Zara Brand Valuation PDF

CATHOLIC UNIVERSITY OF PORTUGAL
Master Thesis
ZARA: A Case Study about Brand Valuation
Rita Leo Furtado Gomes
Porto 2011
CATHOLIC UNIVERSITY OF PORTUGAL
School of Economics and Management
MSc. in Finance
Master Thesis
ZARA: A Case Study about Brand Valuation
Rita Leo Furtado Gomes
Master Thesis Advisor:

Prof. Lus Pedro Krug Pacheco
Porto, September 2011

EXECUTIVE SUMMARY
The 100 most valuable brands in the world increased their value last year
by 3,7% to a total of USD 1,203 thousand million (based on Interbrand 2009 and
2010 database). This seems to be somewhat controversial given the financial
crisis that we are experiencing. However, one may think that is especially during
these times that there are the major opportunities for mergers and acquisitions.
Following this, when we consider a transaction, the first issue that we think
about is how determine its right pricing. Some assets, such as properties and raw
materials, can be easily identifiable and converted into a monetary value. In turn,
the brands, as others intangible assets, despite may be the most important assets
in many business, they cannot be explicitly valued.
Hereupon, and motivated by the chance of ZARAs brand acquisition by

Hennes & Mauritz AB (H&M), we will try, along this dissertation, to find out a
reliable way to calculate the ZARAs brand value.
Firstly, we are going to approach some essential concepts that are critical
for a better comprehension of all the case study. Therefore, we will focus more on
the topic of brand valuation. Our purpose is to describe the different motivations of
brand valuation as its different approaches.
The second major part of this work is the review of the Brand Rating, BBDO
Brand Equity Evaluator and Interbrand models. Every method will be presented
in particular and afterwards critically assessed by means of the list of the compiled
requirements. After these three analyses, we gather the conditions to select the
one most appropriate to valuate ZARAs brand. Due to the limitations present in all
models, the brand valuation will be a long road of options and reviews.
Nevertheless a monetary value will be reached and so, we will meet the
requirements that enable to start the negotiations between buyer and seller.
Keywords: brand valuation, brand valuation methods, Interbrand.

GREETINGS
I couldnt forget to present my sincere compliments to all of those who have

helped me to make this case study better.
First of all, I have to thank Professor Luis Pedro Krug Pacheco for the
precious guidance and availability throughout the whole period. The numerous
clarifications along with the academic material were of extreme importance to
develop my work. Valuing Zara without his insights would have been not only
harder but also would have turned out with poorer results.
Also, Mr. Indalecio Perez Diaz del Ro, from the Corporate Responsibility
Department of Inditex, has been a wonderful help, always available to answer to
any and all of my questions, as well as to provide me all the data he could. I am
sincerely thankful for.
TABLE OF CONTENTS
LIST OF FIGURES..................................................................................................... 6
LIST OF TABLES ...................................................................................................... 7
LIST OF ABBREVIATIONS....................................................................................... 8
INTRODUCTION........................................................................................................ 9
PARTE I LITERATURE REVIEW AND ZARAS PRESENTATION..................... 11

1. THE CONCEPTS APPROACH ..................................................................... 11
1.1. Brand....................................................................................................... 11
1.2. Brand Equity............................................................................................ 12
1.3. Brand Valuation....................................................................................... 14
2. PROBLEM STATEMENT AND ZARAS PRESENTATION ........................... 15
2.1. Problem Statement & Research Question .............................................. 15
2.2. Zara Presentation.................................................................................... 16
2.2.1. The Company .................................................................................... 16
2.2.2. The Concept ...................................................................................... 17
2.2.3. Key International Competitors ........................................................... 19
2.2.4. The Financial Performance................................................................ 21
2.3. A Brands Value in the Existing Accounting Standards ........................... 22
3. THE ORIGIN AND THE PURPOSES OF BRAND VALUATION .................... 24
3.1. Origins: The series of acquisitions in the 1980s ..................................... 24
3.2. The Purposes of Brand Valuation ........................................................... 25
3.2.1. Brand Management Purposes ........................................................... 26
3.2.2. Accounting Purposes ......................................................................... 27
3.2.3. Transactional Purposes ..................................................................... 28
3.3. Method Requirements for the Cause of Acquisition ................................ 29
4. CLASSIFICATION AND CHOICE OF THE METHODS OF BRAND
VALUATION ......................................................................................................... 31
4.1. The Different Approaches ....................................................................... 32
4.1.1. Financial............................................................................................. 33
4.1.2. Consumers Perspective .................................................................... 36
4.1.3. Integrative Methods ........................................................................... 37
4.2. The Selected Methods ............................................................................ 38
4
PARTE II METHODS OF BRAND VALUATION .................................................. 40
5. PRESENTATION AND CRITICAL ANALYSIS OF THE SELECTED METHODS ............. 40
5.1. Brand Rating ........................................................................................... 40
5.1.1. Method Presentation.......................................................................... 40
5.1.2. Critical Analysis.................................................................................. 43
5.2. BBDO Brand Equity Evaluator.............................................................. 45
5.3. Interbrand ................................................................................................ 50
5.4. The Choice .............................................................................................. 55
6. ZARA BRAND VALUATION BY INTERBRAND METHOD ............................ 56
6.1. Calculation of Brand Value...................................................................... 56
6.1.1. Segmentation..................................................................................... 56
6.1.2. Financial Analysis .............................................................................. 57
6.1.3. Demand Analysis ............................................................................... 60
6.1.4. Brand Strength Analysis .................................................................... 62
6.1.5. Net Present Value Calculation ........................................................... 64
6.2. Analysis of the Result.............................................................................. 66
7. PROBLEMS AND LIMITATIONS FACED THROUGHOUT ZARAS BRAND
VALUATION ......................................................................................................... 68
REFERENCES......................................................................................................... 71
APPENDICES .......................................................................................................... 77
APPENDIX 1: ZARA'S BRAND VALUATION BASED ON INTERBRAND MODEL .77
APPENDIX 2: ZARAS BRAND VALUATION BASED ON INTERBRAND MODEL

