How in Hell do You Value a Brand?

Despite a lack of consensus on how to calculate the value of a brand, Charles Orton-Jones (in the Financial Management Magazine on 18 March 2013) highlights how they are increasingly making their way on to the balance sheet and being used to gauge a company’s wellbeing.

Let’s be honest, says Orton-Jones, even marketing professionals have their doubts about the science of branding. He refers Marketing Week columnist Mark Ritson lost his temper recently when looking at the league tables of the most valuable brands. He ranted: “Dumb marketers keep banging on about getting ‘marketing into the boardroom’. Are they insane? We can’t even agree within a $100billion what the value of the world’s biggest brand is. BrandZ says Apple is worth $182bn, while Interbrand claims it’s only worth $76bn. Clearly, there will always be differences in valuation caused by methodology or base assumptions. But $100bn? Come on! It’s a joke”’ says Ritson.

With this in mind, Orton-Jones continues, many management accountants may try to give marketers and their brand numerology a wide berth. But alas, this is not an option, he says, for two reasons. First, brands are powerful tools with an astonishingly wide array of corporate applications. Second, brands are creeping onto the balance sheet, thus becoming part of the management accountant’s domain. If the first claim was in any doubt, then Orton-Jones asks us to consider the case of the drug, ibuprofen. Consumers regularly face a choice between generic ibuprofen costing $ 2 a pack or Nurofen costing $8. The chemical composition of both products is identical. Yet consumers repeatedly and knowingly buy the branded product.

Brands can be used as collateral against loans. When Indian tycoon Vijay Mallya needed to raise funds for acquisitions he used his whisky brands – Bagpiper and Whyte & Mackay – as collateral. He is currently trying to pull off the same trick with his (insolvent) Kingfisher airline brand. Following an administration, an insolvent firm can sell its brands, a process requiring a valuation. Again, when Woolworths went bust the administrator used an external valuer to find a price for the brand to ensure a decent return was received from buyer Shop Direct Group.

Orton-Jones says that a royalty arrangement can help a firm lower its tax bill. Starbucks UK pays a licensing fee to Starbucks Coffee EMEA BV, a structure (controversially) designed to lower its UK tax liabilities. Brands can be loaned out. Starbucks struck a deal with Kraft to co-create a range of supermarket goods. Kraft brought its knowledge of the grocery market to the deal and Starbucks provided a brand that offered a 20 per cent price premium. The deal ended in legal arbitration, but over a 12-year period Starbucks’ packaged coffee sales grew from $50m to $500m. Investors are starting to pay attention to brands as indicators of financial health.

Research by Millward Brown – one of the “big three” brand valuation agencies – showed that shares in its BrandZ portfolio of strongest brands had outperformed the S&P 500 by 37.1 per cent since April 2006 to May 2012. Jim Stengel, former global marketing officer for Procter & Gamble, says his Stengel 50 top brands have outperformed the S&P 500 by 400 per cent since the turn of the millennium.

There is also the small matter of IFRS 3 requiring firms to value all acquired assets independently on the balance sheet, including brands. These factors ought to convince you that brands are worth understanding.

The tricky part is putting a monetary value on a brand, says Orton-Jones. How exactly does one do that?

The key document is ISO 10668. This lists the permissible ways in which a brand may be valued. Have a read and you’ll notice that there are an awful lot of approved methods.

The process starts on solid ground. Legal due diligence confirms the legal status of the brand and identifies potential threats. For purely financial reporting purposes the legal due diligence is not compulsory, but for any activity involving a third party it is mandatory. The next stage is behavioural analysis. This looks at the market in which the brand operates, the perception of the brand among stakeholders, customer perceptions and the range of benefits derived by the brand owner. The last step is the controversial financial analysis – the number-crunching bit.

There are three ways to perform financial analysis:

1) The market approach benchmarks brands by looking at real-world transactions. Researchers scour the press for brand sales to see what similar brands are fetching. The figure is then tweaked to account for differences between the brands being compared. This technique has the advantage of anchoring valuations in the real world.

