Interbrand

The value of a brand

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Summary:

Reel p. 3

Introduction p. 9

Brand Value p. 17

Legal p. 25

Brand Valuation p. 28

Interbrand p. 38

Case Studies p. 52

Conclusion p. 58

Opinions p. 59

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If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.

John Stuart, Chairman of Quaker (ca. 1900)

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Brands account for more than one-third of a firms total market value.

Brand Valuation: The financial value of brands, By Interbrand

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One cannot ignore brands. Companies may pay large sums of money for them and, therefore, they should be included as an asset in the balance sheet.

Chris Pearce, Rentokils, CFO and President of Group 100

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Valuation is a tricky business because, unlike most of the activities associated with marketing, it is expressed in a single, comparable financial number.

Mark Ritson

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Introduction:

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Assets

An asset is anything that is capable of producing cash flow now or in the future.

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Tangible Assets

Those that can be touched

Land, building, machinery, raw materials, inventory and finished goods, and cash.

In 1978, this assets accounted for 95% of the valuation of the companies in the Down Jones Industrial Average.

In 2006 the tangible figure had declined to around 20%.

This is caused by the emergence of information economy in which intellectual property had replaced physical assets as the primary source of value creation.

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Intangible Assets

Cannot be seen, touched or physically measured, which are created through time and/or effort

The intangible assets are not particularly liquid, and unlike the material assets, they may or may not be owned by the company.

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Intangible Assets

Intangibles are becoming substitutes for physical assets.

Are the ones that dont hurt when dropped on your toe.

Are those things that a company knows, has or does that make it worth more than just the sum of its tangible parts.

Is the difference between a company market capitalization to its net assets value.

Five classes of intangible assets (IFRS 3):

1. Marketing-related (such as trademarks and brands)

2. Customer-based (such as customer list)

3. Artistic (such as movies and music)

4. Contract-based (such as drilling rights and licensing agreements)

5. Tecnology-based (such as patents)

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Intangible Assets

Patents, concepts, models, and computer and administrative systems.

Are created by the employees and are thus owned by the organization

Sometimes they can be acquired from elsewhere.

Decisions to develop or invest in such assets can be made with some degree of confidence, because the work is done in-house.

Also the culture or the spirit belongs to the internal structure.

The internal structure and the people together constitute what we generally call the organization.

Internal structure

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Intangible Assets

Relationships with customers and suppliers, brand names, trademarks and reputation, or image.

Some of these can be considered legal property.

The value of such assets is primarily influenced by how well the company solves its customers problems.

There is always an element of uncertainty.

Reputations and relationships can be good or bad, and can change over time.

External structure

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Intangible Assets

Peoples ability to act in various situations.

It includes skill, education, experience, values and social skills.

Competence cannot be owned by anyone or anything but the person who possesses them.

Individual competence

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Brand Value:

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The brand is one of the few assets that can provide long-term competitive advantage.


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Brand Value

A brand can be considered as an asset that currently provides certain margins per unit that are higher than those of an unbranded product and a differential volume, and which also provides the brands owner certain real options for future growth.

These real options may be geographical growth, growth through the use of new distribution channels, growth through additional differentiation, growth through the use of new formats, growth through the possibility of gaining access to new market segments, withdrawal facilitated by the use of franchises .

One of the prerequisites of adequate brand management is to take into account the real options provided by the brand for making decisions that increase (and do not decrease) these options value.

Valuation of Brands and Intellectual Capital Pablo Fernandez

Series of real options

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Brand ValueChain

MarketingActivity

BrandImage

BrandEquity

CustomerBehaviour

BrandValue

Vulcans Earthlings and Marketing ROI Savis Rutherford

Brand Value models put a dollar value on brands or marketing activities by identifying the incremental cash flows earned as a result of the strength of the brand or the effectiveness of the effort.

They are aiming to deliver an ROI measurement, although this is more often expressed as a Net Present Value figure.

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A companys brands are often its most important assets, more important even than the bricks, mortar and machines, whose value is included in the accounts.

Chris Pearce, Rentokils, CFO and President of Group 100

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The Value of a Company An asset is anything that is capable of producing cash flow now or

in the future.

The value of a company comes for tangible and intangible assets.

The market puts a value on these, and reflects it in stock price.