BY CHANGING RBI TO 40% ................................................................................... 78
ANNEXES ................................................................................................................ 79
ANNEX 1: H&M AND ITS OTHER BRANDS ........................................................... 79
ANNEX 2: BEST GLOBAL BRANDS, 2010 RANKINGS ......................................... 80
ANNEX 3: CASH FLOW COMPUTATION ............................................................... 86
5
LIST OF FIGURES
Figure 1. ZARA's Sales Contribution by Sales Format ........................................... 17
Figure 2. ZARAs Business System ........................................................................ 18
Figure 3. A Product Market Positioning Map .......................................................... 19
Figure 4. Characteristics of Brand Valuation Approaches ...................................... 33
Figure 5. Financial Approaches .............................................................................. 34
Figure 6. Icon Iceberg ............................................................................................. 41
Figure 7. The Brand Rating Formula .................................................................... 43
Figure 8. Process to Calculate Brand Equity for the Purpose of Acquisition Applying
the BBDO Brand Equity Evaluator................................................................. 46
Figure 9. The BBDO Five-level Model ................................................................. 47
Figure 10. Overview of the Interbrand Method ....................................................... 51
Figure 11. S-curve .................................................................................................. 53
Figure 12. Example of ZARAs Market Segmentation ............................................ 57
Figure 13. Branded Own Label Drivers/ Role of Brand........................................... 61
Figure 14. Cash Flow Computation ........................................................................ 86
6
LIST OF TABLES
Table 1. Best Global Brands of Fashion Industry 2010 Rankings ........................ 22
Table 2. Examples of Goodwill Payments in the Eighties. ..................................... 24
Table 3. Perspectives and Reasons for Brand Valuation ....................................... 26
Table 4. Required Criteria for Brand Valuation Methods in Case of Acquisition .... 31
Table 5. Fulfilled Criteria by Brand Rating Brand Valuation Method ...................... 44
Table 6. Fulfilled Criteria by BBDO Brand Equity Evaluator Brand Valuation

Method...................................................................................................... 50
Table 7. Fulfilled Criteria by Interbrand Brand Valuation Method ........................... 54
Table 8. ZARAs Financial Analysis Applying the Interbrand Valuation Method .... 58
Table 9. ZARA Demand Analysis Applying the Interbrand Valuation Method ........ 62
Table 10. The ZARAs Brand Strength Score and their Evaluation Criteria ........... 63
Table 11. ZARAs Brand Value Calculation by Applying the Interbrand Valuation
Method.................................................................................................... 65
Table 12. ZARAs Brand Value in Euros and Dollars ............................................. 66
Table 13. ZARAs Brand Value by Assuming Different Brand Discount Rates and
Long Term Growth
Rates................67
Table 14. ZARAs Brand Valuation based on Interbrand Model ............................. 77
Table 15. ZARAs Brand Valuation based on Interbrand Model by changing RBI to
40%.....................................78
Table 16. Best Global Brands of Fashion Industry 2010 Rankings ...................... 85
7
LIST OF ABBREVIATIONS
BBS Brand strength score
BEE Brand Equity Evaluator
BEES Brand Equity Evaluation System
BEVA Brand Equity Evaluation Accounting
CAPM Capital Asset Pricing Model
CF Cash flow
cf. compare
EBIT Earnings before interest and taxes
EVA Economic value added
GDP Gross domestic product
i.e. this is; in other words
IAS International Accounting Standard
IFRS International Financial Reporting Standards
ISO International Organization for Standardization
No. Number
NOPAT Net operating profit after tax
NPV Net present value
p. page
pp. pages
PWC PricewaterhouseCoopers
RBI Role of brand index
WACC Weight average cost of capital
8
Catholic University. ZARA: A Case Study about Brand Valuation.
INTRODUCTION
In the late 1980s, with the series of acquisitions of strong branded

companies by six and more times of their book value, - as a way of example,
the Rowntree purchase by Nestl, who paid an estimated 83% of the price as
goodwill (Haigh 1999) led to brand valuation has become one of the most
important focus of managing activity.
Beyond that, the strong development of new technologies has allowed

that the markets reaction to new information has become easier and quicker,
which has stimulated financial transactions, like mergers and acquisitions. In
fact, nowadays, intangible assets, with principal emphasis for brands, are
increasingly being recognized as highly valued properties (Roberts 2011)
and their transactions (for the most different reasons) have increased
substantially.
This case study, about brand valuation, will be critically developed

with the aim of determine the ZARAs brand value for the final purpose of
acquisition. Hennes & Mauritz AB (H&M), a fast fashion company is
analyzing the hypothesis of acquire ZARAs brand, its closest competitor.
However, H&M wonders about what should be the right value of its offer.
To provide the basis for the work, we will firstly delineate what is
included in the definition of brand, brand equity and brand valuation by
pointing out different visions of various authors. Following that, we will
introduce the ZARAs business to allow a better understanding of the brands
position in the market and its background. A topic that we could not also
forget to mention, for its controversies, is the accounting treatment of the
intangible assets in the balance sheet. To provide a general survey of the
brand valuation subject, we will go back to its origin and consequently
address the different causes for brand valuation. Here, we will determine the
acquisition the appropriate cause of ZARAs valuation and therefore we will
construct a list with special requirements that the brand valuation models
must fulfill. To conclude the first part of the study, called literature review and
9
ZARAs presentation, we will classify by different approaches the numerous

methods of brand valuation.
Nowadays the list of valuation models is too large (Salinas, 2009) for
we address all of them in this work. Thereby, in the second part of this
dissertation, we will sort out those that gather more consensus about
consistency and are applied more frequently. Additionally, they should meet
largely the requirements established along the work and must be suitable for
the purpose of the valuation.
Nevertheless, brand valuation is far from being a consensual subject

or an exact science. The discussion about the best method to calculate the
brand value is still an open issue, since systematic analysis have proven that
each of the existing methods has its owns limitations. In fact, over our
process of ZARAs brand valuation, we had to take some assumptions, in
which the difficult task as to make them as plausible and coherent as
possible. Moreover, consider that a brands value depends on its capacity to
create value now and in the future, there is always going to be uncertainty
along the process.
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PARTE I LITERATURE REVIEW AND ZARAS

PRESENTATION
1. THE CONCEPTS APPROACH
We cant start speaking about brand, without first define it. This is
particularly important when there are many different perspectives and
definitions for brands concept. In the following chapter, we will present and
discuss the various definitions and perspectives of brand, brand equity and
brand valuation that are critical for comprehension the present study.
1.1. Brand
To date, there is no standardized definition of brand. Over the past

years, the brand has taken different functions over economic agents and is
used a large number of times by different research areas, which has led to
exist different interpretations of it and, consequently, brand assumed different
meanings.
In literature, for Leuthesser, a brand is a product additional value (for

its customers1) compared with what would be the value of another identical
product without the brand (as cited in Wood, 2000). With the same point of
view is the definition of Kotler (2000), a marketing reference, that defined
brand as a name, term, sign, symbol, or design, or combination of them
which is intended to identify the goods or services of one seller or group of
sellers and to differentiate them from those of competitors. Differently, is the
Kellers (1998) vision that concerns itself more with the conception of the
brand, whenever a marketer creates a new name, logo or a symbol for a new
product, he or she has created a brand.
In an formal perspective, the dictionary of business and management

