Brand ValuationCompilation by Rajesh Ingle - PhD27th & 28th Nov 2010

Section I

1)Introduction to Brands: Products v/s Brands

2) Anatomy of a Brand, Overview of brand building process

3)Customers and Brands: Understanding brands from the customer's perspective, Brand positioning and, Brand Identity

4)Introduction to Brand valuation

“What cannot be measured cannot be managed”

Jack Welch

Fundamentals

The Desire

The Willingness

The Ability

The Awareness

The word ‘brand’ is derived from old Norse word “brandr” , meaning burn,and it was by this method that early man marked is livestock

Salt

Soft Drin

k

Automobile

s

Cosmetics

Clothing

Jewelry

Furn

iture

Houses

Vacati

ons

Haircu

ts

Child Care

Television Repair

Lega

l servi

ces

Root Can

al

Auto Repair

Medica

l Diag

nosis0

20

40

60

80

100

120

IdeaServiceGoods

(Most Goods) ATL Activities

Product=

(Most Services)BTL Activities

Prosperity of Brand• Powerful consumer Insight

Understand and anticipate your consumers.• Focus

People and resources are concentrated where they can add greatest values.

• InnovationEvolve and adapt to changes in consumer needs and aspirations. The driver for innovation is not just insight , but foresight.

Successful brands• Have a clear customer benefit• Make a promise and keep it• Have simplicity, clarity and honesty• Have distinctive logos and design• Are widely available• Build trust• Have a price/quality trade off – win/win• Help consumers make good decisions• Offer consistently superior value• Are about the total experience• Result ? Higher margins, higher volumes, innovation,

better quality

Ref: Professor Malcolm McDonald (Cranfield University) 9th April 2010

Decline of brandBig five mistakes the company should avoid• Arrogance- Forgetting that the brand

actually belongs to the consumers.eg endless cycle of relaunches ,upgrades and extensions.

• Greed-Numerous companies have sought to make their prized assets more and more profitable.eg Unilever country soup.

• Complacency –Sitting back and resting on reputation only to discover that faster, hungrier , more innovative competitors have passed them by.

• Inconsistency- Consumer’s expectations of consistency extend well beyond the quality of the ingredients they expect to find in a branded product, or the customer service standard they expect from a branded service. Increasingly , consumers expect the values of brand to be reflected in every aspect of business behind the brand.

Decline of brand

• Myopia- We live in a world of permanent change. Those who fail to Understand the consequences for change for their brands inevitably put those brands at risk.

(Ref: Ex Unilever Chairman Mr. Nial Fitzgerald’s speech)

Decline of brand

What went wrong with many brands?

• Success led to smugness• Superior margins became the primary purpose• Cutting corners/reducing costs• Economical with the truth (eg. ‘low fat’, but no mention of

high sugar content)• Add some gold to the packaging (illusion of quality)• Made decision-making harder• Became the new commodities

Ref: Professor Malcolm McDonald (Cranfield University) 9th April 2010

What went wrong with many brands

Single brand across organisation

Endorsed brands House of brands

Branding possibilities, few examples………….

Source: Davidson H

BRAND PORTFOLIO AND ARCHITECTURE

Brand Relationship SpectrumTypes of Brand

Type 1:

Single Brand AcrossOrganization

Type 2:

Endorsed Brands

Type 3:

House of Brands

Organized Brand Individual Brand

IBMMayo ClinicHarvard UniversityGreenpeaceGoldman Sachs

None

Ralph LaurenMicrosoftSonyMcDonalds

PoloWindowsPlay station 2Big Mac

Procter & GamblePfizerWoodruff Arts Center

PampersViagraAtlanta Symphony Orchestra

Brand

Nest e

Brand

Source: Davidson, H.

Brand Value Added BVA® varies by sector

Perf

um

es

FM

CG

Con

su

mer

E..

.

Wh

ite G

ood

s

Fin

an

cia

l S

...

Mob

ile

Uti

liti

es

Bu

lk C

hem

i...

0

10

20

30

40

50

60

70

80

90

100

Source :Brand Finance

have paid £31 billion forbut have bought only £4 billion of tangible assets- Gillette brand £ 4.0 billion- Duracell brand £ 2.5 billion- Oral B £ 2.0 billion- Braun £ 1.5 billion- Retail and supplier network £10.0 billion- Gillette innovative capability £ 7.0 billion

TOTAL£27.0 billion(David Haigh, Brand Finance, Marketing Magazine, 1st April 2005)

Intangibles

• VW purchased Rolls Royce Motors from Vickers for USD 909 Millions.

• 2/3rd of the amount paid was for Good will.• This was a celebration time for VW till they

realised…………………………………….

• The trademark Rolls Royce belonged to company named Rolls Royce PLC.• This trade mark was sold to BMW for only USD 73 Millions.

Did you know??

In 1996 Plymouth Gin was acquired by private investors led by John Murphy. During this time Plymouth was again being produced with grain spirits and Master Distiller Sean Harrison began his career with Plymouth and is still there today. Production had dropped to an all time low with virtually no exporting. By 1999 UK sales had tripled to 18,000 cases and the exports were on the rise. Plymouth Gin returned to its traditional strength of 41.2% abv.

