BRAND VALUATION

There are several values

 Cont.

 Value of liquidity in case of forced sale

 Book value for company accounts
 Value needed to encourage banks to lend
the company money
 Value of losses or damage to worth of
brand
 Value in order to estimate price of licenses
 Value for management control which
depends on behavior encouraged in
managers
 Cont.

 Value for partial sale of assets

 Value in case of a takeover or M&A

Million dollar question:

Is it necessary to include brands on the

Balance Sheet?
 Cont.

 Acquired brands must be included

 Created brands may be included

Observe the difference between “must” &

“may” to understand the difference in
accounting for value of inorganic & organic
brands.

In India, we go with goodwill.

 Cont.

 For created brands:

Brand is an asset which should be taken
into account if:
1. It is likely that the brand will bring about
a future economic advantage which will
have an influence over the whole
company.
2. The article has a cost or a value which
can reliably be valued.
 Cont.

 Arguments against including created

brands on Balance Sheet:

1. Acquired brands are accounted for at

their purchased price which is
determined by expected profits.
2. Valuation methods for internal brands
are highly subjective – this goes against
basic accounting principles.
 Brand Equity
 In the context of valuation it can be
summed up as the “added value endowed
to product or service”.
 This value may be reflected in how
consumers think, feel, and act with
respect to the brand, as well as the
prices, market share and profitability that
the brand commands for the firm.
 Valuation Methods

 Cost-based methods:

1. Valuation by historical cost

2. Valuation by replacement cost
3. Market Value Method
4. DCF Method
5. Brand Contribution Method
6. Inter-brand Method
 Price-based methods

1. Price Premium Method

2. Market Share Equalisation Method
3. Price-Premium at Indifference
 Customer-based Brand Equity

 Brand Knowledge Method

(brand recall)
 Attribute-oriented Approach

 Blind Test
 Cost-based methods

 Historical Cost: This is the money that has

been spent on the brand till date (i.e. on
creating the brand). Method is
inappropriate because a prospective buyer
is interested in the future cash flows from
the brand & the money spent on creating
the brand is no guarantee for future sales.
Costs incurred on brands is no measure of
efficiency & poorly spent finances do not
translate into brand equity.
 Replacement Cost
 How much would it cost to create a brand with
the turnover, profitability, distribution reach,
brand loyalty etc. of Colgate?
 This cost is the brand equity of Colgate.
 Promo expenses on launch alone would cost
close to 5 crores (national).
 For Close Up, say Rs. 200 crores was spent on
production & marketing over the years to
achieve present turnover. Let’s add another
100 crores for brand loyalty & equity. So brand
value = 300 crores. But what is the guarantee
that that a brand created at 300 crores will
achieve the market share ofClose Up?
 Cont.

 Replacement Cost = Launch cost +

production & admin. costs (over the years)
+ brand premium (acquired)
 This method is better than historical cost,
but suffers from setbacks.
 Present costs (as replacement cost
method) are as bad indicators as past
ones (historical cost method) for brand
valuation.
 Market Value Method

 Brand value for a particular brand is

obtained by comparing it with the value
that had been realized in a comparable
current M&A.
 If Cibaca was bought by Colgate for 131
cr. what should be the Colgate equity?
Since Colgate’s turnover is 17 times that
of Cibaca, should we multiply
131x17=2227 cr.? This may not be
realistic! Better option is P/E value of
shares.
 Recent brand acquisitions (values)

 Eveready – 290 cr
 Kelvinator – 250
 Farex/Glucon/Complan – 210
 Thums Up/Gold Spot – 180
 Cibaca – 131
 Transelektra (Good Knight) – 80

* All were bought on “Market Value

Method”.
 DCF Method
 Consists of
1. Estimating cash flows that would accrue to
brand in future
2. Converting these to present values, using
time value of money
*Consider the case of Usha fans:
If the estimate of sales for next 10 years is
SI, S2, --- S10 & a discount of 15% is
applicable to these amounts then present
value P (Brand Value)= SI/1.15+S2/(1.15)2
--- S10/(1.15)10
 Cont.
 The 15% here is supposed to cover the
uncertainty attached to future. But it is difficult
because competitors may outperform Usha or
nature of industry might change (like the shampoo
industry after the intro of sachets). So this method
is useful only when the industry is stable &
company’s turnover predictable. One option is to
use PE ratio of industry.
 PE ratio = Market Value Per Share/EPS
 Industry PE ratio = Market Capitalization/Net Profit
 S&P 500 PE ratio has traditionally ranged from 13-
15 (considered good).
 Brand Contribution
 This method tries to identify the value that
is added by the “brand” to the product. It
compares the profits earned by the brand
with the profits earned by an unbranded
product in the same category. The
difference between the 2 is treated as a
measure of brand value. But any
organization will not sell at this price & will
demand several times this value. So brand
value will = K x (profit from brand – profit
from unbranded product in same
category).
 Inter-brand method

 The weighted average of the last 3 years’

profits of brand is computed.
 This figure when multiplied with a no.
gives the value of brand equity. The no. =
P/E of company/industry & a factor called
brand strength.
 Brand strength is dependent on certain
variables like leadership, stability,
internationality etc. of brand (see next
slide).
 Measuring Brand Equity –
Interbrand Method
 Market (10%) – Whether the market is stable, growing and has
strong barriers to entry
 Stability (15%) – Brands that have been established for a long
time that constantly command customer loyalty
 Leadership (25%) – A brand that leads the sector that it
competes in
 Trend (10%) – Gives an indication where the brand is moving
 Support (10%) – The support that the brand has received
 Internationalization/Geography (25%) – The strength of the
brand in the international arena
 Protection (5%) – The ability of the company to protect the brand
 Cont.
 This method despite all its emphasis on
quantification has several qualitative factors
incorporated in it that finally decide the brand’s
equity e.g. “brand strength” computation rests
more or less on subjective judgement.
 Why multiply earnings with P/E ratio? P/E ratio in
this context is the ratio of the price of a
company’s share in the industry to the average
earning per share for that industry. This
represents the amount someone is ready to pay
to obtain an earning “E” from company.
 Cont.