defined a brand as a name, sign or symbol used to identify items or services
1
We use the terms customer and consumer interchangeably.
11
of the seller(s) and differentiate them from the goods of competitors (as cited
in Keller, 1998). Similarly to this consideration is The American Marketing
Association definition, which defined a brand as a name, term, sign, symbol,
or design, or a combination of them, intended to identify the goods and
services of one seller or a group of sellers and differentiate them from those
of competitors (as cited in Wood, 2000). On the same line of perception is
the concept of the Marketing Science Institute that defined brand as the
strong, sustainable and differentiated advantage with respect to competitors
that leads to a higher volume or a higher margin for the company compared
with the situation it would have without the brand. The differential volume or
margin is the consequence of the behavior of the customers, distribution
channels and the companies themselves.
To sum up, there are different definitions for brand however; all of
them converge on the issue of brand providing identity and/or difference
between competitive offerings.
1.2. Brand Equity
An important concept that we will adopt in this study is the brand

equity. At the simplest level, brand equity can be described as the value of a
brand however, if you ask 10 people to define brand equity, you are likely to
get 10 (maybe 11) different answers as to what it means (Winter cited by
Salinas 2009, p.12).
In literature, we can essentially find three different perspectives on the

meaning of brand equity: the financial perspective, the consumer perspective
and the integrative perception including both perspectives (Kartono and Rao
2005).
The financial perspective seems to be the origin of the term brand

equity. For Middleton and Dalla Costa (cited by Haigh 1999, p.24) equity in
the context of brands is essentially a financial concept. It is the bottom line
the specific dollar worth of a product or service, beyond its physical and
12
delivery costs, that is realized because of the impact of its branding. With the
same point of view are Simon and Sullivan (1993) that defined brand equity
as the incremental cash flows which accrue to branded products over and
above the cash flows, which would result from the sale of unbranded
products2. In this perception the profit results from the differential revenue
between a branded and a generic product (Salinas 2009, p.14).
An alternative view that breaks free from the financial perspective,

highlighting the judgments made by consumers, is the consumers
perspective. This approach of brand equity is regarded by Keller (2002) as
the differential effect that brand knowledge has on consumer or costumer
response to the marketing of the brand. For Keller, brand knowledge is
essentially defined in terms of two components, brand awareness and brand
image. Another well-known approach of brand equity is that of Aaker (1996)
who defined the concept as a set of assets and liabilities linked to a brands
name and symbol that adds to or subtracts from the value provided by a
product or service to a firm and/or that firms costumers. These assets and
liabilities on which brand equity is based differ from context to context, but in
Aakers view, they can be usefully grouped into four categories: brand
loyalty, brand name awareness, perceived brand quality and brand
associations. A simpler concept is from Leuthesser (1988) that refers to
brand equity as a qualitative parameter that is caused by the set of
associations and behaviors on the part of a brands customers, channel
members and parent corporation that permits the brand to earn greater
volume or greater margins than it could without the brand name.
Accordingly to Kartono and Rao (2005) studying brand equity solely

from the perspective of either the firm or the consumer may be inadequate.
They justified that while assessing brand equity from the perspective of the
firm can provide a measure of the financial value of the brand to the firm, it
neglects the fundamental basis of the brand equity concept, which suggests
that the equity of the brand its not merely a dollar-metric value but also an
2
The incremental cash flows are based on the value consumers place on branded products
and on cost savings brand equity generates through competitive advantages (Simon and
Sullivan 1993).
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intangible asset residing in the minds of consumers. Similarly, while

measuring brand equity from the perspective of the consumer gives an
indication of the value that the brand name provides to the consumer in the
form of the consumers favorable (or otherwise) attitudes or perceptions of
the brand, or the increase in the consumers utility provided by the brand
name, it does not show how these mindset measures can be translated into
more tangible measures of a brands financial value or its market
performance, which may be more useful for managers.
Following this, the perspective that we will adopt in this case study is
the integrative perception including both, the financial and the consumers
perspective. For Kartano and Rao (2005) this integrative perspective of
measuring and managing brand equity will not only have significant
implications for firms attempting to improve the equity of their brands on both
fronts, but will also be useful in developing a more complete picture of the
brand equity concept. Some researchers such as Aaker and Jacobson
(1994, 2001) and Kim, Kim, and An (2003) have also shown the existence of
a relationship between measures of consumer brand perceptions and the
brands financial performance (as cited by Kartano and Rao 2005). Therefore
brand equity not derived merely from the market performance and does not
only consider the consumers estimation. Brand equity provides all the
mindsets and actions of consumers what we carry around in our heads
about the brand (Ambler as cited in Glynn and Woodside 2009, p.274) and
simultaneously makes possible to evaluate a monetary value.
1.3. Brand Valuation
Before moving towards an assessment of the brand valuation

requirements and models, it becomes interesting to find out what various
researchers worldwide has to say about brand valuation. Firstly, brand
valuation could be defined as the job of estimating the total financial value of
the brand (Kotler 2002). It is the systematic method of computation of a fair
market price for the brand in the terms of currency (Bakshi).
14
According to Salinas (2009, p.18), the goal of the brand valuation is

indisputably to determine a brands economic (monetary) value. For Tauber
(1988), brand valuation current interest stems from the escalating costs of
developing new brands, which as led to prevalent use of brand extension and
international expansion (as cited by Simon & Sullivan 1993). In Fernndez
(2001, p.19) opinion, the brand valuation process is very useful, since it helps
identify and assess brand value drivers. But brand valuation is also important
because intangible assets are increasingly been recognized as highly valued
properties (Roberts 2011).
Throughout this work, we will refer to brand valuation according to

Cravens (1999) perspective, which defined brand valuation as a more
comprehensive than costing technique because it relates to the outcomes
and incorporates projections of future income and cash flows.
2. PROBLEM STATEMENT AND ZARAS PRESENTATION
Throughout this chapter, we are first going to expose the actual

situation regarding to the case in study for then (briefly) present ZARA and
talk about its main competitors and financial performance.
2.1. Problem Statement & Research Question
It has long been recognized that brand names are important

commercial and institutional assets for companies in different business
sectors, but only recently have serious attempts been made to estimate their
value. One of the causes for the current interest in brand valuation is related
to acquisitions. In the existing competitive environment, brands have become
important assets that started to be traded in the market. In this sense, an
upcoming problem arises; how determine the right price on each transaction
of acquisition or merger?
15
This present case is a Hennes & Mauritz AB (H&M) study, which is

analyzing the hypothesis of acquire ZARAs brand, its closest competitor.
H&M is a Swedish fashion retailer, known for its fast fashion clothing
offerings for women, men, youths and children. H&M has about 87,000
employees and more than 2,200 stores in 40 markets (H&M website). Since
2007, with the aiming of increase market share, H&M has launched and
acquired new companies in the same field of business (annex 1).
At the present, H&M is studying the possibility of acquires ZARAs

brand and is in this sense that several questions arise; what should be the
right value of H&M offer? How much is ZARAs brand?
2.2. Zara Presentation
2.2.1. The Company
Established in 1975, in Galicia (north-west Spain), ZARA is the

flagship of Inditex Group and one of the largest global fashion companies. At
the close of 2009, there were 1.723 ZARA stores operating in 77 countries all
over the world (Inditex Annual Report 2010).
In addition to ZARA which accounted for 64,6% of Inditex sales in