In 2001 Vin & Spirits (the parent company of Absolut) buys 50 % and global distribution was now available. UK sales went up to 36,000 cases. By 2002 case sales reached 60,000 and Plymouth Gin was declared the ##1 premium gin by Impact Magazine in the UK outselling Bombay Sapphire and Beefeaters. Today Plymouth is fast becoming the favorite spirit of mixologists world wide.

Did you know??

Notes of Cautiona)Drop in the Hutch brand in India must have resulted in direct loss of USD 6.5 Billion, as this is the perceived value of the brand.

b)Vodafone acquisition of Mannesmann (Germany). It paid a heavy price for its haste and recently announced that it was writing off £ 28 billion in goodwill from its balance-sheet related to its Mannesmann acquisition in 2000.

Did you know??

• On March 2001, the UK’s Post Office, founded in 1635 by Charles I, changed its name to Consignia.

• On June 13, 2002 the name was changed back to Royal Mail.

• USD 92,000 was spent on branding exercise and later USD 2million in consigning the Consignia name to history, as it alters the signs on 3,000 buildings to meet company law requirements.

Did you know??

How have other companies done it?

New positionand organisation

New identityand organisation

New beliefsand role

New directionand empathy

New contextand direction

New directionAnd organisation

Businessobjectivesof change

Whatdrove the

change

Whatactuallychanged

Estimatedcost of

rebranding

Benefitsof change

- Brand Value,-Business Value

Contextfor

change

• RJR Nabisco sold their brand to Kohlberg, Kravis and Roberts for $30 Billion?

• Philip Morris bought Kraft for $12.9 billion ($ 11.6 billion for “goodwill”)?

• Nestle bought Rowntree (home for Kit-Kat, After Eight, Polo…) for $4.5 billion. More than five times book value?

Did you know??

Harley Davidson has patented the thumping sound of its engine.

Did you know??

Brands are key intangibles in most businesses

Brand20%

OtherIntangible Assets55%

TangibleAssets25%

Developed Markets

Brands are estimated to represent at least 20% of the intangible value of businesses on the major world stock markets. Brands combine with other tangible and intangible assets to create value

Intangible assets

Brand

Software

Patents

Distribution rights

Tangible assets

Assembled workforce

Business Goodwill

Marketing intangible

Technology intangibles

Customer intangible

Contract intangibles

Illustrative

Source: Brand Finance

Customer relationships

Asset split across selected economies

Asset split across selected economies26

Asset Breakdown for the top 10 countries by Enterprise Value (US$ millions, 2008)

Inter Tech’s 5 year performance

Performance (£million) Base Year 1 2 3 4 5

Sales Revenue- Cost of goods sold

£254135

£293152

£318167

£387201

£431224

£454236

Gross Contribution- Manufacturing overhead- Marketing & Sales- Research & Development

£119481822

£141582323

£151632423

£186822625

£207902724

£218952824

Net Profit £16 £22 £26 £37 £50 £55

Return on Sales (%) 6.3% 7.5% 8.2% 9.6% 11.6% 12.1%

AssetsAssets (% of sales)

£14156%

£16255%

£16753%

£19450%

£20548%

£20645%

Return on Assets (%) 11.3% 13.5% 15.6% 19.1% 24.4% 26.7%

Performance (£million) Base Year 1 2 3 4 5

Market Growth 18.3% 23.4% 17.6% 34.4% 24.0% 17.9%

InterTech’s 5 Year Market-Based Performance

Customer Retention (%)New Customers (%)% Dissatisfied Customers

88.2%11.7%13.6%

87.1%12.9%14.3%

85.0%14.9%16.1%

82.2%24.1%17.3%

80.9%22.5%18.9%

80.0%29.2%19.6%

InterTech Sales Growth (%)Market Share(%)

12.8%20.3%

17.4%19.1%

11.2%18.4%

27.1%17.1%

16.5%16.3%

10.9%14.9%

Relative Product QualityRelative Service QualityRelative New Product Sales

+10%+0%+8%

+8%+0%+8%

+5%-20%+7%

+3%-3%+5%

+1%-5%+1%

0%-8%-4%

Why Market Growth Rates Are Important

A quick glance at Table 2, however shows that most market indicators are negative. It is obvious that, when market conditions are less benign, this company will not last long.

There is frequently one line of revenue and dozens of lines for costs. Can this be changed?

The Big Question?

• Why does the world need this brand?• Who are the competitors – near and far?• How does this brand differ from competitors?• Who are the customers for this brand?• Who are NOT customers for this brand?• What exactly is the product/service this brand

will offer?• What is the ‘know-how’ of this brand?• What is this brand NOT?• Are the company’s processes aligned behind the

brand?• Can employees articulate the answer to

question one?

Essential Questions

THANK YOU

1)Reasons for valuation of Brands

2)Brand Equity: Development and Measurement

3)Managing the Brand Portfolio over time

Section II

?Why Value Brands ?

