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Valuation of Brands

An Overview

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Most Valued Luxury Brands

Brand Value
Louis Vuitton $23.58 b
Gucci $9.45 b
Hermes $6.18 b
Cartier $5.5 b
Tiffany $5.16 b
Burberry $4.34 b
Prada $4.27 b
Ralph Lauren $4.04 b

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Prospects for Brand Values - 2013

  Bain & Company sees luxury goods growth cooling

worldwide to 4 to 5% in 2013 from 5% last year. Bain
forecasts a luxury market compound annual growth rate of
5-6% between 2013 and 2015. The total size of the market
was $273 billion in 2012 and Bain thinks it could reach
$290 billion by 2015.

  Those brands will be the ones to watch when it comes to

clothing and accessories, at least.(Forbes 6/7/2013)

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  Brand Valuation assigns financial value to equity created by

name or image
  Traditional accounting information focuses on financial
reporting and hence needs restatement
  Accounting focus – Data must be reliable, verifiable and
  Valuation Focus – Data should future oriented, collected
outside the firm (not verifiable)
  Ensure delivery of consistent brand image
  If the entire organization knows how brand value is computed it is
easier to avoid actions that negate or reduce brand value

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What is Brand Valuation?

  Brand Valuation quantifies the benefit of brand equity to the

owner of the brand
  Brand Equity – brand loyalty, name awareness, perceived quality,
brand associations, competitive advantage created by brands
(Aaker -1991)
  The process of valuing a brand requires a certain degree of
estimation and subjectivity
  Process can be consistently applied over time and
important for brand management
  Brand Valuation is a measure of performance and helps
evaluate magnitude of the brand vis-à-vis the company

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Uses of Brand Valuation
Acquisition Strategic
Merger Brand Management


Brand Portfolio
Evaluation Performance
Appraisal - Managers

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Methods of Brand Valuation

Cost Based
Formulary Approaches

Market Based
Income Based Approaches

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Cost Based Approaches

  Consider the costs involved in creating the brand from the stage of
research, product concept and all the marketing and sales inputs
  Looks at historical information
  Little future orientation , some future orientation is possible by using
replacement cost.
  Need to identify historical costs some of which are not directly
related to the brand – basis of allocation ?
  Richard Branson incurs costs on trying to circumnavigate the
globe in a balloon $4.9 million in 1998. How much do you
allocate to building the Virgin Brand
  What discount rate

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Market Based Approach

  Externally focused based on the price at which a brand can

be sold.

  Determination is difficult when there is no ready market for

such brands

  Create proxies for how financial markets value a brand

  Similar brands may not be easy to come by

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Income-Based Approach

  Examine future potential of the brand

  Determine net revenues directly associated with the brand
and discount using appropriate discount rate
  Several ways of determining net revenue
  Compare a brands price premium to generic
  Overvalues small brands with high premium and undervalues
larger brands with low premium
  Value royalties associated with a brand as in a licensing agreement
  Useful for international brands
  Sales volume of branded against un-branded
  Comparison of direct sales with retailer sales

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Formulary Approaches

  Interbrand - useful for reporting and strategy

  Three weighted average PAT as brand profitability
  Only factors directly related to a brand’s identity considered
  Only factors directly related to brand identity considered
  This is at times difficult since the function may not be separated
from the brand
  Gillette’s powerful distribution network

  Apply a multiplier to brand profitability

  Multiplier based on 7 factors weighted by Interbrand proprietary

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Formulary Approaches – Interbrand Variables

  Leadership – the ability of the brand to function as market leader and

secure the benefits of a dominant position
  Stability – brands that retain their image and consumer loyalty over a
long period are more valuable
  Market – brands are more valuable in certain product markets than
  Internationality – brands known around the world have greater capacity
to increase market
  Trend- The ability of the brand to remain current despite competition
  Support – Brands that are consistently supported by the company
  Protection – related to legal issues related to the brand. Is the brand
protected by a registered trademark