2010 (figure 1), the group have seven other endorsed brands: Bershka
(avant-garde clothing), Massimo Dutti (quality and conventional fashion), Pull
and Bear (youth casual clothes), Stradivarius (trendy clothing), Oysho
(undergarment chain), Zara Home (household textiles) and Uterqe
(complements and accessories).
These retailing chains have an overall structure but were organized as

separate business units. Ghemawat and Nueno (2003) stated that, in effect,
each of the chains operated independently and was responsible for its own
strategy, product design, sourcing and manufacturing, distribution, image,
personnel, and financial results, while group management set the strategic
16
vision of the group, coordinated the activities of the concepts, and provided
them with administrative and various other services.
Figure 1. ZARAs Sales Contribution by Sales Format

Source: (Inditex Annual Report 2010).
2.2.2. The Concept
According to Amancio Ortega, founder and chairman of Inditex, the

ZARAs aim is to democratize fashion by offering the latest fashion in
medium quality at affordable prices.
The turnaround time of ZARAs business system (figure 2) is critical

for its success. ZARA is able to originate a design and have finished goods in
stores within four to five weeks in the case of entirely new designs, and two
weeks for modifications (or restocking) of existing products, what contrasts
with the traditional industry model which involve cycles of up to six months
17
for design and three months for manufacturing (Ghemawat and Nueno,
2006).
Figure 2. ZARAs Business System

Source: ZARA Harvard Case Study (Ghemawat and Nueno 2006, p.30).
ZARA's products design is one of its most distinguishable features.

The brand designers focused its attention on understanding the fashion items
that it costumers wanted and create approximately 40.000 new designs
annually, from which 10.000 are selected for production (Ferdows, Lewis,
and Machuca 2004). Consequently, ZARAs production is subcontracted to
internal or external suppliers, depending on whether the garments are to
fashion or are not subject to seasonal variation, which are responsible for all
of production process. Before reaching the stores, all ZARAs merchandise
passed through the distribution center in Arteixo. According to Lorena Alba,
Inditexs director of logistics, the vast majority of clothes are in distribution
center only a few hours, and none ever stayed for more than three days.
The store is where the ZARAs specific business model begins and
ends (Inditex Annual Report 2009). The costumers desires meet the offers of
the design teams in the stores but is also in the stores that the costumers
feedback arrived every day. From September 2010 ZARA launched its online
store and at the end of the year the system was operating in eleven
countries.
Although ZARA has never advertised in traditional channels, its main

chain of advertising is the store, which chief characteristics include: preferred
18
locations, meticulously design window displays, unique internal and external

architectural design and tailored coordination of the product (Inditex Annual
Report 2009). Furthermore, ZARA has eight million facebook fans (in begin-
2011) and a several presence on others social media platforms.
2.2.3. Key International Competitors
A Harvard Case Study about ZARA considers that while Inditex

competed with local retailers in most of its markets, its three closest
comparable competitors were H&M, The Gap, and Benetton (Ghemawat and
Nueno 2006, p.4). Figure 3 shows the different position in product space of
these competitors.
Figure 3. A Product Market Positioning Map

Source: ZARA Harvard Case Study (Ghemawat and Nueno 2006, p.23).
Note: Uterqe is a ZARA competitor but its not represented in the figure above because
was only established in 2008 and the figure was performed in 2006.
As mentioned, H&M was considered ZARAs closest competitor,

although there exist important key differences between them. H&M differs
essentially from ZARA because they outsource all of its production, which will
19
implying longer lead times and spend more money on advertising. The H&M
prices also tended to be slightly lower than ZARA. However, both brands
have important similarities; they are European based companies, in a
segment of fashion forward at lower prices and have a strong international
expansion strategy. Regarding this last point, is important refer that H&M had
been quicker to internationalize, generating more than half its sales outside
its home country by 1990, 10 years earlier than Inditex (Ghemawat and
Nueno 2006, p.5).
The Gap had been founded in 1969, in San Francisco and had
achieved stellar growth and profitability through the 1980s and 1990s with
what was described as an unpretentious real clothes stance. Its store
operations ere essentially U.S.-centric and in 1987 when Gap had begun its
international expansion, they faced certain difficulties in finding locations in
some markets, in adapting to different costumer sizes and preferences, and
in dealing with more severe pricing pressures than in the United States. By
the end of the 1990s, supply chains that were still too long, market
saturation, imbalances and inconsistencies across the companys store
chains and the lack of a clear fashion positioning had started to take a toll
even in the U.S. market. In 2001 a failed attempt to reposition to a more
fashion-driven assortment, a massive decline in The Gaps stock price and
the departure, in 2002, of its long-time CEO, Millard Drexler (Ghemawat and
Nueno 2006, p.5) caused a Gaps loss of competitiveness among its main
competitors and simultaneously Gaps brand value is decreasing
substantially over the last years.
Benetton is one of the three brands the least that competes with
ZARA. Benetton, incorporated in 1965 in Italy, emphasized brightly colored
knitwear. It achieved prominence in the 1980s and 1990s for its controversial
advertising and as a network organization that outsourced activities that were
labor-intensive or scale-insensitive to subcontractors and sold its production
through licensees. While Benetton was fast at certain activities such as
dyeing, it looked for its retailing business to provide significant forward order
books for its manufacturing business and was therefore geared to operate on
20
lead times of several months. Benettons format appeared to hit saturation by

the early 1990s, and profitability continued to slide through the rest of the
1990s. In response, it embarked on a strategy of narrowing product lines,
further consolidating key production activities by grouping them into
production poles in a number of different regions, and expanding or
focusing existing outlets while starting a program to set up much larger
company-owned outlets in big cities (Ghemawat and Nueno 2006, pp.5 - 6).
2.2.4. The Financial Performance
In 2010, ZARA net sales was 8.088 thousand of euros, which

represent an increase of 14% regarding to the previous year and EBIT
(earnings before interest and taxes) reached 1.534 thousand of euros, an
increase of 39% over 2009.
According to Interbrand rank about Best Global Brands3 by value