EnterpriseValue

MarketValueEquity

Funding

Perspective Enterprise

Value Tangible

Assets Intangible

Assets

MarketValue of

DebtProperty

Plan Equipment

NetWorkingKapital

MarketingRelated

CustomerBased

Artistic

ContractBased

TecnologyBased

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Brand ValuationTwo valuations of the shares of a consumer products company


Adjustedbookvalue

501

Goodwill==brand value +

+ "intellectual capital"337

Valueof sharesfor seller

838

Valueof sharesfor buyer

1,34

Value due todistribution of

buyer's other brands240

Better brand positioning117

Valueof sharesfor seller

838

Buyer's expectations

Value of assets abovetheir book value

194

Shares' book value307

Present situation

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Nokia had US$11 Billion of tangible assets. A new investor in Nokia was willing to pay $40.90 per share,

making the market capitalization a whopping $190 Billion. ~$183 Billion in intangible assets. It is the difference between the market value ~$190 Billion and the net book value $5.7 Billion.

Look under the surface!

Karl-Erik Sveiby

Nokias Invisible Balance Sheet, Q3 2000

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Legal:

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Accounting treatment of brands and intangible assets in the United States

Recognition of goodwill: only when buying businesses and as the difference between the price paid and the purchased companys book value.

Depreciation of goodwill: over its useful life and not more than 40 years. It may be written off if its value should deteriorate or disappear.

Definition of intangible assets: separately identifiable rights that have usefulness and value.

Depreciation of intangible assets: over their useful life. They may be depreciated immediately in the event of deterioration.


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ISO 10668

Legal analysis: The first requirement is to define what is meant by brand and which intangible assets should be included in the brand valuation opinion.

Behavioral analysis: The brand valuer must understand and form an opinion on likely stakeholder behavior in each of the geographical, product and customer segments in which the subject brand operates.

Financial analysis: ISO 10668 specifies three alternative brand valuation approaches: the Market, Cost and Income Approaches. The purpose of the brand valuation, the premise or basis of value and the characteristics of the subject brand dictate which primary approach should be used to calculate its value.

Wikipedia

Inter. Standard on monetary brand valuation.Was developed to provide a consistent framework for the valuation of local, national and international brands both large and small.

This sets out the principles which should be adopted when valuing any brand.

The brand valuer must conduct 3 types of analysis before passing an opinion on the brands value:

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Brand Valuation:

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The valuation of brands is still a relatively new concept... partly art, partly science.

Interbrand

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Brand Valuation

The brand valuation process increases the amount of information held by the company about its brand and it should be developed so that it can be used as a management tool for value creation.

A good brand valuation process is a tool that helps maintain a coherent strategy over time and assign marketing resources consistently.


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Brand Valuation

For most of the century, tangible assets were regarded as the main source of business value.

The market was aware of intangibles, but their specific value remained unclear.

Brands, technology, patents and employees were always at the heart of corporate success, but rarely explicitly valued.

Major brand owners were aware of the importance of their brands, but on the stock market, investors focused their value assessment on the exploitation of tangible assets.

Past


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Brand Valuation

Today the majority of business value is derived from intangibles.

The brand is a special intangible that in many businesses is the most important asset.

This is because of the economic impact that brands have. They influence the choices of customers, employees, investors and government authorities.

Some brands have also demonstrated an astonishing durability.

Today, leading companies focus their management efforts on intangible assets.

Present


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Brand Valuation

When valuing a brand, it is particularly important for whom that value is being determined, since the brands value is not the same for the company that owns the brand as for a company with a competing brand or for another company operating in the industry with a brand that does not compete directly with it, etc.

Likewise, it is vitally important to define for what purpose we wish to determine a brands value, whether it is to sell it or to collect a series of royalties or to facilitate the brands management or to capitalize its value in the balance sheet and then depreciate it.

for whom and for what purpose


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Brand ValuationWhen to do it

1. Accounting Purposes: The international accounting standards require that goodwill in an acquisition be allocated to the intangible assets that the company is acquiring. The valuation of marketing-related assets is now part of the due diligence performed before an acquisition.

2. Prospective Transactions: 4 categories: Securitization involves raising funds against the security of future revenues. Brand-based tax planning is relatively common. It involves transferring ownership of the trademark to a central holding companythat then charges a royalty to the operating companies for the use of the assets.