2) The cost approach asks the hypothetical question: “How much would it cost to build this brand from scratch?”

3) The income approach tries to identify the additional income generated by the brand. This can be done in a number of ways. – The price and volume premium method estimates the higher price commanded by a brand, or the extra units sold, because of the strength of the brand, using generic alternatives for comparison. Valuing Nurofen compared to generic ibuprofen would be particularly susceptible to this approach. Some of the ways are as follows:

  • The income-split method identifies the proportion of the economic profit attributable to the brand. This involves discounting the cost of capital employed and factoring in behavioural research.
  • The multi-period excess earnings method values the brand as the present value of the future residual cash flow after deducting returns for all other assets required to operate the business.
  • The incremental cash flow method compares the cash flow generated by the brand to the cash flow generated by a similar, but unbranded, product.
  • Lastly, the popular royalty-relief method, which uses market data to try to calculate what fee would be levied if the brand owner did not in fact own the brand, but licensed it from a third party.

So, which is the best? Each valuation firm has its own view. At Brand Finance the “relief from royalty” method is the most frequently used. Managing director Richard Yoxon says there’s a good reason for this: “The basic premise is to ask how much you’d need to pay to license the brand if you didn’t own it. The method has the benefit of being quasi-market. We are benchmarking the brand with comparable real-world examples. It is the most commercial approach.” Interbrand, another company specialising in the valuation of brands,  broadly prefers the income-split method. The reason is that comparable real-world deals can be hard to find. And even when deals in the same industry are available, who is to say whether the same metrics should apply to another brand? Interbrand is also known for the strength of its behavioural analysis, using experts to identify the position of a brand in a market.

Each approach has its merits, argues valuations expert Anastasia Kourovskaia, vice president at global research agency Millward Brown Optimor: “If you want a defensible figure to present to the tax authorities, then Brand Finance’s relief from royalty method is a good one. The taxman can’t argue with real-world figures. The cost approach, where you try to work out what it would cost to create a brand from scratch, is useful for new brands. For older brands, such as Coca-Cola, it is impossible to know what it would take to re-create the brand. Interbrand’s use of experts seems to me the more difficult method. Experts may disagree. And we know that advertising awards are often given by experts to campaigns, which don’t deliver much uplift in sales, whereas campaigns that drive sales may be ignored by experts.” Millward Brown Optimor’s unique selling point is its use of customer surveys when building a valuation. “We use a battery of questions to identify their opinion of the brand and their relationship to it. It’s vital because consumers are the ones who really matter,” says Kourovskaia.

The method has its critics too. Brian Millar, director of strategy at branding consultants Sense Worldwide, says: “Asking consumers can drag you into a false world. People will make up opinions about brands they’ve never really thought about.”

Consensus exists on one point, says Orton-Jones. Putting a valuation on brands helps to communicate the vital role they play to cynics in the boardroom. Management accountants may be included in that roster. Brand Finance’s Yoxon says: “Management accountants need to understand that brands have an impact. It isn’t just woolly marketing speak. By putting a value on brands it may be possible to justify increased investment in the brand. For example, if you update your stores you will incur a substantial cost. Carrying out a brand valuation and measuring how customer perceptions translate to the bottom line makes it easier for both marketing and finance departments to commit to that investment. Brand valuation can build a bridge between those departments.”

If only precise brand valuations could be more readily determined. Mark Ritson proposed one answer: “We need the marketing equivalent of a cage fight to work out who is the most accurate valuation firm… wait for an actual acquisition to take place and then compare the price paid with the one predicted by the firms.”

The winner becomes the industry standard. The losers quit the field. Bring it on!

Charles Orton-Jones is editor of He used to be editor of EuroBusiness magazine, and won the PPA Business Journalist of the Year award.

Source: Financial Management, March 2013