 When P/E ratio is multiplied by weighted

earnings, it gives the price of the
company. This when multiplied by brand
strength gives price of brand. This is the
rationale of the inter-brand method.

 Example: BE of brand X with PE ratio=15

is calculated (next slide).
Example
 Example
 Therefore the Brand Strength will be
 = 51 points scored /100 points earn marked

 = 0.51

 Hence, Brand Equity = 0.51 x 15 x 31.444

 = 240.60 million (rounded off).

This is the price a company will have to pay to

acquire brand X.
 Price-based methods

 Price premium method:

This compares the difference between the
retail price of the “brand” & the retail price
of an unbranded product in the same
category. Difference gives indication of
“brand strength” only i.e. indication of
brand equity. Higher the retailer premium
that a brand can charge, greater is its
equity in the mind of the customer.
 Cont.

 Drawbacks:
1. Comparing Colgate Total with an
unbranded product will give it a high BE
as compared to CDC.
2. Some toothpastes like Babool are
deliberately priced low for market
penetration. So it would not be fair to
assume that Babool enjoys less BE.
3. This method would reduce BE to almost
0 for brands like Nirma & Lifebuoy.
 Market Share Equalization Method

 Suppose there are 100 consumers of

toothpaste in the country, out of which:
65 use Colgate @ 17.40 for 100gm
20 use Close Up @ 22.50
10 use Promise @ 17.40
5 use Babool @ 14.60
*What are the prices at which the market
share for each of these brands is equal?
 Cont.

 Colgate is obviously the most popular brand, but

if the price is raised beyond a point, people will
switch. What is the point at which 40 people
switch from Colgate to other brands?
Colgate – 25 – 24.50 (up by 40%)
Close-Up – 25 – 23.00 (almost constant)
Promise – 25 – 17.50 (almost constant)
Babool – 25 – 14.60 (constant)
So at these prices, we have forced = market
share for all 4 brands.
 Cont.

 If we multiply all the prices by a factor of

10, we get the brand equity nos. i.e.
1. Colgate = 245
2. Close Up = 230
3. Promise = 175
4. Babool = 146
 Price Premium at Indifference

 Tries to compare free prices of brands at point

of indifference. Let’s take Colgate & Promise.
Let’s say on average, a customer jumps from
Colgate to Promise at Rs. 24.5 (from previous
example).
 B. E. of Colgate =

(Revised price of Colgate) – 1 (X 100)

(Price of Promise)
= 24.5 - 1 X 100
17.5
= 40 (premium commanded by Colgate)
 Customer-based brand equity
 Brand Recall Method:
Suppose you want a consumer to recall
Nirma (say). Then you can allot scores
based on following scale:
1. TOM – 10/10
2. Somewhat unaided – 6/10
3. Somewhat aided – 4/10
4. Almost totally aided – 2/10

Average score = 22/4 = 5.5/10 (BE) or

55/100
 Cont.
 Drawbacks of this method:
Like most attitude scores, the score
obtained for brand equity with the
customer as the focus needs extensive
validation i.e. it has to be administered to
several groups of people containing a
representative sample of consumers. Until
several such studies are carried out on
different products/brands, a score cannot
be interpreted. So problems associated
with this method are related to validation
& standardization.
 Examples

 If Colgate is one of the most popular

Indian brands with a score of 82, then
should Nirma at a score of 55 be
compared to Colgate or should it be
compared only to other detergent brands?
 Is it fair to compare equity of brands
across categories as wide as say IT &
FMCG?
 Cont.

Attribute-oriented approach:
Take a particular brand & list all its
attributes. Rate these attributes on a scale
of 1-10, based on a consumer survey.
Sum up the scores. This represents the
equity of the brand scale. Repeat the
exercise on competing brands & you get
the BE for all the brands.
*Soap example (next slide).
Soap Example
 Cont.

 Limitations of this method:

BE is usually more than what the

attributes bestow on the brand. Equity is a
function of many things & using just one
aspect is likely to give a lopsided view.
 Blind Test
 BE in this case is defined as the difference
between the overall performance of a
brand & the sum of the scores it obtains
on the objective parameters.
 Example:

Suppose at the overall brand level, out of

100, Yamaha scores 78, Shaolin 82 &
Splendour 85. This is the preference at
brand level i.e. the score obtained when
you ask the consumer to rate the brands.
 Cont.

 Now perform a blind test on attributes

like:
1. Fuel efficiency – Sh(6), Sp(9), Y(8)
2. Pick-up (6), (6), (7)
3. Load carrying (7), (6), (6)
capacity
Total(30) 19 21 21
Out of 100 63 70 70
 Cont.

 Differences:
Shaolin = 82 - 63 = 19
Splendour = 85 – 70 = 15
Yamaha = 78 – 70 = 8

So equity is highest for Shaolin & the

lowest for Yamaha, but the overall
preference was highest for Splendour.
 Cont.

 Limitations:
Problem lies in identifying subjective &
objective parameters. It could be easy ih
the case of 2 wheelers, but may be tough
in the case of talcum powder. So taking
subjective factors for measuring BE could
lead to problems.