Brand licensing requires an understanding of the economic benefit provided by the brand in order to establish an appropriate royalty rate Brand sale requires an understanding of the economic benefit provided by the brand expressed as an overall value rather than as a royalty rate.

3. Management of the Brands: A marketing valuation will reflect the fact that a brand is a bundle of meanings, and be based on a broader set of assumptions. It will also not generally be subject to external third-party validation.

Three uses:


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Brand Valuation Accounting and financial reporting

Insolvency and liquidation

Tax planning and compliance

Litigation support and dispute resolution

Corporate finance and fund raising

Licensing and joint venture negotiation

Internal management information and reporting

Strategic planning and brand management

Brand and marketing budget determination

Brand portfolio review

Brand architecture analysis

Brand extension planning

Interbrand

Uses

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Strategic Brand Management:

Focuses on internal audiences by providing tools to manage and increase the economic value of brands.

Brand Valuation

Interbrand

Applications

1. Making decisions on business investments.

2. Measuring the return on brand investments.

3. Making decisions on brand investments.

4. Making decisions on licensing the brand to subsidiary companies.

5. Turning the marketing department from a cost center into a profit center.

6. Allocating marketing expenditures according benefit.

7. Organizing and optimizing the use of different brands in the business.

8. Assessing co-branding initiatives.

9. Deciding the appropriate branding after a merger.

10. Managing brand migration more successfully.

11. Establishing brand value scorecards that provide actionable measures for optimal brand performance.

12. Managing a portfolio of brands across a variety of markets.

13. Communicating the economic value creation of the brand to the capital markets.

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Brand Valuation

Interbrand

ApplicationsFinancial transactions:

1. Assessing fair transfer prices for the use of brands in subsidiary companies.

2. Determining brand royalty rates for optimal exploitation of the brand asset through licensing the brand to third parties.

3. Capitalizing brand assets on the balance sheet.

4. Determining a price for brand assets in mergers and acquisitions.

5. Determining the contribution of brands to joint ventures.

6. Using brands for securitization of debt facilities.

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Interbrand:

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Interbrand

Wikipedia

A division of Omnicom, is a global branding consultancy, specializing in vast brand services, including brand analytic, brand strategy, brand valuation, corporate design, digital brand management, and naming. Today, Interbrand is amongst the largest brand consultancies and has grown to include 40 offices in 25 countries.

Was founded by John Murphy, a native of Essex in the United Kingdom.

In 1974, Murphy opened Novamark, a product-naming consultancy. In 1979, to the benefit of its growing client roster, Novamark opened an office in New York, but under the name Interbrand.

In 1993, Interbrand was acquired by the Omnicom Group, and throughout the 1990s and 2000s expanded their service capabilities by acquiring leading branding and identity.

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Interbrand Philosophy of brand building

Ramesh Jude Thomas, Chief Executive Officer of Equitor Consulting

There must be a relationship between building a brand and enhancing shareholder value.

Building a brand should mean creating a tangible, measurable value at the shareholders end.

Brand building should help in wealth generation in an increasingly competitive world where there is tremendous possibility of wealth being destroyed.

The durability of the business is the reason why a company or an owner invests in brand building.

The brand value must ensure security of demand even as the world around turns highly competitive.

41back to summaryJohn Murphy, Interbrand founder, Holdsworth, 2001

There was huge buying and selling of branded-goods businesses where what was essentially being bought and sold was brands. But nobody knew how to value brands.

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Interbrand

Model name or ownership

Year of development

Author

Country

Approach

Principal methodology

Discounted cash flow (multiplier model)

1988 (multiplier model); 1993 (DCF model)

J. Murphy

United Kingdom

Income

Capitalization of multiples based on P/E; strength and demand driver analysis

Brand Valuation Model

The International Brand Valuation Manual: A Complete Overview and Analysis By Gabriela Salinas

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Interbrand

1. An estimation of the strength of a brand based on its market and management.

2. An estimation of the proportion of company earnings attributable to the brand.

3. A brand multiplier based on the quality of the brand: a measure that built on market data as well as data on the affective relations that the brand had managed to install with consumers. Most contemporary brand valuation models maintain some version of this approach

3 elements of valuation method


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Interbrand Alternative brand valuation models


DCFModel Annuity Model

Basic valuation approaches proposed by Interbrand

Discount Rate Multiplier

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Interbrand Discounted Cash Flow model


1. Segmentation: This stage consists of determining the main homogenous client groups according to applicable criteria such as product or service, distribution channels, consumption patterns, purchase sophistication, geography, existing and new customers, on which the financial and demand analyses are based.

