38% 1.882 8.293 8.000 7% 1.350.412 8.

13 92.464 30.000 20% 585.600 267.74 236.5% 1.000 5% 130.062 30.5% 1.000 -24% 468.632 30.235 452.901 13.000 9% 501.37 212.000 4% 53.0% 44.000 2% 55.800 291.000 4% Total administrative expenses growth % 595.22 219.000 3% 325.000 4% 484.543 30.000 17% Tax Rate Tax Charge Profit After Tax Discount Rate Discount Factor Discounted Profit After Tax 30.400 12.500 409.000 1022% 382.000 5% 124.000 #DIV/0! 118.000 3% 499.021 Drivers of internal cost: staff costs/ productivity Drivers of financial cost: cost of debt/ cost of equity/ gearing = WACC © Brand Finance plc 2006 .000 3% 316.54 227.400 103.0% 3.0% 114.0% 150.000 3% Profit Before Interest and Tax growth % 148.193 30.000 3% Marketing growth % 46.0% 175.000 158% 416.000 4% Other overheads growth % 112.000 #DIV/0! 300.5% 1.958 9.0% 124.000 5% 135.200 12.600 12.500 12.700 12.000 #DIV/0! 50.000 9% 52.5% 1.000 2% 308.Which links to the valuation model Salaries growth % 294.300 350.000 3% 515.5% 1.

0 % (20.4 % 37.0 % 83.0 % (237) 9.0 % (0.1 % (62.0 % 45 29.2%) 96 20.9 % (21) 0.0 % 37.086 843 243 £m 128 100 29 Enterprise Valuation (Rs.8 % (110) 21. 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 0.6 % (0) 0.0 % 35 (16.0 % (188) 18.1%) (44) 5.0 % (0.3%) 130 15.3 % 9.4 % 14.2 % 25.8 % (19.1 % (19.5%) 21 44.1%) (48) 5.2 % 42 38.Brand Finance Approach Reporting Unit: Brand: Market: EARNINGS APPROACH Branded Business Value Value in Perpetuity Value .9% 2012 346 15.0 % (20.2%) (36) 5.0 % 61 11.6 % (0) 0.3%) (33) (27.3%) 113 18.7 % (90) 23.3%) 86 20.46 43 2006 121 2007 2009 213 20.0 % (0.8 % (0) 0.76 47 146 20.2 % (62.2 % (62.4 % 19.50 20.7 % 27.0 % 55 20.3%) 158 9.8 % 37.2%) (40) 5.2 % 9.2%) 67 20.0 % (0.0 % (62.7 % 9.3%) (34) 4.9% 1.0 % (19.6 % (0) 0.9 % (23.1 % (40) 0.6%) 71 27.Years to 2010 Soap Total Rs.60 2015 461 10.9 % (32) 2014 419 10.2%) 2010 255 20.9% 1.6%) 56 33.0 % (19.3%) 144 10.33 42 0.3 % 0 © Brand Finance plc 2006 .2 % 17.7 % 0 0.0 % (261) 10.0 % (285) 9.2 % (62.7 % (26) 0.0 % (0) 0.1 % 26.9% 1.0%) 14 11.7%) Forecast 2013 381 10.2 % (42) 0.8%) 47 Historic 2008 176 20.0 % (0.7 % (62.9 % (73) (60.0 % (62.4 % 0.4 % 42 38.4%) 30 45.7 % 21.9% 1.9 % 38.21 37 41 1.0 % (216) 15. 1.7 % (133) 21.7 % (0) 0.6%) 126 14.1 % (62.0 % (0.6 % (37) 0.5 % 23.0 % (17.6%) 109 12.0 % (62.4 % 38.0 % (0.2 % (0) 0.3%) 176 11.0 % (19.0 % (0) (0.8%) 98 13.0 % 9.0 % 21 44.4%) 80 20.8 % (0) 0.0 % (38) 5.0%) 55 16.8 % 9.9% 1.1%) (50) 4.5%) 9.9 % 24.1%) (46) 5.0 % (159) 20.0 % 37.0 % 37.0 % (0.0 % 69 14.0 % (0.2 % 37.1%) (42) 4.0 % 37.0 % 30 45.10 32 2011 301 18.6 % (0) 0.1 % 0 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 © Brand Finance plc 2006 106 .

(Brand Finance) 107 . Those shown above are for illustrative purposes.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 © Brand Finance plc 2006 Note: Measures have to be customised to each business model.

Summary .

19 1105.4 21.6 1086 .0 221.9 6) 7) Interbrand's Approach Brand Finance Approach 845.Various Valuation Approach Sr.5 657. 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.No.

– Relevance: It should fulfill their specific need . 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. it ‘fits in’ with their lifestyle. It outlines four different blocks of brand equity: – Differentiation: It is the starting point for all strong brands. It was launched by the advertising agency Young & Rubicam in 1993. .Other Proprietary Methodologies Brand Asset Valuator: • One of the first models of brand equity.

– Equity: It Measures over all good will associated with brand • Challenges – It lacks the diagnostic to depth.Other Proprietary Methodologies Equitrend • It is a brand equity measures developed by research house Harris Interactive . – Salience : It measures the percentage of respondents who have an opinion about the brand. It has three key measures: – Quality : Measured on 10 point scale ranging from outstanding to poor quality. . – It contains no real measure of brand loyalty – It fails to capture dynamic changes in brand’s position. and is used predominantly in North America.

Performance. Relevance. No Presence Brandz Voltage • Bonding provides an indication of the strength of the brand. Advantage. Presence.Other Proprietary Methodologies Brandz • Method developed by WPP. Voltage score is a one.number summary of the growth potential of brand. • Brand Dynamics pyramid consists of : Bonding. 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.

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