From The BrandMetrics Database - 2005

South African brands are vulnerable. No matter what the sales figures say, many have tenuous grips on life. That’s what an analysis of the BrandMetrics database says. The database contains the details of more than 300 brands that have been valued over the past four years. The total value of these brands exceeds R60 billion and whilst even this quantum cannot claim to be representative of the spectrum of the country’s brand portfolio, it is large enough and comprised of sufficient leaders that it should be taken as a powerful indicator.

BrandMetrics, the Wits University developed brand valuation tool, measures the future economic benefits of the brand asset. Brand value is the capitalised present value of the income stream that flows from the brand’s users. It measures brand equity.

In order to calculate the value it follows the following precise steps:

· First it extracts the economic profit from the brand’s income statement and balance sheet. Economic value is the net operating profit after tax minus the product of the capital employed in generating that profit multiplied by the weighted average cost to the company of that capital.

· Next, the category in which the brand trades is examined to test its volatility or stability. The aim is to evaluate the extent to which the category will help or hinder the brand to sustain or improve its economic profit. The result of this systematic appraisal is measured in number of years of expected economic life.

· Applying a discipline named the Resource Recognition Procedure, the resources within the firm that drive economic profit are identified. Once they have been reduced to the major items, the resources are quantified to produce what is known as Dilution. This percentage is applied to the Economic Profit to extract the portion attributable to the brand: the Brand Premium Profit.

· Finally market research is used to establish the brand’s standing within its market. A Brand Knowledge Structure (BKS) is derived for the brand; the notionally strongest and weakest brands in the category.

Using growth patterns that reflect the long-lived nature of the brand the brand earnings are projected into the future and discounted to present value.

Since this technique is identical for all brands normative data can be drawn from the database of all the valuations.

Table 1 shows the ten most frequently mentioned resources thought to drive economic profit. This is of course across all brands and varies by sector.
Nonetheless it is interesting to note the dominance of the top five with control of costs or margin management heading the list followed very closely by the brand. The closeness of the next two, customer relations and supply chain management could actually be combined if customers are interpreted to be the trade. Having channel control or access is crucial to the life of a brand, and South African managers know this only too well.




The average dilution for all the brands valued is 66,36%. This means that the portion of economic profit that is attributable to the brand and no other resource is two-thirds of the total. Since the lowest dilution recorded is 28% and highest 88% the range is wide and the figure of 66,36% is achieved because of the high number of fast moving consumer goods in the sample. As an indication we have found parastatals generally to be least branded; followed by insurance companies which hover around 50%. Next come banks at about 55 – 60%. FMCGs all fall within a range of 65 to 70%. The highest scores are achieved by medial titles.

The most worrying finding is the number of years in the average Franchise Run for all the brands. It is only 6,69 years. All the brand leaders in the sample exceed 12 years and the best known are in the upper teens. In valuation language the Franchise Run is the number of years it takes for a brand to achieve half its economic expected life. This is a function of the expected life analysis of the category (see above) and the brand’s competitive position within the category. Brands with a Franchise Run close to the mean of 6 years are vulnerable to pressures on their ability to sustain economic profit.

Another way of expressing this apparent weakness is by the ratio of Net Operating Profit After Tax to the Brand Valuation. In the sample this is a mere two. This ratio exceeds nine for some of the brand leaders that have been valued.

The methodology does not explain the reasons for the scores it produces. The tools it uses to establish the input variables do give some insights. It could be that South African consumers are less brand conscious and loyal than marketers give them credit for. This idea would be consistent with the view that deplores the shift over a few decades from brand building media support to promotional dealing and price-cutting. Or it could be that brands that do not dominate a category are given too little support and left to fend for themselves.

Whatever the reasons marketers should take note of these indicators and use them to shore up their brand defences. Brands are now, officially, assets and shareholders do not like to see the source of their wealth being eroded.

Dr Roger Sinclair is a Visiting Professor at Wits University and Managing Director of Brand Valuation Company, BrandMetrics.