Vendor Acquirer Goodwill/Consideration

Rowntree Nestle 83%Pillsbury Grand Metropolitan 86%Trebor Cadbury-Schweppes 75%Verkade United Biscuits 66%

Identification of opportunities

Price Negotiation

Mergers and Acquisitions

Competitive pressuresStock exchange pressuresAvailability of resourcesPresence of ambitious management team

Rational groundsKnowing the premium , before handPreparing the finance packageInherent value of the brand

Why Value Brands?

Projective visionary process based on fact rather than hunch

Brand ExtensionInternational

Branding

Resource allocation Financial Appraisal

Management Information

Brand Strategy

Which to milk andwhich to dispose off

Understanding the revenueproducing assets

Modelling tool for the exploration of various ‘what if? ‘ option

Internationalisation of brandsby identifying key strengths and weakness

Why Value Brands?

IFRS , US GAAP

Goodwill

Gearing

Balance Sheet Benefits

Borrowing capabilities

Lenders are beginning to look at Brands as assets on which to secure borrowings

Gearing ratios are closely watchedby lenders, making it inevitable forBrand valuations

Why Value Brands?

Investor Presentations

Brand Licensing and Franchising

Presentation on strength of brand to its share holders and investor’s community.Undergoing analysis to draw attention to the particular strengths and features of brands

Royalty rates planned are still largely subjective.Trademark owner still ask for what is attainableBrand valuation can assist to provide the framework for setting the royalty rates

Why Value Brands?

How is brand value created?

Customer Impact

BusinessDrivers

FinancialResults

MarketingInvestment

• Brand development• Innovation• Communications

• Unique experiences• Loyal behaviour• Price insensitive

• Revenues• Value uplift• Costs and risks

• Profits• Future cashflows• Returns to investors

BrandPower

BrandValue

BrandEquity

• Perceived value• Preference• Loyalty

• Business impact• Leverages drivers• Reduces risk

• Future security of earnings• Economic value • Royalty rates

Source: Brand Finance

Range of Services

Brand Valuation

Technical Brand Valuations

Brand Due Diligence

Value-BasedMarketing

Balance Sheet Valuations

Brand Portfolio Review

Tax Valuations

Dynamic Brand Value

Modelling

Acquisitions

Return on Brand

Investment

Development of Licensing

Programmes

Disposals

Private Equity Transactions

Initial Public Offerings

Brand Value Scorecards

Expert witness

Brand Licensing

Advice on Royalty Rates

Due Diligence on trade marks and licensing

Brand Transitions

Investor Relations

Investor Realtions

International Financial Reporting Standard (IFRS 3), which came into force at the end of March 2004, provides for a single international accounting treatment for acquisitions. Adopting the precedent set by US Financial Accounting Standard 141 (FAS 141) of June 2001, IFRS 3 requires that “goodwill” be specifically allocated to the intangible assets required.

FAS 141 and IFRS 3 is to require companies to be transparent about the nature and scale of the assets that they are acquiring. It is no longer permissible to report a single “goodwill” figure representing the excess of the purchase price over the tangible assets acquired.

Other current reasons on Brand Valuation

Other current reasons on Brand Valuation

• Goodwill must be allocated to five classes of intangible assets-

1)Technology based assets ( such as Patents),

2)Contract Based assets (such as Lease and licensing agreements)

3)Artistic assets (such as plays and films),

4)Customer-based assets (such as customer lists)

5)Marketing-related assets (such as trademarks and brands)

© Brand Finance plc 2006

“ISO 10668 gives brand valuation analysis the

Institutional credibility which it previously lacked. It

professionalises brand management.”

David Haigh, CEO, Brand Finance Plc

© Brand Finance plc 2006

The new ISO 10668 applies to Brand Valuation commissioned for all purposes

including :• Accounting and financial reporting• Insolvency and Liquidation• Tax planning and compliance• Litigation support and dispute resolution• Corporate finance and fund raising• Licensing and JV negotiations• Internal management information and reporting• Strategic planning and Brand management

Also can be used for:• Brand and marketing budget determination• Brand portfolio review• Brand Architecture analysis• Brand Extension planning

ISO 10668 – New International Standards on Brand Valuations

© Brand Finance plc 2006

ISO 10668 :Module 1 Legal Analysis

Define what is brand and which Intangible assets to be included

ISO 10668 :Module 2 Behavioral Analysis

To understand and form an opinion on likely stake holder behaviour in each of the

geographical, product and customer segments in which the subject brand operates.

ISO 10668 :Module 3 Financial Analysis

Conducting a thorough financial analysis

ISO 10668 specifies three alternative brand valuation approach: Market, Cost and

Income.

Requirements of an ISO Compliant brand valuation?

© Brand Finance plc 2006

ISO

THANK YOU

1)Various ways of valuation of brands and the advantages and disadvantages associated with it.

2)Implication of IFRS on Brand valuation

Section III

Brand Valuation: Difficulties

……………..everybody has a opinion of price but the opinion rarely matches

Brand Valuation : Difficulties

• Future benefits need not be monetary in nature.