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Formulary Approaches – Financial World Variables

  Estimate operating profits attributable to a brand and

compare with unbranded

  Adjust resulting premium for taxes

  Multiply adjusted premium with Interbrands seven variables

using Interbrand’s assessment of brand strength

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Acker’s “Brand Equity Ten”

  5 categories of measures to establish a comprehensive

measure of brand equity
  Measure of price premium
  Satisfaction or loyalty
  Perceived quality
  Leadership
  Popularity
  Superiority of formulary approaches lies in the
comprehensive nature of these measures

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Capitalization of Brand Values

  Even though a brand is not tangible it can be bought and

sold like a physical product.

  In Australia, New Zealand and UK brands can be

accounted for on the balance sheet

  US brands not included unless it was purchased in which

case it can be capitalised and amortised

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Example: FW Illustration

  Brand Value = product of annual net after tax profits adjusted to

exclude the net earnings expected for an unbranded product (averaged
over time) and a multiple reflecting the brands strength
  Leadership ability to influence the market;
  Stability ability to maintain a consumer franchise
  Market vulnerability of demand to changes in taste or technology
  International scope cross cultural potential
  Trend long term appeal to consumer
  Support strength of communication
  Protection strength of brand owners legal or property rights
  Multiples range from 6 to 20. Greater the brand strength greater the

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Estimating the Value of Kellogg’s Brand

Brand all $ million 1992 1993 1994

Coca Cola 33,446 35,950 39,050

Marlboro 39,469 33,045 38,714

Pampers 5,924 5,732 5,919

Dewars n.a. 765 761

Black and Decker n.a. 855 1,627

Kellogg 9,678 9,372 11,044

Kodak n.a. 10,020 11,594

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Price/Sales Ratio

  P0/S0 = P/S = [Profit margin x Pay-out ratio x (1+gn)]

  ÷ [r - gn]

  Value of a brand name = [(P/S)b – (P/S)g] x Sales

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Corporate Brand – Live Example 1 (1999)

Alpha Limited

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  Wholly Indian Company

  Company in Agro-chemicals, plant nutrients and pesticides
  Turnover – US$ 300 million
  Employees 500
  Products – Widely sold all-over India under brand names
with a fixed corporate prefix – E.g. alpha-growth a plant
  Valuation of corporate brand Alpha used in all products
  Purpose – To consider valuation for an IPO

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Data and Methods

  Data collected 7 year

  Historical
  Annual data on all R&D and product introduction costs

  Annual Data on all brand building efforts for each brand

  Marketing costs on product awareness creation

  Sales and distribution costs across regions

  Volume growth for each product and product group

  Price changes of each product and group

  Market share data

  Current
  Price point of competition for each product

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Valuation Methodology

  Corporate brand value is sum of all product brand values

  For each major product/ product group examine brand
investment in terms of
  Research and development expenses
  Product development
  Marketing investment
  Sales effort
  Investment recognized in terms of time and amount
  Time Value of Money considered

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Valuation Methodology II

  Price Premiums on products and product groups identified

  Products classified into products of strong premium,
marginal premium and no premium
  Product price difference between Alpha brand and
unbranded (weakly branded) identified as brand premium
  Volume forecasts obtained for each product for the next 5
  Forecasts of sales and expenses done for each of the
strong and marginal premium brands
  Non premium brands ignored
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Valuation Methodology III

  Investment in brand development

  Specific investment on brands or product developments forecast for each of
the previous product groups
  Other investments of marketing and selling expenses allocated in
proportion of brand sales to total sales

  Corporate Discount rate determined on the basis of debt and equity

structure and reference group of listed entities in the same business
  .
  Sales less identifiable and allocated expenses taken as contribution

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Valuation 1 – DCF of Brand Premium

  Sales premium = Difference in selling price x actual

quantities sold
  Investment Premium = Actual investment by company less
standard investment based on selling and marketing
expenses of standard companies
  Help in assessing this was taken from the marketing and
sales team
  Terminal value a multiple