(annex 2), ZARA was positioned at No. 50 in 2009 and its brand value was
6.789 thousand of dollars. In 2010 its position fell two numbers and ZARA
was at No. 48 however, its brand value had a positive variation of 10% and
ZARAs brand value was 7.468 thousand of dollars. Interbrand express that
ZARA continues to differentiate itself from other fast fashion brands by
offering the highest price points and the closest direct replicas of runway
fashions. It builds value on its responsiveness and relevance.
As we can see in table 1, ZARA belongs to the most valuable brands

worldwide and it comes in fourth on fashion industry, which exceeds some
luxury fashion brands, such as Herms (ranked at No. 69), Giorgio Armani
(No. 95) and Burberry (No. 100). In front of ZARA, ranked at No.21 is H&M,
its biggest competitor. According to Interbrand, H&M irreverently mixes high
fashion inspiration with bold-print low prices, and demonstrates that it knows
the quality of its brand promise is about more than product and price points.
3
Interbrand evaluates brand value on the basis of how much it is likely to earn for the
company in the future. Interbrand uses a combination of analysts projections, company
financial documents, and its own qualitative and quantitative analysis to arrive at a net
present value of those earnings (Bloomberg Business Week).
21
Furthermore, H&M takes responsibility for the integrity of its operation chain,
from employees to materials. The Gaps value was at No. 84, having fallen of
position No. 78 that ranked in 2009. As a curiosity, the last time that Benetton
belonged to the Interbrand rank about best global brands by value was in
2001, occupying the position No.100.
Table 1. Best Global Brands of Fashion Industry 2010 Rankings

Source: excerpt from (Interbrand Rank about Best Global Brands 2010).
2.3. A Brands Value in the Existing Accounting

Standards
The International Financial Reporting Standards (IFRS) 2008,

recognizes together with the International Accounting Standard (IAS) 38
(paragraph 1 to 133) the accounting treatment for intangible assets that are
not dealt with specifically in another Standard.
IAS 38 defined an intangible asset as an identifiable nonmonetary

asset without physical substance and established that an asset is identifiable
when it: (i) is separable (capable of being separated and sold, transferred,
22
licensed, rented, or exchanged, either individually or together with a related

contract) or (ii) arises from contractual or other legal rights, regardless of
whether those rights are transferable or separable from the entity or from
other rights and obligations. Furthermore, an intangible asset shall be
recognized if and only if, (i) it is probable that the expected future economic
benefits that are attributable to the asset will flow to the entity; and (ii) the
cost of the asset can be measured reliably.
In accordance with this standard, an intangible asset shall be

measured initially at cost and the cost of a separately acquired intangible
asset comprises: (i) its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its intended use. In
this sense, IFRS 3 Business Combinations stated that if an intangible asset
is acquired in a business combination, the cost of that intangible asset is its
fair value at the acquisition date. If an asset acquired in a business
combination is separable or arises from contractual or other legal rights,
sufficient information exists to measure reliably the fair value of the asset.
However, IAS 38 contains additional recognition criteria for

intangible assets. It stated that internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance that are
internally generated should not be recognised as assets, which means that
the value of these assets will not be included in accounting statements.
Following this, we can conclude that the accounting treatment for

intangible assets, in which the brand is included, is different. The internally
generated brands are not recognized and should not appear in balance
sheets, contrary to acquired intangible assets that should be recognized and
its acquisition value must be reflected on its accounting statements.
In practice and in Pablo Fernndez view (2001, p.20), it is possible to

assign a value to a brand that has recently changed hands, but the inclusion
home-grown brands is particularly risky, because there is no generally
accepted valuation method.
23
3. THE ORIGIN AND THE PURPOSES OF BRAND VALUATION
3.1. Origins: The series of acquisitions in the 1980s
Brand valuation began to be target for attention in the late eighties. In

this time, the main boost for brand valuation began with the series of
acquisitions, in which strong branded companies were secured at six and
more times their book value (Aaker 1991). By way for example, when the
British company GrandMet acquired Pillsbury in 1988, it paid an estimated
88% of the price as goodwill (Haigh, 1999 see Table 1).
Examples of Goodwill Payments in the Eighties
Acquirer Seller Goodwill as % of price paid
Nestl Rowntree 83
Grand Met Pillsbury 88
Cadbury Scheppes Treber 75
United Biscuits Verkade 66
Table 2. Examples of Goodwill Payments in the Eighties.

Source: on the basis of (Haigh 1999).
Beyond that, other acquisitions have shown that brands can create
value and justify high market to book multiples. Thats what happened with
the Nestl deal to Rowntree. In 24 June 1988, The New York Times
announced that Rowntree P.L.C. today accepted the 2.55 thousand millions
of dollars buyout offer from Nestl S.A., ending a months-long takeover fight
for the British confectioner, the maker of Kit Kat chocolate bars. This was the
largest foreign takeover ever of a British company. This acquisition was aim
of considerable attention around the world, since various bids to acquire
Rowntree were refused. On this subject, Kenneth Dixon (Rowntree's
chairman in 1988) clarified that the bids were too low for its valuable and
well-recognized brands. In the end, Rowntree was acquired by Nestl by two
24
and a half times the pre-bid price and eight times the net asset value of the
company.
The overall trend was that acquisition prices for companies with strong
brands were consistently higher than the value of their net tangible assets
(Salinas 2009, pag.34). The Ford Company, for instance, paid 6.2 thousand
millions of euros for the Jaguar brand. Such a high brand value can only be
explained by the existence of knowledge structures that can be efficiently
tapped, i.e. a brand identity that motivates consumers to accept a higher
price, remain loyal to the brand, buy it again and again and recommend it to
others (Zimmermann et al. 2001, p.13). In such cases, the difference
between market value and book value is called goodwill, and could represent
different types of intangible assets, among which the brand seems to be the
most valuable.
In short, brands can be one of the most valuable assets a company

owns, but also tend to be the least understood (Roberts 2011). Is brand
valuation only important for acquisition purposes? How can we measure
brand value? These issues are what we will discuss in the next sections.
3.2. The Purposes of Brand Valuation
There are different purposes to value a brand and every purpose can
be classified by its internal or external scopes of application (Soto 2008,
p.27). According to Salinas (2009, pag.50 based on Haigh and Knowles
2004), we can group them in three distinct applications: valuations for brand
management purposes, valuations for accounting purposes and valuations
for transactional purposes.
Brand valuations for management purposes are typically based on

dynamic business models and on the role that the brand plays in the models
key variables. On the other hand, valuations for accounting and transactional
purposes focus on a value at a giver point in time (Salinas 2009, p.51). On
25
table 3 is exhibited an overview of possible reasons to value a brand, which

we will analyze on following.
Scopes of
Purposes Reasons for Brand Valuation
Application
Brand strategy
Brand Management Internal
Budget allocation
Performance evaluation
Incentive system for managers
Accounting External Value of acquired brands must be

included in the balance sheet
Internal
Trademark-backed securitization
Transactional
Tax planning
External
Acquisition of a company
Mergers of companies
Table 3.Perspectives and Reasons for Brand Valuation