……..as a collector of old books, you will not buy it for future economic benefit but you will buy it for pleasure and satisfaction.

Brand Valuation: Difficulties It emphasizes the fact that value is dependent on

characteristics of the owner and the purpose for which the property is being held.

……….A winning formula one car has great value to the sponsors and owners of the cars. If the same car is owned by private individual for use on private circuit, it may have far less value

Brand Valuation: Difficulties

The more idiosyncratic the asset the more care needs to be taken in identifying the true purpose of ownership.

……….A ten dollar bill has an immediate recognisable and realisable value , at least in its home country, and will have the same value regardless of the characteristics of its owner or the purpose for which it is put.

Valuation: Defined

• Valuation is defined as a process of assessing the value now of all future benefits flowing from ownership of a particular property.

Case on Valuation of Beer Brand

Simple “Beer Math”

Existing Approximation

The Problem

The Problem

How do we calculate value of ……

Packaging

Advertising

Distribution

Ingredients

Market

A Solution framework

Product Effect of Non- Brand Product All Brand Revenue = Characteristics * Influences

= Category Product Promotion Drivers Impact Impact Brand Equity

* MultiplierDistribution Random (BEM)Impact Shocks

Revenue due to

unbranded product

BEM must be >1 for brands to be value enhancing

© Brand Finance plc 2006

Various Valuation Approach

Sr.No. Approach towards Valuation Value in INR (Million)

1) Cost Approach 183.5

2) Income Approach 657.0

3) Market Approach 221.19

4) Premium Pricing Approach 1105.4

5) Royalty Relief approach 21.9

6) Interbrand's Approach 845.6

7) Brand Finance Approach 1086

© Brand Finance plc 2006

How to Value Brand

• Cost Approach– ‘Creations costs’ may be estimated by looking

back to brand launch and restating actual expenditure in current cost terms. (Cost of reproduction)

– “Re Creation” may also be estimated. However, there is no such thing called as identical brand so it is difficult to calculate a relevant re-creation number. (Cost of replacement)

© Brand Finance plc 2006

Cost approach

• Advantage– Works well for tangible assets like plant and machinery– Ideal for a new brand, where the time period is short and

the costs are readily available.• Disadvantage

– Asset acquired not for economic reasons, the method is less appropriate. (Eg the case of old book )

– It takes no account of future benefits accruing to the asset.

– Valuing Coca Cola by this method will be an extremely difficult task.

© Brand Finance plc 2006

Cost Approach

Cost of reproduction Cost of replacement(Computing the cost for (Replacing existing asset with anproducing exact replica of the asset) alternative that provide same Good for new asset , may not work future benefits)for old asset

Identify current cost of Identify the individualsimilar asset then adjust cost required to bring anthat cost to functional asset to current depreciation , physical situationdepreciation & economicobsolescence

© Brand Finance plc 2006

Case studyValuation

I] Cost method (Rs.in Mn)

Particulars Year (Historical)

0 1 2 3 4 5

Direct cost 1.8 60.9 73.4 90.4 109.6 132.7

Less: Production cost 42.5 51.3 62.0 74.8 90.4

Cost incurred for brand building 1.8 18.4 22.1 28.4 34.8 42.3

Compounded value 3.3 30.2 31.9 36.4 39.4 42.3

Brand value 183.5

Weighted average cost of capital (WACC)

Type of capital Proportion Cost Wt avg cost

Equity 0.40 20% 0.08

Debt 0.60 13% 0.05

0.13

© Brand Finance plc 2006

Market Approach

• It establishes a value for an asset by identifying those values placed on similar assets in the market place.

• Best suited for Real estate, Machinery and equipments in general use, Vehicles, General purpose computer software, Computer hardware, Liquor Licenses and Franchisees

• It however requires following:– There must be a proper market in the assets being valued.– Transaction taking place in the market must be at arm’s length– The precise terms of transaction taking place must be known so

that valid comparison can be made.– The precise timing of the transaction should be known to allow

proper comparison

© Brand Finance plc 2006

Case StudySr.No. Statement Value in INR (Mn)

1) NOPAT (Five years) 44.23

2) Brand value (NOPAT *5)(Similar category soap brand was sold last year with multiple of 3)

221.19

Challenges:1)Every buyer has a different set of parameters regarding how much to pay for a brand or brand portfolio.2)Amount may fluctuate widely according to the buyer’s characteristics and purpose.3)Information that would facilitate comparable analysis is simply not available.

© Brand Finance plc 2006

Cash Flow/ Income approach

• This approach ignores the costs of reproducing or replacing an asset but concentrates on the future cash flows to be derived from the ownership of that asset.

• The future cash flows are discounted to what is called net present value by applying a discount rate which is intended to reflect the risk of the future cash flows being realised

• Best suited for Contracts, Licenses and Royalty agreements, Patents, trademarks , copyrights, Franchisees, securities and Business enterprises

© Brand Finance plc 2006

Cash Flow/ Income approach

• Challenges– Quantification of future cash flows: The future cash flows could be

impacted with market circumstances, outside the control of owners. Also difficult to separate out brand – related cash flows from cash flows generated from efficiencies of other area of business like such as plant and machinery, distribution etc.

