Brands & Branding - article 2000

There have been more brand valuations conducted in the last year or so than in the last decade. Companies like NBS, ABSA, The Sunday Times, M-Net and Vodacom, among quite a few others, have felt it necessary to employ the complex methodologies developed for this purpose as part of their business process. Their reasons for doing this have varied … a fact alone that underlines the range of applications that these approaches reveal.

What stimulated the flurry of interest is probably the attention that has recently been paid to intangible assets by the accounting profession. Over a ten-year period, that reached its peak in 1998 with the adoption of IAS 38 by the International Accounting Standards Committee (IASC), they debated and discussed and eventually agreed to adopt a standard recommended to accountants worldwide that would unite them in a generally accepted way in dealing with brands, among other intangibles.

In South African the standard has been numbered A.C.129 and it provides auditors with the framework that they must use in dealing with brands and other intangibles in financial statements. The irony is that while it was brands that stimulated the development of the standard in the first place, the finished product singles out brands for special and very important exclusions. Basically they may only be recognised as assets on the balance sheet if they have been bought as part of a negotiated purchase that establishes their value. So, in simple language the accountants have decided that brands that are bought, either by separate acquisition or as part of a business combination, are assets; those that companies develop themselves which, incidentally, often is the only reason the company makes profits, are not.

This anomalous situation has resulted in few brands being valued for balance sheet purposes. But the publicity that the new standard generated has stirred the interest in brand values of many managers of both the financial and marketing variety. They have realised the wide-ranging power of modern valuation methods and have applied them imaginatively.

Boosting the share price

A leading company in the media sector of the JSE commissioned a brand valuation to help make strategic decisions regarding the positioning of its various brands. When the valuation was completed it became clear that there was another use to which it could be put.

Management had been perturbed at the rating given to its share by fund managers and had long felt that analysts had failed to recognise the true underlying worth of the brand. They were given strong support for this idea by the brand value which explained about two thirds of the gap between book at market value.

Now a new use is being contemplated for the brand value. It may well feature in the new round of investor conferences as evidence that the intangible assets that generate the future economic benefits had not been given their fair and full value. It remains to be seen if analysts will respond positively to this … but the evidence that will be presented is strong.

In the same vein, other companies are valuing brands with a view to featuring them as notes to the accounts. This, it is hoped, will provide previously unavailable information to the market makers who will adjust the share price accordingly.

The price of a brand

A leading fast moving consumer goods (fmcg) manufacturer did a deal during the year to sell off a number of its brands to an overseas’ investor. The brand leaders in the portfolio were the prize the acquirer was after. But there were other brands as well including two that were quite well known but which had been given scant marketing attention in recent years. As such they had suffered in terms of market share and also consumer knowledge.

The brand valuations confirmed the damage that had been done to them. Profits were low as was consumer awareness. Strangely, those consumers who did know the brand associated the name, quite strongly, with positive evaluative criteria. These are the criteria that consumers use to select their brand and which determine loyalty or switching behaviour.

The brands were not worth a great deal, but the valuation model was able to illustrate how the values could be increased by focused use of the available marketing budget. By concentrating on building awareness and maintaining the already well-established criteria, the value could be easily increased. Thus a useful chip had been added at the bargaining table.

Fending off closure

When an old established middle size bank was bought a few years ago it was the buyer’s initial intention to kill off the hundred-year-old plus brand and replace it with their own name. The acquired bank’s management decided to fight the proposal and among the weapons they brought to bear, was brand valuation. It was a quick decision on the part of the purchaser to keep the venerated name once they realised the value they would be destroying.

Not only was the brand name saved, the elements of the measurement methodology were used to estimate how the brand value could be enhanced by integrated marketing communications that focused on building the Brand Knowledge Structure (BKS). This is the framework of perceptions held in consumer memory that drives the valuation model.

By estimating the impact on the value of various increments in the BKS, targets that go straight to the heart of shareholder value were established and set as objectives.

Judging the size of the marketing expenditure

In 1999 a major newspaper decided to bring its advertising in-house. The decision was approved but determining the amount of money that should be devoted to it was something of a problem. The amount to be allocated was put in perspective by a valuation of the brand. The real power of the valuation will come in to play when the valuation is repeated during the current year. It will show what, if anything has happened to the brand, but more precisely, how the marketing effort has performed. Management will be able to use hard data and sensitive movements to judge what worked, what did not work, and what has still to be achieved. And if the brand value has increased, it will be able to demonstrate to the company’s investors, how management is adding shareholder value.

The ultimate measurement metric

By far the most exciting development in the field of brand valuation is the acceptance by major, multi-brand owning companies of brand valuation as a measurement metric. They are installing computer-based versions of the methodology in their brand plan procedures. This will require brand managers to assemble the complex input data that valuation requires, enter it in a menu led program, have the inputs audited and then produce a valuation.

The uses to which this will be put will essentially be to aid the brand planning and measurement process. Increments in budget allocation can be related, arithmetically, to increments in brand value to calculate return on marketing investment. It can even be used to measure the achievements of the advertising agency and whether the awards won at creative competitions like the Loeries, have translated into bottom line profit.

And, many other uses …

Valuation will serve all the above uses, plus be available for applications such as evaluating the strength of the brand to support extensions. Additionally, the totality of the brand valuations will be featured in financial statements, be used at investor conferences to show the underlying value of the firms’ intangibles, and will be available for less obvious purposes such as taxation, credit collateral, and in the value statements that will eventually replace or appear alongside the familiar balance sheet.

The days when brand values could be calculated on the back of a notepad using a notional ten year period and a guessed at royalty rate, are past. Valuation must encompass both brand premium profit and consumer Brand Knowledge Structure (BKS). Brand premium profit is that portion of the profit that the brand itself generates and which another owner could pocket given a similar or better structure. BKS is a survey-based quantification of the strength with which the brand is held in consumer memory.

These two metrics are brought together through the corporate finance concept of Brand Expected Life. The stronger the BKS the longer the expected life. Since the model uses discounted cash flow and the cost of capital as the discount rate, the value of the brand is strictly related to the number of years over which the brand profits are expected to be earned. The brand premium profits are discounted back to their present value and capitalised.

Where to now?

The chartered accountants have not yet accepted the existence of brands as assets. In their newly adopted standards they are equivocal in their approach to intangible assets. On the one hand brands that are acquired either separately or as part of a business combination are to be listed on the balance sheet, while those that the company has developed itself, are not.

While the standard researchers and writers deal with the anomaly – in which they are currently engaged - brand valuation has only a partial application in this (probably its most critical) area. In the meantime the methodologies are developing and are becoming more sophisticated.

With book values representing only one third of the market capitalisations of shares listed on many stock markets, the need for a more relevant and inclusive form of financial reporting is becoming urgent. There has been much talk about replacing historic cost statements with value statements, or of the two co-existing. Whatever solution the accountants finally select, it will elevate brands to the position they deserve. Using the language of the bean-counters brands are after all: “resources controlled by the enterprise as a result of past events from which future economic benefits are expected to flow.” That is their definition of an asset and brands fit the definition precisely. It makes no sense for them to be excluded from a statement that purports to set out the financial worth of the enterprise.

While there are many uses to which brand valuations are being put, it is inevitable that balance sheets are their final home. While the accountants think and ponder, ways of calculating the value of these most valuable assts continue to develop and improve. Already the best methods are robust and reliable. It will be interesting to see if the accountants acknowledge this when they eventually unveil the results of their deliberations.

ends