Source: on the basis of (Salinas and Cravens).
Out of curiosity, the study of Price Waterhouse Coopers (PWC), held

in 2006, shows the different scopes of application of brand valuation for
business practices. Steering and controlling of brands plays the most
important role of brand valuation (80%), as well as brand transactions such
as the purchase/sale/merger of firms and brands (57%). Brands conduct also
brand valuation for internal reporting (47%), as well as for external reporting
(30%). Brand valuation will also be conducted for budget allocation (23%).
The trade with brands through licensing agreements is considerable
important for companies, however, only one third of the interviewed company
have actually performed brand valuation for this purpose (26%). The less
common application area for brand valuation is the one for financial and
fiscal purposes (as cited by Soto 2008, p.26).
3.2.1. Brand Management Purposes
Valuations for brand management purposes can provide critical

knowledge that influences brand strategy. The brand valuation process
increases the amount of information held by the company about its brand
26
and it should be developed so that it can be used as a management tool for

value creation (Fernndez 2001, p.19). In this sense, brand valuation is an
important parameter to determine budget allocation and to help managers to
decide where they should invest in and disinvest.
Furthermore, brand valuation permits to determine brand strength,

which shows whose components of the brand generates positives
contributions to the company. Pablo Fernndez (2001, p.19) stated about
this that a good brand valuation process is a tool that helps maintain a
coherent strategy over time and assign marketing resources consistently.
Thereby, the use of brand valuation helps marketing professionals focus on
the long-term benefits associated with the brand, which increases the ability
of brand to endure and grow (Cravens and Guilding 1999).
Another important reason is to control the brand value, which permits

to compare the value between brands in the brand portfolio and between
competitors brands. These value variations should be observed, in order to
take constructive actions to improve it.
Moreover, the performance of brand management can be measured

by changes in the value of the brand, which means that the brand value
works as an incentive system for managers and can be used to determine
manager wage compensation (or bonus). In this sense, is important to note
that management performance was not only based on short-term earnings,
such as sales and profits, but also on long-term perspectives of development
of the brand. Using a long-term perspective allows managers to concentrate
on action that benefit the entire company and that are reflected in the value
of the brand (Cravens and Guilding 1999, p.57).
3.2.2. Accounting Purposes
Regarding to valuations with accounting purposes, is important to

state that current regulations require that all identifiable intangible assets of
acquired business must be recorded at their fair value, i.e., the value of
27
acquired brands must be included in the balance sheet (Salinas 2009, p.52).
For this actual regulation, brand valuation is indispensable, which contradicts
with the older practice of recording the purchase price in excess of the net
acquired assets as a single figure under goodwill (Salinas 2009, p.52).
3.2.3. Transactional Purposes
Value a brand by transactional purposes may require two different

types of scopes of application: internal and external.
The main objectives for value a brand in internal transactions are the
trademark-backed securitizations and the tax planning (Salinas 2009, p.53).
In trademark securitization, funds are collected in exchange for collateral
based on future revenues generated by licensing the trademark, i.e.
trademark licensing royalties (Salinas 2009, p.53 based on Eisbruck, 2007).
In this context, brand value is an important indicator of the royalty rates to be
paid from the licensee to the brand holder. Furthermore, brand valuation may
also be used for tax purposes. Usually, subsidiaries transfer brand and other
intellectual property assets to a centralized holding company, which charges
operating companies royalties for the use of this assets, such that a portion
of the operating companies profits may evade local taxes (Salinas 2009,
p.53). Is in this sense that fiscal authorities ask for clarifications of the brand
value, to ensure that local taxes (i.e., fiscal obligations) have been met.
The external transactions are essentially characterized by acquisitions

of companies, which is the main objective of this work, valuate Zaras brand
for H&M take over. In these transactions, the knowledge of brand value is an
important complement in determining the purchase price. Furthermore, brand
value can also be used as a guarantee for external investors (Soto 2008,
p.31 as based on Kranz 2002). The reasons for the acquisition of companies
could be very different. In this present case study, H&M is considering
acquiring Zaras brand because of its well-established brand and to get more
market share. Due to increasing competitive market, for companies, it is
usually more attractive and riskless to obtain brand rights through firm
28
acquisition than building a new brand (Soto 2008, p.31 as based on

Bekmeier-Feuerhahn 1998). Further, the buying company can avoid risk of
failure and save some time and costs (Sander 1994, p.54).
3.3. Method Requirements for the Cause of Acquisition
As exposed in the previous section, there are many different reasons

for brand valuation and depending on the reason why a brand is evaluated,
the requirements can vary (Kapferer 2004, p.452).
First of all, when valuing a brand, it is particularly important for whom

that value is being determined for, 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 (Fernndez 2001, p.5). Likewise, it is vitally important
to define for what purpose it is wished to determine a brands value,
whether it is to sell it, to collect a series of royalties, to facilitate the brands
management or to capitalize its value in the balance sheet (Fernndez 2001,
p.5).
In this particularly case study, Hennes & Mauritz was interested in

take over its strongest competitor with the purpose of increased its market
share. Thus, it becomes obvious that the value of the brand would be
different for another prospective buyer (Fernndez 2001, p.5).
Moreover, when we value a brand, a wide range of information is

gathered about the brand, its performance and its history from a number of
different sources (Haigh 1999, p.11). Because of this, we will expose the
requirements that are important taken into account when we apply the
valuation methods and after, to facilitate the analysis, we will draw up a
checklist with these requirements.
Zimmermann et al. (2002, p.8) listed some general requirements like

validity, reliability and objectivity. Validity and objectivity means that the
valuation methods should be exempt of random errors and must provide
29
stable, exact and consistent results (Bekmeier-Feuerhahn as cited by Soto

2008, p.24). Reliability are required in order to achieved transparency of the
method, because it assured that the results remain the same even if they
were measured at different points of time or by different people (Soto 2008,
p.24).
Further on, the cost-efficiency and feasibility of the valuation

approach, i.e. the requisite time, effort and costs, must be in proportion to the
usefulness of the findings. In other words, the data needed must be easily
available and accessible, not requiring immense effort and investment to
generate them (Zimmermann et al. 2002, p.8).
Additionally, Soto (2008, p.25) points out that a brand that posse a
monetary brand value will be regarded as an investment which creates
futures cash flows. By way of example, for Hennes & Mauritz take over
ZARA worth more than if it would acquire a food company, since it will
eliminate a competitor. However is important refer that brand valuation will
only ever be credible if they were based on reliable forecasts, and reliable
forecasts must be informed with statistical valid historical data relationships
(Haigh 1999, p.29). It means that to represent a complete picture of the
brands potential success, we must consider past, present and future data.
A further criterion refers to standardization. Zimmermann et al. (2002,

p.8) stated that a brand valuation approach must allow as wide an application
as possible. The model must guarantee that brands from various sectors as
well as of differing types can be evaluated with equal success.
Finally, it is essential that the brand measured result is expressed in

monetary units, so that this monetary brand value can be compared with the
competitors brands (Soto 2008, p.25) and can be also important for help
corporate management to track a brands contribution to shareholder value
(Zimmermann et al. 2002, p.7). In addition, and between others valuations
purposes, identify the monetary value in an acquisition case is certainly
indispensable!
30
The table bellow shows a checklist with the requirements that brand
valuation methods must to fulfill to be suitable for the case of acquisition,
especially regarding to Hennes & Mauritz take over ZARA. To provide a
simplified overview, the requirements will be grouped into three categories:
methodical requirements, covering content and relevance of results.
Categories Requirements
Validity
Methodical Requirements Reliability
Objectivity
Cost-Efficiency
Covering Content Transparency
Feasibility
Past oriented-results
Present oriented-results
Relevance of Results Future oriented-results
Complete Picture
Financial Figure
Table 4. Required Criteria for Brand Valuation Methods in Case of Acquisition