– All brand have a finite life– Assessment of risk is required to establish an appropriate discount

rate: Strong brands are less risky than weak brands

© Brand Finance plc 2006

Case StudyIncome method (Rs.in Mn)

Particulars Year 5 Years (Estimation)6 7 8 9 10

Revenue 212.6 255.1 301.0 346.2 380.8 418.9 Estimated growth in revenue 20% 18% 15% 10% 10%Direct Cost 132.7 159.2 187.8 216.0 237.6 261.4 Cost as % of revenue 62% 62% 62% 62% 62% 62%Gross profit 79.9 95.9 113.2 130.2 143.2 157.5 Gross margin % 38% 38% 38% 38% 38% 38%Indirect overheads 37.7 39.6 41.5 43.6 45.8 48.1 EBITDA 42.3 56.4 71.6 86.6 97.4 109.4 Less: Interest 2.0 2.4 2.8 3.3 3.6 3.9 PBDT 40.3 54.0 68.8 83.3 93.8 105.5 Depreciation 1.0 1.0 1.0 1.0 1.0 1.0 PBT 39.3 53.0 67.8 82.3 92.8 104.5 Tax 13.3 18.0 23.1 28.0 31.6 35.5 PAT 25.9 35.0 44.8 54.3 61.3 69.0 Terminal value 888.6 Net income 25.9 35.0 44.8 54.3 61.3 957.5 Brand Value (Present value) 657.0 Discount rate 13% Terminal growth rate 5%

© Brand Finance plc 2006

Price Premium Approach• This system is based upon the extra price (or profit) which a branded

product may command over an unbranded or generic equivalent.• Challenges:

– The rise of private label makes it difficult to identify a generic.– Many Branded products do not have generic equivalent (eg Perfumes)– It is difficult to conceive that a generically equivalent product could be

offered at anything like as keen as a price as the branded product .(eg Mars bar)

– Selling prices are often related to short- term tactical factors.

• Hence this cannot be a way of understanding brand value. However premium pricing can serve as an indication of brand strength and may therefore play an important part in a valuation

© Brand Finance plc 2006

Case study5

• BV= ∑ (Earnings)ii=1 (1+K)I

Where k= opportunity cost of capital which is equal to WACC= 0.13

(Earnings)I = Earnings of the ith year growth earnings =15%

Hence Brand Value is 1105.4 Mn

© Brand Finance plc 2006

Simpler way

If Kellogg’s sells 1 billion cartons of cereal in Europe and we find that on average it sells at a rough price premium of 30% . We can say that the brand in Europe is worth 300 million Euros.

Volume X Price premium = Brand Value

© Brand Finance plc 2006

Economic substitution analysis

• If we didn’t have that trademark or brand what would the financial performance of the branded business be? How would the volumes, values and costs change?

• The problem with this approach is that it relies on subjective judgments as to what the alternative substitute might be.

• The two most useful economic use approaches are the earnings split and royalty relief approaches.

© Brand Finance plc 2006

Earnings Split Approach• Under an earnings split approach we attribute earnings above a break-

even economic return to the intangible capital. This involves four principal steps.

1) Appropriate segmentation of the market to ensure that we study the brand within its relevant competitive framework.

2) The second step is to forecast the economic earnings of the branded business earnings within each of the identified segments. These are the excess earnings attributable to all the intangible assets of the business.

3) The third step is to analyse the business drivers research to determine what proportion of total branded business earnings may be attributed specifically to the brand.

4) The final step is to determine an appropriate discount rate based on the quality and security of the brand franchise with both trade customers and end consumers.

© Brand Finance plc 2006

Illustration of valuation approach (Brand Finance)

= Total

+ Segment A

+ Segment B1. Segmentation

2. Due diligence of forecasts

Yr4

Yr2

Yr3

FutureValue

Discounted to present value

Future Cash Flows

BusinessValue

Yr1

3. Brand contribution to earnings4. Risk attached to

future earnings

Yr5

TrademarkValue

© Brand Finance plc 2006

Royalty Relief model

• Royalty relief assumes that a company has no brand and needs to license one. If a brand has to be licensed from a third party a royalty rate turnover will be charged.

• Ownership therefore relieves the company from paying a license, hence royalty relief.

• This is the most frequently used method of valuation because it is highly regarded by tax authorities and courts, largely because there are a lot of comparable licensing agreements in the public domain. It is relatively easy to calculate a specific percentage that might be paid to the trademark or brand owner.

