WHAT HAS LURED THE BEAN COUNTERS TO AD LAND? Part 3

By - CTL
November 7, 2017
0

By Dorothy Thompson.

“HOW DO YOU VALUE A BRAND”?

What is a brand really worth? There are many different reasons why companies buy and sell brands. Recently Reckitt Benckiser sold their entire food division, telling the market that while highly profitable it wasn’t part of their core business future plans. They sold it for 4.2 Billion USD. The purchase transaction price equates to 20 times the division’s earnings before interest, tax, depreciation and amortization 

Accenture, recently acquired The Monkeys and design agency Maud for an undisclosed fee, why would a corporate advisory company with no experience in Advertising buy an ad agency? Rumours are that it was sold for between 20 and 25 times earnings.

A brand can be something so abstract many times people find it difficult to understand its individual value or the value that it might bring to a company. So where do you start.

It’s important when sitting down to estimate a brand valuation to determine what your brand includes. It could include your trademarks, logos, packaging, marketing strategy, digital assets, brand colors, position in the market, etc., remembering that the brand is only worth as much as the market will pay for it.

With that being said strong brands carry a great deal of value; let’ take a look at the top five world’s most valuable brands recognized by

Forbes magazine.

  • Apple                 $104.3 billion
  • Microsoft           $56.7 billion
  • Coca-Cola         $54.9 billion
  • IBM                    $50.7 billion
  • Google              $47.3 billion

There have been various brand value research studies that have been carried out in consumer markets to determine the premium that people will pay for brands. Measuring brand value and assessing the value of intangibles by asking consumers to separate out the brand and place a monetary value on it is difficult because this is not what we do in the real world. In fact, in most of the research done most consumers, when asked to place a monetary value on brands, are in denial about paying a premium just for the name. Who are they trying to kid? When I brought may car I convinced myself that it was for the special safety features that it offered. More fool me, but brands like Cartier, Dior, Rolls Royce Bugatti, Mercedes Benz, all rely on their prestige for their position in the market place.

That said, when people are asked in brand value surveys to place a monetary value on a car they have said “the Volkswagen brand is seen to be worth more than that of Ford while the Mercedes brand has a value above both”. According to the boffins in each case the survey concluded, “the brand is seen to be worth around 10 per cent of the retail value of the car”. One wonders how this percentage was arrived at.

Now lets consider the value of brands in different light; that of what a company’s price is worth if sold on the open market, additionally, how this value can be estimated even when a sale is not anticipated. At the outset it is important to draw a distinction between individual brands owned by a company (e.g. Kit-Kat) and a brand that is also the company name (e.g. The Monkeys).

When selling a company the seller looks to obtain a value over and beyond that of its physical assets. Physical assets sometime are plant and equipment stock etc. However in the service industries assets go up and down in the lifts every evening, a much more challenging exercise. In the past this has been called “goodwill’ and is taken to mean the value of the loyalty of the company’s customers.

This is an interesting concept as loyalty is an important part of branding so already it is clear that there is there is a strong link between goodwill and brands. After all, a good brand is one, when customers insist on by name and for which they are prepared to pay a premium. This loyalty would have a value if the brand were ever sold.

Accountants are now reconsidering and refining their views of goodwill so it can extends beyond loyalty. On these grounds goodwill is taken to include other intangibles. This concept of goodwill is important as it signifies that it is an asset, namely something that an organisation controls like its top people, or perhaps the creators of the brand and which will provide future benefits to the new owners.

A annual brand value research study (in 2015) of the world’s top 100 brands assess brand values on a variety of issues such as strategic brand management, marketing budget allocation, marketing ROI (return on investments), brand extensions, merges & acquisitions, licensing, and investor relations. So its not surprising that that Coca-Cola is a leader, but it is more difficult to see how (according to the boffins) Cisco has a brand value greater than Honda.

Brands are vulnerable are dependent on many intangibles such as, people’s perceptions of them. Building these perceptions can take many years as reputations are earned by repeated proof that a brand reinforces its position in the market. Perceptions can, however, be destroyed overnight. Perrier’s reputation took an embarrassing blow in 1990 when a North Carolina study reported having found benzene in the water. Source Perrier shifted from explanation to explanation on the issue, finally stating that it was an isolated incident of a worker having made a mistake in the filtering procedure and that the spring itself was completely unpolluted. The incident cost them the recall of 160 million bottles of Perrier (ouch). Imagine that you were in the process of buying Perrier at the time; it would surely have caused you to want to knock a few bucks of its price.

The capitalisation of a company’s brand value on the balance sheet is therefore contentious as it requires the brand to be separated out from the other intangibles and, as in the case of the Perrier problem, the brand value can be completely stuffed almost overnight. So, whether or not the value of a brand can be separately assessed realistically, remains a problem of confirming or reassessing its value each year. Many things can affect this, such as sugar becoming the new demon of the health-obsessed do-gooders.

Similar problems faced the Bean Counters in the valuation of other assets such as property (whose value can be all over the shop depending on market forces). The difference in the case of brands is the lack of an efficient market for them. The procedures and practices of valuation in this area are not yet agreed.

The reason that measuring brand value becomes contentious is because brands are increasingly being recognised as an asset, and their value is being included in company balance sheets. In other words they were given special status and not treated as part of the goodwill.

Grand Metropolitan (Grand Metropolitan plc. was a leisure, manufacturing and property conglomerate headquartered in England. The company was listed on the London Stock Exchange and was a constituent of the FTSE 100 Index until it merged with Guinness plc. to form Diageo in 1997.) It was one of the first companies to recognise this potential when, in August 1988, it arrived at an assessment of £565 million in respect of the brands, such as Smirnoff Vodka, that they had only acquired it during the previous three years. This was followed shortly in November of that same year by Rank Hovis McDougall (RHM plc. formerly Rank Hovis McDougall, was a United Kingdom food business. The company owned numerous brands, particularly for flour, where its core business started, and for consumer food products. It was listed on the London Stock Exchange and was once a constituent of the FTSE 100 Index but was acquired by Premier Foods in March 2007. It capitalised its internally created brands, (i.e. not ones which had ever been purchased for cash) such as Bisto, Hovis and Mr Kipling, placing a value on them of £678 million. The significance of this act can be seen when it is set against the company’s net assets at the time, which were only around £300 million.

In the case of RHM or Cadbury Schweppes it is easy for us to see how one of the brands could be spun off and sold to another company, without any disturbance to customers, as long as the brand continues to deliver the same qualities in terms of the product and its promises, most customers don’t care who owns the factory. For example, recently Bega has acquired Kraft peanut butter. Nothing has changed as far as the product goes only the owner, and label.

But what of a situation where the brand is the company, as in many business-to-business or industrial firms? Here the brand and the company are intertwined and because they are inseparable, one cannot easily be sold without the other.

However when you chose wade into these waters, it is without doubt it is a bit of a roll of the dice. Without doubt, the worst thing you can do is to buy a brand, and then change everything that made it successful, because think you are smarter then the original owners. The whole reason that you bought it was because of its sucess. Allowing your ego to replace common marketing sense is without a blue print for disaster.

 

 

 

Leave a Reply

Your email address will not be published. Email and Name is required.