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Valuation Method 2 - Multiple

  Based on margins price to sales ratios estimated for Alpha

and unbranded company on the basis of profit margins,
growth and cost of equity (Reference Damodaran)
  The difference in P/S ratio between target and unbranded is
taken as the brand premium
  Brand Premium x Sales (Current) = Value of Brand

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  Many companies unlisted so quality of data questionable

  Quite a large number of costs were allocated and not
traced to building the specific brand as records not kept
with brand valuation in mind
  Multiples valuation was based on many assumptions as
data for unlisted companies was not easy to come by.
  Time consuming the effort took about 6 months

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  The entire top management and particularly MD (CEO)

takes a keen interest at all stages of the exercise
  Brand consciousness in senior management

  Achieves a benchmark for the corporate brand

  Comprehensive review of all brands helped the company

evolve a new dynamic corporate strategy

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Beta Limited - 1998

An interesting brand valuation


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Situation 2009

  From 1970s Beta has invested in building the brand and

has taken it from a relatively obscure unknown brand to the
best recognized brand in India for that product
  Current Sales (2009): $200 m; Net Profit: $13m; Return on
Net-worth 31%
  Sales CAGR since 2003: 21% Net profit (30%)
  Leading brand in a product segment with almost 50%
market share

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Situation Historical

  Gamma limited – privately held company owned by the

management group of Beta limited.
  Beta a publicly held company listed on stock exchanges
with public shareholding
  Gamma owns a brand which has been leased in perpetuity
to Beta. The lease was done in the 70s.
  Lease in perpetuity and irrevocable unless the management
ownership structure of Beta goes down as a result of stake sales by
any of the management team
  Fixed Lease rental unchanged since 70s

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1999 the Proposition

  Brands to be sold by Gamma to Beta for a one time

  The absence of ownership of brand seen as a poison pill
which destroys Beta’s shareholder value
  Issues of Corporate Governance emerge
  Brand Value created over 20 years by Beta and Beta plans
to extend the brand to many other categories (related)
taking the investment to another level.
  Beta now a public company while the lease was agreed
when the company’s were small and closely held.

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Valuation Method

  Market Multiples
  Share Price to Sales of beta compared to market multiples of
unbranded lesser brands (Damodaran)
  Lesser brands not listed so derived market multiple based on
margins, growth, risk. These were estimated after discussions
with Beta company sales and marketing executives
  Royalty perpetuity
  Value of Brand = Royalty / (WACC) Where WACC is the cost of
capital of Beta (Value of Brand in Beta’s hand)

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Valuation Method ctd

  Brand Premium
  Determine the investment in the brand over the last few years
  Advertising budgets

  Brand extensions

  Promotion

  Sales and Sales force budgets

  Marketing Budgets

  Discounted value of investments determined in 1999.

  Sales Quantity x Pricing Premium = Brand Equity
  Consider Sales of the original product and all extensions

  All brand building expenses treated as cash outflows

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Valuation ctd

  Determine proportion of Brand building expenses to Brand premium

  Proportion x discounted value of various expenses (marketing etc.)
= Brand building investment = I
  Discounted Value of (Brand Premium – Brand building expenses) –I
= Value of Brand
  Value of Brand range
  Royalty method : $ 5 m
  Multiples Valuation: $88 m
  Brand Premium Valuation: $130 m

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What is the right Brand Value?

  Considerations
  Fair to all shareholders of Beta => Minority, Institutions, Funds and
Management Group
  Fair to owners of Gamma.
  How to ensure value neutrality in the transaction?
  What the market could pay?
  Highest Valuation?
  Weighted Average?

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What Happened?

  Brand acquired at $6 million (1999-2001)

  Estimated market value of brand $ 110 million (2001)
  Turnover $146 million
  Net Profit $ 10 m

Not to be quoted or transmitted in any form

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