© Brand Finance plc 2006

Source :Brand Finance

• Determine a royalty rate range in each sector Comparable licensing agreements Industry norms, databases, precedents

• Calculate specific royalty rate Quantify the strength and performance of the

brand relative to its competitors – Brand Power Index

The composition of the Brand Power Index will depend on the market, customer and market research data available

Apply the Brand Power Index score to royalty rate range

• Margin analysis and commercial sense checks

Royalty rate range

Brand PowerIndex

8.0%

7.5%

7.0%

6.5%

6.0%

5.5%

5.0%

71

Royalty Relief model

© Brand Finance plc 2006

Case Study (INR mn)

Royalty Relief method Years 6 7 8 9 10

Revenue 255.1

301.0

346.2

380.8

418.9

Royalty rate 0.0

0.0

0.0

0.0

0.0

Royalty 1.3

1.6

1.9

2.1

2.3

Terminal value 29.1

Cash flow 1.3

1.6

1.9

2.1

31.4

Brand value 21.9

Discount rate 13% Terminal growth rate 5%

© Brand Finance plc 2006

Interbrand’s Approach

• To determine a brand’s value, certain key factors needs to be determined– Brand earnings– Brand Strength (which sets the multiple or

discount rate)– The range of multiples (or discount rates) to be

applied to brand earnings

© Brand Finance plc 2006

• Step 1-Identify the factors that may impact a brand’s value. Market Leadership Stability Market Internationality Trend Support Protection

© Brand Finance plc 2006

Interbrand’s Approach

• Step 2-Decide the relative importance of each factor.Since the mentioned seven factors are of equal importance , so Interbrand has weighted them appropriately by giving each one a different maximum score.

Interbrand Factors WeightingLeadership 25Stability 15Market 10Internationality 25Trend 10Support 10Protection 5Brand Strength 100

© Brand Finance plc 2006

Interbrand’s Approach

• Step 3: Score the brandsInterbrand Factors Weighting Brand A Brand BLeadership 25 20 7Stability 15 12 7Market 10 10 10Internationality 25 22 12Trend 10 7 5Support 10 7 7Protection 5 3 3Brand Strength 100 81 51

© Brand Finance plc 2006

Interbrand’s Approach

• Step 4: Estimate the amount of earnings attributable to the brand

Brand earnings for Brand A and Brand B

$ million Brand A Brand BProfit after tax (PAT) 200 150Deduct overhead costs (50) (50) Deduct profit (Not attributable to brand) (100) (50)Brand earnings 50 50

© Brand Finance plc 2006

Interbrand’s Approach

Multiple

Brand Strength Score

Converting Brand Strength into Multiple

© Brand Finance plc 2006

Interbrand’s Approach

• Step 5: Value the Brands

Brand values for Brand A and Brand B (USD Million)

Brand A Brand BBrand earnings 50 50Multiple 18 11Brand earnings 900 550

© Brand Finance plc 2006

Case Study

Valuing the Brand A

Brand Earnings 52.8

Multiple Applied 16

Brand Value (INR mn) 845.6

© Brand Finance plc 2006

Brand Finance Approach

• This approach seeks to forecast future brand earnings. These are then adjusted –discounted- to reflect the ‘time value of money’ (the dollar today is worth more than a dollar a year from now).

• It uses Financial forecast, Branded business earnings, Demand Drivers Brand Value Added Index and Risk Factors (Brand Beta)

© Brand Finance plc 2006

Start with a ‘Branded Business’ valuation

FutureValue

discounted at cost of capital

FUTURE CASH FLOWSOVER PLANNING PERIOD

PERPETUITY

BrandedBusiness

Value

Today Time

Yr.1

Yr.2

Yr.3

Yr.4

Yr.5

© Brand Finance plc 2006

Tangible

BrandedBusiness

Value

Intangible

Business value - Value tangible assets =

Split between tangible and intangible assets

%

%

Value intangible assets

© Brand Finance plc 2006

Intangible

Brand represents a proportion of intangible value

Patents

Trademark

Software

Recipe

© Brand Finance plc 2006

Reconciling the answer

• Brand value should be reconciled back to total intangible asset value and to Branded Business Value as a sense check

Tangible

BrandedBusiness

Value

Intangible

Patents

Trademark

Software

Recipe %

%

%

%

%

© Brand Finance plc 2006

Illustration of valuation approach

= Total

+ Segment A

+ Segment B1. Segmentation

2. Due diligence of forecasts

Yr4

Yr2

Yr3

FutureValue

Discounted to present value

Future Cash Flows

BusinessValue

Yr1

3. Brand contribution to earnings4. Risk attached to

future earnings

Yr5

TrademarkValue

© Brand Finance plc 2006

Flexing the brand’s economic use

BVA

Magnitude ofearnings

BVA

Magnitude ofearnings

Brand Beta

Quality of earnings

Brand Beta

Quality of earnings

Contributionof brand

to demand

Contributionof brand

to demandResilience of

the brandResilience of

the brand

• Increase cash flows levels

• Accelerate cash flows

• Reduce risk attached to future cash flows

© Brand Finance plc 2006

1 Brand Value Added BVA® varies by sector

0

10

20

30

40

50

60

70

80

90

100P

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um

es

FM

CG

Co

ns

um

er

Ele

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on

ics

Wh

ite

Go

od

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Fin

an

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lS

erv

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s

Mo

bile

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Bu

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© Brand Finance plc 2006

2 Setting the Discount Rate

• A strong brand provides a more secure stream of future earnings and demands a lower discount rate