Source: on the basis of (Soto 2008, p.26).
4. CLASSIFICATION AND CHOICE OF THE METHODS OF

BRAND VALUATION
Numerous alternative methods are currently in use, but there little

agreement as to their relative strengths and weaknesses (Lipman 1989 as
cited by Simon and Sullivan 1993). On this section, we will address the
different approaches and methods of brand valuation, with the aim of
selecting three suitable methods to analyze in detail and thereafter choose
one of them to calculate ZARAs brand value. The approaches that we
present in this part will be discussed in general, while those selected will be
deeply discussed in part two of this study.
31
4.1. The Different Approaches
In literature, we can find at least 39 different proprietary valuation

models for commercial brands4 that have been proposed by different
providers and scholars (Salinas 2009, p.57). These models can be classified
by different criteria and grouped on distinct approaches5. Similarly to the
definition of brand equity (see chapter 1.2), we will group the brand valuation
methods in three different approaches, the financial, the consumers
perspective and the integrative perception of both approaches (figure 4). The
financial approach valuation methods quantify a monetary value for brand
equity, and the consumers perspective is not taken into account. By
contrast, the valuation methods which approach is the consumers point of
view consider qualitative determinants to compute brands value like brand
images and the associations the brand evokes. The integrative methods
interlink the financial approach to the consumers point of view, i.e., the
quantitative and qualitative methods.
4
Commercial brand is defined as a product or a service Brand, as opposed to corporate
brand (Salinas 2009, p.57).
5
Approach refers to the general ways in which any kind of asset can be valued (Salinas
2009, p.57).
32
Quantitative procedures to compute a

monetary value for brand equity
Financial Consumers perspective not taken into
account
Used to value brand equity in the context of
acquisitions, licensing and analysts opinions
Brand equity seen as a qualitative construct

Brand that can be made manifest using scorecards
Valuation Consumers High degree of subjectivity in the choice of
Approaches Perspective factors explaining brand strength
Endeavor to explain what goes on in the
hearts and minds of customers to determine
a brands value
Provide a monetary value for brand equity

Composite Include variables covering earnings status,
Financial/ market status and psychographic status of a
Consumers brand
Perspective
Interlink qualitative and quantitative factors
Figure 4. Characteristics of Brand Valuation Approaches

Source: adapted from (Zimmermann et al. 2001).
4.1.1. Financial
The methods of financial approach consider the financial market

performance data to determine a monetary brand value. This value can be
explained by the contribution made by a brand in effect, its utility value
that derived from the entire range of performance generated by a product
concept. Customers overall willingness to pay for a product is used to identify
their willingness to pay for specific product features, one of which is the
brand itself, and its value can be ascertained as a result (Zimmermann et al.
2001, p.21).
The financial approach can be also subdivided into cost, market and
income approaches, as we can see by the following figure.
33
Financial
Approaches
Cost Market Income
Brand Value Brand Value Brand Value

(based on) (based on) (based on)
Replacement Value of Future
or Comparables Income
Reproduction Capitalised to
Cost Present Value
Figure 5. Financial Approaches

Source: (author).
In the cost approach the value of a brand is determined by considering

the cost of developing it (brand acquisition, creation or maintenance) during
any and all phases of its development (Salinas 2009, p.58). It is defined
under the International Organization for Standardization (ISO)6: 10668 as the
value of a brand based on the cost invested in building the brand, or its
replacement or reproduction cost Note: It is based on the premise that a
prudent investor would not pay more for a brand than the cost to replace or
reproduce the brand. The actual cost invested in the brand shall encompass
all costs spent on building the brand up to the value date.
The market approach is focalized principally on comparables. When

information of market transactions involving comparable brands is available it
is possible to estimate one brands value by comparison to another brand
(Haigh 1999). It is defined by ISO: 10668 as the measures value based on
6
The International Organization for Standardization (ISO) is one of the worlds biggest
developers and publishers of international standards, that published, in 2010, a model
designated BSI ISO: 10668: Brand Valuation: Requirements for monetary brand valuation.
The document specifies a framework for brand valuation, including objectives, bases of
valuation, approaches to valuation, methods of valuation and sourcing of quality data and
assumptions. It also specifies methods for reporting the results of such valuation (ISO
website).
34
what other purchasers in the market have paid for assets that can be
considered reasonably similar to those being valued. The application of the
market approach shall result in an estimate of the price reasonably expected
to be realized if the brand was to be sold.
The income approach requires the identification of future income,

profits or cash flow attributable to the brand over its expected remaining
useful life, and discounting or capitalizing them to present value (Salinas
2009, p.63). According to ISO: 10668 the income approach measures the
value of the brand by reference to the present value of the economic benefits
expected to be received over the remaining useful economic life of the brand.
One of the advantages of these models has directly to do with the

data sources they need. Because they are based entirely on figures from
within the company, there is no need for costly, time-consuming efforts to
gather external data. A further benefit is that the models are relatively easy to
use, allowing brand value to be computed swiftly and economically
(Zimmermann at al. 2001, p.21).
However, the methods of the financial approach are not out of some
drawbacks. The result produced by all these models is the brands monetary
value from an accounting perspective. Because they ignore the consumers
role in the generation of brand value, some important information is lost, or
rather it is not even recorded in the first place (Zimmermann at al. 2001,
p.21). In the Zara case, for example, the brand has become, in a short time,
one of the most valuable brands worldwide. So, it seems to be very important
to include in the brand valuation some past variables and the reasons for the
brand fast rise.
Another point of criticism, this time from an analysts perspective, is

that some methods of this approach do not take the competitive environment
into account when arriving at a valuation (Zimmermann at al. 2001, p.22).
Zara is a fast fashion brand that competes strongly with H&M and others
fashion brands so; Zaras competitive environment must be taken into
account when we calculate its brand value.
35
In short, the methods of financial approach, per se, dont offer an

adequate basis for determine a brands value because they don't consider
qualitative variables that also influence brand values.
4.1.2. Consumers Perspective
Accordingly to the definition of brand equity (see section 1.2), the

