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28 March 2015

Brand Valuation

Tag(s): People, Business, Marketing
David Haigh is the CEO and founder of Brand Finance plc. David qualified as a Chartered Accountant with Price Waterhouse in London. He worked in international financial management, then moved into the marketing services sector, firstly as the Finance Director of The Creative Business and then as Finance Director of WCRS & Partners. He left to set up a financial marketing consultancy, which was later acquired by Publicis, the pan European marketing services group where he worked as a director for five years. He then moved to Interbrand as Director of Brand Valuation in its London-based global brand valuation business, leaving in 1996 to launch Brand Finance. David has represented the British Standards Institute on the International Standards Committee working party on the standardisation of brand valuation methods and practices, whose draft standard (ISO 10668) was published in November 2010.

David has written many articles for the marketing and financial press on branded businesses and brand valuation and is the author of numerous publications. He also lectures on the subject of branded business, brand and intangible asset valuation at many of the leading business schools around the world. This week he gave a lecture on the subject of brand valuation for the Worshipful Company of Marketors of which he is a Liveryman and I am Senior Warden. The event was held at David’s new venture, Brand Exchange, a new Club in the heart of the City, created as the meeting place for senior professionals involved in managing brands and reputation.

He started by telling us that brand valuation is becoming increasingly regulated. The Chinese understand its importance stimulated by President Xi Jinping who at the 12th National People’s Conference announced that he wanted major change. China must be a place where things are created not just made quickly. China should be known for its brands. The government has created a Ministry of Brands and Quality. The country has taken a great interest in ISO 10668 and believes it does not go far enough. It has reopened discussions about the standard.  It hosted the last meeting which David attended and while these are normally modest affairs China put on a great show and attended in force. Chinese companies are using the standard as a way of understanding how you build brand equity. Chinese companies are buying undervalued Western brands, ranging from MG Rover and Volvo to Weetabix.

Brand Finance sets out to help brands make money. It seeks to understand the fundamental drivers of value and understand intangible assets. Traditional accountants are uncomfortable with measuring the intangible. They like to measure the tangible and put that on the balance sheet at replacement cost or at the purchase price depreciated over time at a set rate. However, quoted companies are nearly always worth far more than this and the difference can only be explained by understanding the value of intangible assets.

Brand Finance has analysed 58,000 companies in over 120 countries across 72 different sectors. These companies total $71 trillion in equity and debt but only $33 trillion of this is accounted for by tangible assets. The other $38 trillion is made up of intangible assets. These consist of brands, intellectual property including patents and know how, and other intangibles including goodwill. Goodwill arises when one company acquires another, but pays more than fair market value of the net assets (total assets – total liabilities). The goodwill amounts to the excess of the “purchase consideration” (the money paid to purchase the asset or business) over the total value of the assets and liabilities. It is classified as an intangible asset on the balance sheet, since it can neither be seen nor touched. However, according to International Financial Reporting Standards (IFRS), goodwill is never amortised. Instead, management is responsible for valuing goodwill every year and to determine if impairment is required. If the fair market value goes below historical cost (what goodwill was purchased for), impairment must be recorded to bring it down to its fair market value. However, an increase in the fair market value would not be accounted for in the financial statements.

This practice gives rise to several anomalies. The largest is that if a company buys a brand the value will be registered on the balance sheet as goodwill, though an intangible asset. If a company creates and grows a brand it will not. So a company like Diageo has created many brands like Johnny Walker and Baileys which are not on the balance sheet while Smirnoff which was acquired is on the balance sheet.

Accountants like to talk about the useful economic life of an intangible asset. If this is intellectual property like a patent which generally lasts for twenty years this is fair enough. But how long might a brand’s useful economic life be? Is it not indefinite? PWC did some work that produced the conclusion that a brand’s life might last for eight years. This might be justified if they assessed all the brands that are ever created as the vast majority of new products fail. But if they had considered the actual life of brands surely they would reach a different conclusion.  According to a report published by the Bank of Korea in 2008 investigating 41 countries, there were 5,568 companies older than 200 years. Of these 3,146 are located in Japan, 837 in Germany, 222 in the Netherlands and 196 in France. A nationwide Japanese survey in 2009 counted more than 21,000 companies older than 100 years.