• We use a variant of WACC based on brand strength scoring– Cost of equity flexed for brand risk– Cost of debt flexed for brand risk– Weighted for owner or for sector

© Brand Finance plc 2006

3 ßrandßeta®Scoring Template

Attribute ScoreTime in market 0 -10Distribution 0 -10Market share 0 -10Market position 0 -10Sales growth rate 0 -10Price premium 0 -10Elasticity of price 0 -10Marketing spend/support 0 -10Advertising awareness 0 -10Brand awareness 0 -10

TOTAL max 100

© Brand Finance plc 2006

Forecasts

Economic Value Added

Branded Business Value

Internaldue

diligence

Marketdue

diligence

Outline of Brand Valuation process

Drivers of demand(BVA®)

Discount rate(BrandBeta®)

Market

Business

Customer

Market

Business

Customer

Branded Value

© Brand Finance plc 2006

Is brand investment creating value?

D

Current valueof portfolio

BrandedBusiness

Value

Value creationopportunity

Resources allocation &Management Time

??

B

C

A

E

F

© Brand Finance plc 2006

What is driving consumer value?

Importance

10 20 30 40 50 60

Size

Features

Availability

Design

Exclusivity

CompetitorsPerformance

10 20 30 40 50 60

Size

Features

Functional delivery

Availability

Design

Exclusivity

Image

Leadership

… and understand how we perform against competition

© Brand Finance plc 2006

How do they effect business results?

10 20 30 40 50 60

Size

Features

Weight

Availability

Design

Exclusivity

Coolness

10 20 30 40 50 60

Size

Features

Weight

Availability

Design

Exclusivity

Coolness

Volume

Pricing

Cost of sale

Cost of ops

Cap employed

Cost of cap

Image

Revenue

Costs

Op Profits

Capital cost

Ec Profit

… how does customer economics impact our revenues and profits

© Brand Finance plc 2006

MVEquity

MVDebt

IntrinsicBrandedBusiness

Value

MVGap

MarketValue

Market and intrinsic value often differ

HiddenValue

© Brand Finance plc 2006

Brand:

Enterprise valuation

Branded Business Value 3,181,300 Total Brand Value 254,504

Earnings approach - Enterprise Value

GBP HistoricYear ended 30 September 2002 2003 2004 2005 2006 2007

Revenue DriversTotal Market Size 700,000 833,333 925,147 944,138 986,717 1,029,412 Market Share 25% 27% 29% 31% 31% 32%Volume 175,000 225,000 268,293 292,683 305,882 329,412 Price 8.00 8.00 8.20 8.20 8.50 8.50

Total Sales 1,400,000 1,800,000 2,200,000 2,400,000 2,600,000 2,800,000growth % 29% 22% 9% 8% 8%

Total Direct Costs 790,906 1,200,000 1,350,000 1,500,000 1,600,000 1,700,000growth % 52% 13% 11% 7% 6%

Gross Profit 609,094 600,000 850,000 900,000 1,000,000 1,100,000margins % 33% 39% 38% 38% 39%

Forecast

Utilities Brand

Branded Business Value Brand Value

Which links to the valuation model

Drivers of revenue: market share/ volume/ price premium

Drivers of direct cost: supplier costs/ trade discounts

© Brand Finance plc 2006

Salaries 294,000 300,000 308,000 316,000 325,000growth % #DIV/0! 2% 3% 3% 3%

Marketing 46,000 50,000 52,000 53,000 55,000growth % #DIV/0! 9% 4% 2% 4%

Other overheads 112,000 118,000 124,000 130,000 135,000growth % #DIV/0! 5% 5% 5% 4%

Total administrative expenses 595,901 452,000 468,000 484,000 499,000 515,000growth % -24% 4% 3% 3% 3%

Profit Before Interest and Tax 13,193 148,000 382,000 416,000 501,000 585,000growth % 1022% 158% 9% 20% 17%

Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%Tax Charge 3,958 44,400 114,600 124,800 150,300 175,500

Profit After Tax 9,235 103,600 267,400 291,200 350,700 409,500

Discount Rate 12.5% 12.5% 12.5% 12.5% 12.5%Discount Factor 1.13 1.22 1.37 1.54 1.74

Discounted Profit After Tax 92,062 219,632 212,543 227,464 236,021

Drivers of internal cost: staff costs/ productivity

Drivers of financial cost: cost of debt/ cost of equity/ gearing = WACC

Which links to the valuation model

© Brand Finance plc 2006

Brand Finance Approach  Reporting Unit:      

  Brand: Soap      

  Market: Total  

  EARNINGS APPROACH Rs. £m   

 Branded Business Value 1,086 128

 Value in Perpetuity 843 100

 Value - Years to 2010 243 29

                             Enterprise Valuation (Rs. In Crores) Historic Forecast  Year ended 31st March 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015                           Revenues   121 146 176 213 255 301 346 381 419 461

