The colour of money

When the Australian Government announced that cigarettes sold in the country would soon be devoid of any branding, many business people in completely disparate industries sat up and took notice.

After all, the cigarette industry is one that seems to defy almost all the marketing restrictions placed on it – the removal of traditional advertising channels, sport event sponsorship and even carrying anti-smoking messages on its packaging.

Just imagine, if you can, a car company being forced to sell vehicles with a large sticker on the front (compete with gory image) stating “Driving this car could kill you” – this is essentially what cigarette companies have been asked to do.

But with the removal of branding from the equation the true worth of each company’s brand will now be tested in an unprecedented fashion. Just how much is a brand worth, anyway?

A matter of taste

“Brands reside in the mind of consumers, that’s all that brands ultimately are,” explains Professor Charles Areni, from the University of Sydney’s Faculty of Business and Economics.

“They are neurons firing in the brains of consumers when they are exposed to various marketing stimuli – but of course you can’t put that on any financial statements so you have to resort to other methods of valuation.”

Brand Finance managing director Tim Heberden says a different way to think of brands is as a “stock of goodwill in the minds of current and potential customers”.

“That concept of stock is useful, because it is something that needs to be continually built up and augmented and at the same time it can decay or plummet if you do something wrong,” he explains.

Of course, the worth of a brand to a company will vary by sector – a fashion house, for example, will rely much more on its brand and image for distinction from competitors whereas an earthmoving machinery manufacturer will be able to rely more on its tangible products for competitive advantage.

“There are some sectors where the plants and equipment and tangible assets are very important and there are other sectors, such as the fashion industry, where brand is the dominant contributor of value,” Heberden adds.

“We have done studies of stock markets over the past few years. Until the GFC, on average intangible assets were generating about two-thirds of corporate value Р although that is all intangible assets, not just brands. Brand contribution could be around 5% in companies which are heavily commoditised to more than 50% in heavily branded companies.”

Recipe for disaster

The issue, of course, is that Heberden’s definition of ‘goodwill’ is a rather intangible concept, despite the best efforts of accountants and marketers to tell us otherwise. The result is that there is no set empirical method of calculating brand value –although there are several accepted conventions.

According to Professor Areni there are three basic approaches to establishing the value of your brand.

“One is a cost based approach, which is essentially Accounting 101,” he explains.

“How much does it cost to establish a brand in a given industry or product category? For example you would look at media expenses, marketing and communications  and so on. You simply track all the expenses incurred to establish the brand and launch it into a given product category. The problem with that approach is that it tells you nothing about future value, so it is useless for stock prices or attracting investors and using it for financial statements and it says nothing about marketing excellence. You can give two groups of marketers $10 million to develop a brand and one can develop a powerhouse and the other a market failure, so it really tells you nothing about how a brand is likely to generate revenue and profits in the future.”

A second approach is a market based approach known as relief from royalty.

“It is based on the idea that a brand can be licensed and sold to a company as an intangible asset,” Areni continues.

“The company will then use that brand on something tangible that it produces. For example the Fosters Group is a perfect example where you can value that particular brand – not by how much is sold in Australia, but by how much foreign companies in other geographic areas are willing to pay to license that brand whether it is Miller in North America or a Belgian conglomerate in Europe. What do these licensees usually pay to access the brand?”

This method is limited, of course, where a company uses its own brand to produce its own product and never tests the market to establish a licensing price with any accuracy.

A third approach is based on income, which revolves around the idea that strong brands generate more income than weak brands.

“There are three components to this method,” Areni says.

“We know that strong brands command a better price in a particular product category in a given industry. A great example of this is Nivea, which is a brand name for skin care products. In their product line they have multiple price points and the most expensive skin cream is 60 times more expensive than the cheapest skin cream, looking at millilitres as the common unit.

“This is the same company within their own product line – there are serious differences in the ability to command  

a price premium.

“Strong brands also command disproportionate market share. For example, we know that if you do blind taste tests of Coke versus Pepsi its roughly a wash. But if you brand them so that consumers do a test where they can see if they are drinking Coke versus Pepsi, Coke wins by a two to one or three to one margin in the US. We know that is the brand creating that. The actual market share is in the middle of those two measures, but it does suggest that Coke commands a portion of its market share because of the brand and not because of what is in the bottle.”

The third component is more subjective, which establishes how long into the future a particular price point can be maintained or a market share retained.

“Different methods will make different assumptions on that, which is why a lot of brand valuations diverge,” Areni says.

“You can take a given brand that exists and show that with actual brand data the dominant techniques come up with wildly divergent estimations of brand value.”

In one example they took the data of one company and ran it through these different methods. The highest value they got was just under a billion dollars for the brand, and the lowest value they got was $175 million for the same brand.

“Forecasting is always going to be an imperfect science and that is where you are going to get this divergence in different brand values.”

Another variable clouding the valuation debate is the purpose of the valuation, cautions Professor Mark Uncles from the University of New South Wales.

“There is a problem about the value to whom – the value to the current owner, or the value to someone who has just bought the brand or the value to someone who might buy the brand,” he says.

“For example, I might be an owner of a brand which has been around for a long time and I have done nothing much with it, so I might think the value of that brand to me is quite low or it may be considered a dying brand. There may be another company, perhaps a rather more energetic company, who thinks ‘if we have that brand in our company we could do wonders with it – we would reposition it, relaunch it, put advertising support behind it, talk to the trade and get distribution and make a go of it’. The value of the brand to that organisation is completely different.”

Ultimately this creates a fourth method of valuation – the brand is worth whatever a buyer is prepared to pay for it.

“It is kind of like a house which is worth whatever the last person paid for it, but when you are at a dinner party you can still talk about the value of your house even if you haven’t just traded it – and there is a value to your house even if you don’t know what that value is,” Uncles says.

And just like house prices, valuations can change overnight.

“Let’s say your brand equity is damaged – something goes hideously wrong with your product and it hurts people or kills someone or something like that – overnight that goodwill which is associated with your brand can dissipate and your earnings can go through the floor,” Heberden says.

“In any instance people’s purchase behaviour is affected by their perception of the company and the brand – that’s the day to day pay back you get from owning that brand.”