2. Financial analysis: Identify and forecast revenues and earnings from intangibles generated by the brand for each of the distinct segments determined in Step 1. Through this analysis, the model attempts to establish economic earnings or EVA (Economic Value Added), also referred to here as intangible earnings. Through Interbrands analytical framework, called role of brand, the percentage of intangible earnings that is entirely generated by the brand can be calculated.

3. Demand analysis: In this step, lnterbrand

establishes the Role of Brand Index (RBI) or the percentage of intangible earnings attributable to brand, referred to as brand earnings. Assess the role that the brand plays in driving demand for products and services in the markets in which it operates, and determine what proportion of intangible earnings is attributable to the brand.

4. Brand strength analysis: Through competitive analysis, Interbrand analyzes brand strength, which is in turn related to the discount rate. Determine the competitive strengths and weaknesses of the brand.

5. Brand value calculation: In this stage, the discount rate is applied to brand earnings. The sum of the present value of brand earnings represents brand value. The ability of brands to continue generating future earnings.

To calculate brand value, Interbrand uses a five-stage process:

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InterbrandThe Earnings Split Approach (Economic Use)


1. Market and Competitive Context: This identifies the overall dynamics of the market and the strengths of competition.

2. Business Segmentation: Brand influence varies by line of business, customer and product type. This step divides business into segments.

3. Financial Forecast: Projections for the future earnings of each segment.

4. Brand Value Added: Identifying the drivers of purchase decision in each segment, and the impact exerted by the brand.

5. Risk Analysis: Assesses the strength of the brands franchise with trade customers and end customers to establish a security of future brand earnings attributable to the brand.

Most commonly used for marketing purposes:

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Interbrand Role of brand


1. Firstly, Interbrand identifies the demand drivers or the factors that motivate consumers to purchase a particular brand. Interbrand finds that Microsoft customers arc conscious not only of the brand in itself, but also of its market domination, Its presence in 80% of the market, and the difficulty associated with transferring files to a new software platform. In the case of Sheil, in addition to the brand alone, customers are aware of the location of its gas stations.

2. Step 2 determines the relative importance of the specific attributes identified in step l.

3. Lastly, Interbrand determines the role that the brand plays in each of these drivers. This step is the most subjective part of the process .

Is determined via a three-step process:

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Brand Valuation

Interbrand

Interbrand values the brand by multiplying the brands differential earnings by a multiple. This multiple is obtained by quantifying the factors that, according to Interbrand, determine the brands strength.

Steps followed by Interbrands method to calculate the brands differential earnings.

Brands differential earnings.

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Brand Valuation

Zimmermann er al. (200 I) and Interbrand Zintzmeyer & Lux

Factor

1. Leadership

2. Stability

3. Market

4. International image

5. Trend

6. Support

7. Protection

Evaluation Criteria

Market share, market position, market segment, brand awareness

History, current position, satisfaction, customer loyalty

Competitive structure (concentration), market growth, volume, sales

Presence in foreign markets, export, history

Consideration, attractiveness

Quality, consistency, share of advertising, identity

Date of registration, legal coverage and monitoring

Max.

25

15

10

25

10

10

5

Brand strength specific attributes or evaluation criteria by factor

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Brand ValuationExamples of brand strength calculations

Interbrand

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Brand Valuation

Zimmermann er al. (200 I) and Interbrand Zintzmeyer & Lux

1. Leadership. A leading brand is more stable and has more value than another brand with a lower market share, because leadership gives market influence, the power to set prices, control of distribution channels, greater resistance to competitors, etc.

2. Stability. Brands that have become consolidated over long periods of time or which enjoy a high degree of consumer loyalty obtain high scores in this factor.

3. Market. A brand in a stable, growing market with high entry barriers will score very high.

4. Internationality. Brands operating in international markets have more value than national or regional

brands. However, not all brands are able to cross cultural and national barriers.

5. Trend. A brands tendency to keep up-to-date and relevant for the consumer increases its value.

6. Support. Brands that have received investment and support must be considered to be more valuable than those that have not. The quantity and quality of this support is also considered.