  % Growth     20.7 % 20.8 % 20.7 % 20.0 % 18.0 % 15.0 % 10.0 % 10.0 % 10.0 %                   Cost of Goods Sold ( Variable Overheads)   (73) (90) (110) (133) (159) (188) (216) (237) (261) (285)  % Growth    23.2 % 21.2 % 21.1 % 20.0 % 18.0 % 15.0 % 9.7 % 10.1 % 9.2 %  % Margin  (60.8%) (62.0%) (62.2%) (62.4%) (62.2%) (62.3%) (62.3%) (62.3%) (62.3%) (62.3%)                   Gross Profit   47 55 67 80 96 113 130 144 158 176   % Growth    16.9 % 20.0 % 20.2 % 20.0 % 18.0 % 15.0 % 10.4 % 9.8 % 11.4 %  % Margin    38.0 % 37.8 % 37.6 % 37.6 % 37.6 % 37.6 % 37.8 % 37.7 % 38.2 %                   Advertisement & Promotions   (0) (0) (0) (0) (0) (0) (0) (0) (0) (0)  % Growth    0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %  % sales  (0.3%) (0.3%) (0.2%) (0.2%) (0.2%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%)                 Fixed Overheads   (33) (34) (36) (38) (40) (42) (44) (46) (48) (50)  % Growth    4.9 % 5.0 % 5.0 % 5.0 % 4.8 % 5.1 % 5.0 % 5.0 % 4.0 %  % Margin  (27.0%) (23.5%) (20.4%) (17.7%) (20.6%) (19.6%) (19.3%) (19.8%) (19.6%) (19.6%)                   EBIT   14 21 30 42 56 71 86 98 109 126   % Growth    44.4 % 45.2 % 38.4 % 33.7 % 27.5 % 20.9 % 13.2 % 12.1 % 14.7 %  % Margin  11.9 % 14.3 % 17.1 % 19.7 % 21.9 % 23.7 % 24.9 % 25.6 % 26.1 % 27.2 %                   Taxation   0 0 0 0 (21) (26) (32) (37) (40) (42)  Tax rate  0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %                   Net Operating Profit After Tax (NOPAT)   14 21 30 42 35 45 55 61 69 83.50   % Growth  - 44.4 % 45.2 % 38.4 % (16.5%) 29.2 % 20.8 % 11.7 % 14.0 % 20.3 %                   Discount Rate   9.9% 9.9% 9.9% 9.9% 9.9% 9.9%  Discount Factor  1.10 1.21 1.33 1.46 1.60 1.76                           Discounted NOPAT           32 37 41 42 43 47

© Brand Finance plc 2006 106

Brand Scorecard Framework

Market & Financial

Performance

BehaviourMarketingActions

Perceptions

Trial

Frequency

Loyalty

Awareness

Familiarity

Salience

Quality perceptions

Value perceptions

Image perceptions

Preference

Marketing Investment & Performance Scorecard

Brand equity measures

Activitymeasures

Behavioural measures

Performance & Financial measures

© Brand Finance plc 2006 107

Brand Value Added($ million)

$25$20$15$10

$5

$0

-$5-$10

-$15-$20

-$25

Brand Equity Index

010

2030405060

7080 90100

Brand Performance Score

010

20

3040

5060

7080 90 100

Note: Measures have to be customised to each business model. Those shown above are for illustrative purposes. (Brand Finance)

Summary

Various Valuation Approach

Sr.No. Approach towards Valuation Value in INR (Million)

1) Cost Approach 183.5

2) Income Approach 657.0

3) Market Approach 221.19

4) Premium Pricing Approach 1105.4

5) Royalty Relief approach 21.9

6) Interbrand's Approach 845.6

7) Brand Finance Approach 1086

Other Proprietary Methodologies

Brand Asset Valuator:• One of the first models of brand equity. It was launched

by the advertising agency Young & Rubicam in 1993. It outlines four different blocks of brand equity:– Differentiation: It is the starting point for all strong brands.– Relevance: It should fulfill their specific need , it ‘fits in’ with

their lifestyle, they feel ‘this brand is for people like me’– Esteem: Extent to which the brand is held in high regards

(perceived quality)– Knowledge: It measures the extent to which consumers

understands and have internalised what the brand stands for.

Other Proprietary Methodologies

Equitrend• It is a brand equity measures developed by research house Harris

Interactive , and is used predominantly in North America. It has three key measures:– Quality : Measured on 10 point scale ranging from outstanding to poor

quality.– Salience : It measures the percentage of respondents who have an

opinion about the brand.– Equity: It Measures over all good will associated with brand

• Challenges– It lacks the diagnostic to depth.– It contains no real measure of brand loyalty– It fails to capture dynamic changes in brand’s position.

Other Proprietary Methodologies

Brandz• Method developed by WPP. It is a study collected annually by

interviewing over 650,000 consumers and professionals across 31 countries to compare 21000 + brands from a broad range sectors.

• Brand Dynamics pyramid consists of : Bonding, Advantage, Performance, Relevance, Presence, No Presence

Brandz Voltage• Bonding provides an indication of the strength of the brand, Voltage

score is a one- number summary of the growth potential of brand.

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