Some of the oldest companies and brands that are still in business are hotels and restaurants. Here are a few examples. Nishiyama Onsen Keiunkan is a hot spring hotel in Japan. Founded in AD 705 it is the oldest hotel and oldest company still in operation according to the Guinness World Records. The hotel has had 52 generations of the same family operating it since its founding. Stiftskeller St. Peter is a restaurant within the monastery walls of St. Peter’s Archabbey, Salzburg, Austria. It is claimed to be the oldest restaurant in Europe mentioned by the scholar Alcuin in AD 803. Sean’s Bar is a pub in Athlone, Ireland that claims to date back to AD 900 and was listed in 2004 Guinness World Records as the oldest pub in Europe. The Bingley Arms in Bardsley, Leeds calls itself the oldest pub in Britain with a history going back to between AD 905 and AD 953. The Château de Goulaine in the Loire Valley has been home to the family of the marquis de Goulaine for over a thousand years. Château de Goulaine is also the estate-bottled wine produced at the château. The Pontificia Fonderia Marinelli is the successor of a bell foundry already at work in Agnone, Italy in 1040. The bell foundry is considered Italy’s oldest family business and among the three oldest family businesses worldwide.

Consider, too, just a handful of long-established iconic British brands: Twining’s dates back to 1706; Lloyds Bank was founded in 1765; Cadbury was created in 1824; Boots opened its doors in 1849; Fox’s biscuits were first baked in 1853; Burberry’s first designs were made in 1856; Lyle invented his Golden Syrup in 1883 and Rolls and Royce got together in 1906. And when did Mr Price meet Mr Waterhouse? Samuel Lowell Price set up in business in London in 1849. In 1865 Price, Holyland and Waterhouse joined forces in partnership in 1865. The name was changed to Price, Waterhouse & Co in 1874.

David demonstrated that the volatility in stock markets exaggerates the volatility in the value of intangibles assets because the tangible assets stay more stable in their balance sheet valuation. Thus businesses that don’t have a clear idea of their own value are vulnerable. It is often when stock markets are low that predators pounce. Kraft bought Cadbury in 2008 when the stock market had plummeted because Kraft knew that Cadburys was worth much more than its then stock market valuation. Similar fates fell to Rowntree and Hovis and many more in previous stock market dips.

Variations by sector are extreme. Thus advertising agencies and software firms typically have just 1%  of their value in tangible assets and 99% in intangible while at the other end of the spectrum mining companies are 77% tangible, 23% intangible; banks and financial services are 78% tangible, 22% intangible while real estate corporations are 84% tangible and just 16% intangible.

When Brand Finance assesses a brand it does not just look at the name and the logo. It does a complete inventory on what is distinctive about the brand. British Airways, for example, has a host of intangible assets that make up the brand including the uniform of the cabin crew, the design of the tail fin and the legacy of years of playing Delibes.  Virgin is a Venture Capital company with a powerful brand that it will license to its long list of partners.

This is an important subject for any owner of intangible assets to understand. David presented the list of the ten most valuable brands in the world from their latest survey:[i]
  1.  Apple                $128,303m
  2. Samsung            $81,716m
  3. Google                 $76,683m
  4. Microsoft              $67,060m
  5. Verizon                 $59,843m
  6. AT&T                     $58,820m
  7. Amazon                $56,124m
  8. GE                         $48,019m
  9. China Mobile       $47,916m
  10. Walmart                $46,737m
It’s impressive to see how many of these are relatively new brands and to note that a Chinese brand has already reached the top ten. Only GE dates from before the 20th century and while Samsung was founded in 1938 it is only recently, with its success in consumer electronics, that it has risen to such prominence. It’s also clear that the strongest brands have the strongest brand performance. 

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