7. Protection. The robustness and breadth of the brands protection (legal monopoly) is a critical factor in its valuation.

In order to calculate the multiple to be applied to the brands differential earnings, Interbrand calculates the brand strength, which is a weight composed of seven factors:

Brand strength

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Case Studies:

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Interbrand has valued over 2500 brands for 350 clients over the last one decade.

Interbrand

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Rethink Possible

Interbrand

After SBC acquired AT&T in 2005 to form the largest telecommunications company in the United States, we were asked to position this new entity as a re-established and forward-looking brand that would re-emerge as a category leader.

In 2009, the company helped AT&T launch Rethink Possible. Rethink Possible is rooted in optimism and possibility. It represents a point of view and a lifestyle choice that can be fueled by what AT&T has to offer. Interbrands work for AT&T spans more than five years of progressive brand evolution and has helped AT&T seize opportunity at key inflection points of industry change.

A new design will roll out from Interbrand that, among other things, trades in the $125 billion companys characteristic orange coloring on retail locations and packaging for more colors. The AT&T globe will also now appear alone without the copy AT&T beside it.

The goal is to move AT&Ts brand perception among consumers from telecommunications company to innovation company. Theres so much innovation happening at the company that I think people dont know, said Senior VP-Brand Marketing and Advertising Esther Lee. We spend an average $18 billion to $19 billion a year on our network, our technology and our inventions in order to drive the future of how people are going to live on our network.

AT&T Rebrand as Lifestyle Company

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Rethink Possible

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LEGO

Interbrand

LEGO has moved with the times in quite dizzying fashion, especially for any adult who remembers the much more basic parallel world it embraced 20 years ago. You could go far with an imagination or instruction manuals alike, but these were still generic springboards for the imagination: a cityscape, space exploration not into pre-defined, branded imaginary worlds.

This is a brand thats gone full-blown experiential, embracing the gamut of its tangible assets and turning them all shades of digital and analogue. It arguably began with its real-world theme parks, including those in Windsor (U.K.) and Denmark, via cobranded tie-ups (e.g. with Pixar, to create a Toy Story series), to hands-on store experiences with 3D product displays, and digital renderings you can generate by holding boxes up to special sensors.

It helps, of course, that LEGOs specialty has always been in generating parallel, imaginative worlds. Doing so in a branded way that speaks to a generation weaned as much on virtual as real gaming, this is an old-school brand that seems to be in pretty good brand health.

Activate new and existing customers

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LEGO

Interbrand

LEGO commissioned Interbrand to create a management tool and go to market strategies that help them activate new and re-activate existing customers. When LEGO asked tell me how to get new customers, Interbrand answered that it wasnt about finding the magic bullet, it was about creating a process to identify the most valuable opportunities.

For an analytics project, Interbrand inserted a key ingredient into the mix: INSPIRATION. LEGO is a creative company by nature. Interbrand created a systematic process, which included an insights and value driven workshop. This workshop is the centre piece for where markets can be inspired from the facts to develop ideas to create new users

Active Share is now well understood and integrated across the entire LEGO business. Overall LEGOs senior leadership team is convinced that the tool will professionalise LEGOs process around the Active Share challenge.

Interbrand have provided LEGOs marketing management function (which is brand new) a systematic process including a working management tool that will be rolled out across 22 markets! This dialogue is truly bringing LEGO together, helping them leverage the value of collaboration.

The work substantiate the expression of the brand as a living asset envouraging inspiration and creativity, specifically targeted by the process. LEGO can now focus their energy and mission on the priority age groups of boys versus the world of boys 2-15.

Interbrand is developing bespoke tools, such as the management tool, which can be the foundation for developing new capabilities and processes for clients. This is Interbrand building capabilities.

Analytics and Brand Valuation

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Conclusion

Interbrand

Overall, there is an increasing need for brand valuation from both a management and transactional point of view.

With the development of the economic use approach, there is at last a standard that can be used for brand valuation.

This may well become the most important brand management tool in the future.

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Opinions:

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Today there are at least 39 differentproprietary brand valuation models practiced by different academics.

The International Brand Valuation Manual, By Gabriela Salinas

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63%of all companies that do value brands use two or more different methods.

Gunther and Kriegbaum-Kling, 2001: 281

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A brands real value is nothing, except in the eye of the beholder.

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The value of a brand

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Interbrand

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