methods of brand value that consider a consumers perspective approaches
have their primer focus on the customers judgments. These models include
brand strength parameters like brand loyalty, brand name awareness and
brand sympathy to achieve brand equity. In this context, brand value is
viewed as an essentially qualitative construct, which can be made manifest
using scorecards (Zimmermann at al. 2001, p.22).
These models set out to explain what goes on in the hearts and
minds of consumers. In contrast to the financially focused models, they
provide those responsible for brand management with an understanding of
where the value of a brand actually comes from. This way, they paint a
precise picture of how brand strength is generated. The information they
provide helps to identify reasons for a loss or gain in value and to track
brand-value trends, making them much more suitable for brand management
than their counterparts based on business finance (Zimmermann et al. 2001,
p.22).
However, in addition to these benefits, the methods of brand equity by

a consumers perspective also present some weaknesses. Firstly, the
psychographic recordings of brand value are not converted into any objective
monetary value (Zimmermann et al. 2001, p.22), which does not allow us to
answer the question that arise in the context of acquisition, indispensable for
this case study.
Another point of criticism is directly involved with the choice of

variables used to explain brand strength and the generations of brand value.
These variables have a high degree of subjectivity and they may not really be
36
mutually independent, which contradicts with an important methodological

assumption. In addition, empirical validation is also difficult in these methods.
A further problem that needs to be viewed critically is the fact that

these models completely ignore certain aspects of business administration
such as competitors strategies or general market developments. Yet these
are factors that could easily have a retarding impact on brand development
and ought therefore to play a role in the valuation process (Zimmermann et
al. 2001, p.22).
In short, the methods of consumers perspective approach, per se,

dont offer either an adequate basis for determine a brands value. Although
they consider qualitative variables that the methods of financial approach
ignore, they are not sufficient to valuate ZARAs brand (for the cause of
acquisition), because they dont take into account an objective monetary
value.
4.1.3. Integrative Methods
These third category of brand valuation methods, known as the

integrative methods, arise in the attempt to overcome the drawbacks of the
methods of financial and consumer perspective approaches.
Also accordingly to the definition of brand equity presented in 1.2, the

integrative methods take into account variables depicting the position held by
a brand as a result of customers purchasing behavior, which can be
aggregated into the following combined variables: the earnings status,
market status and psychographic status of a brand. These qualitative and
quantitative factors are drawn together in each model, in order to compute a
monetary value for the brand (Zimmermann et al. 2001, p.23).
However, also the integrative methods are not free of criticisms.

Firstly, the choice of the determinants that contribute for brand valuation and
the relative weightings of the factors have a high degree of subjectivity. This
problem is compounded by the fact that the procedure used for the actual
37
calculation of a monetary value is sometimes undisclosed, or may be subject

to arbitrary assumptions (Zimmermann et al. 2001, p.23).
Another critical observation is related to the combination of the

financial and the consumers perspective determinants. When the brand
value is calculated, parameters of both methods are included however the
preponderance of each parameter will determine the dominant approach.
According to Zimmermann et al. (2011, p.23), the result is a conflation of
input and output levels in a production function for brand equity.
As a final critical point, verified in most of the models, is the lack of

adaptation of the integrative models according to the purposes of valuation.
This means that the procedures applied cannot be adapted for the present
case of acquisition of ZARAs brand, and beyond that is impossible to
consider different requirements inherent to the case.
4.2. The Selected Methods
It is worth noting that none of the approaches reviewed was free of

criticisms. Throughout the work, we looked the various approaches for brand
valuation and presented the list of requirements that a brand valuation model
ought to fulfill (chapter 3.3). However, in addition to these requirements and
accordingly to the definition of brand equity adopted for the present case
(chapter 1.2), another essential requirement must be assured for a critical
estimation of ZARAs brand value. Such requirement is the balance between
financial and consumers perspective approaches. This means that one of
the methods within the integrative methods must be chosen and both
dimensions, qualitative and quantitative, will be taken into consideration
when valuing the brand.
The first method that we will analyze in the following part of this study
is the Brand Rating. It is a method with a high acceptability because beyond
take into account the financial and the consumers perspective it also reflects
38
the brand future potential. In practical terms, Brand Rating is an easy method
to use and understand.
The following one will be BBDO Brand Equity Evaluator. In my

opinion, the research undertaken by BBDO in 2001 and 2002 and published
in two papers (cf. Zimmermann et al., 2001 and 2002), were one of the most
complete materials that I have found about the subject under study. In
addition, they show greater academic rigor and professionalism. Another
aspect that was on the basis of its choice was the fact that the purpose of
brand valuation is taken into consideration when we value a brand.
The third and final method that we will analyze is the Interbrand
Model. It is the most popular brand valuation method worldwide and its brand
consultancy was the first, in the world, to achieve, the ISO 10668 certification
(in 2010). As mentioned in chapter 4.4.1, ISO 10668 is the international norm
that sets minimum standard requirements for the procedures and methods
used to determine the monetary value of brands.
39
PARTE II METHODS OF BRAND VALUATION
Over this part of the work, we will theoretically present the three
selected methods of brand valuation, the Brand Rating, the BBDO Brand
Equity Evaluator and the Interbrand for subsequently analyze them in a
critical way. The objective is to choose from the different methods studied the
one that seems preferable to value ZARAs brand.
The final chapter, as the name suggests, reports the problems and
limitations faced throughout the valuation.
5. Presentation and Critical Analysis of the Selected Methods
5.1. Brand Rating
5.1.1. Method Presentation
The Brand Rating model was designed, in 2000, by the Icon Added
Value and Dr. Wieselhuber & Partner consultancies. Following the model
development, they founded a company with the same name.
In accordance with the requirements established in section 4.2, the

Brand Rating valuation system is a consumer-oriented, monetary model for
determining brand value. It is based on the assumption that brand value must
be measured above all in the heads of consumers (Zimmermann et al. 2001,
p.61).
The analysis of this model can be divided in three different steps7, or

modules, that comprise the icon iceberg, the discounted price differential and
the brand future score (Zimmernann et al. 2001, p.61).
7
Some authors make a different division of analysis of the Brand Rating model. For
example, Salinas 2009 (pp.158-164) divides the Brand Rating brand valuation method in six
modules. In this study, we adopted the BBDO (Zimmernann et al. 2001) division because is
more clear to perceive. However, at final, the components analyzed are the same
independently of the methodology used.
40
The icon iceberg analysis is based on the Icon Brand Trek approach
that is purely based on the principles of behavioral science. It is often
represented by the image of an iceberg, because the process followed to
value a brand uses an analogy to the iceberg.
Brand awareness
Subjective perception of
advertising pressure
Memorability of advertising
Brand uniqueness
Clarity of internal image
Attractiveness of internal
image
Brand appeal
Trust in brand
Brand loyalty
Figure 6. Icon Iceberg

Source: BBDO Brand Equity Excellence (Zimmernann et al. 2001, p.49).
As illustrated in figure 6, the brand image constitutes the elements of a

brand that are visible to consumers, i.e. the short term measures in the
marketing mix - such as product and packaging design, advertising,
promotions, events, etc. that are perceived by buyers. The brand assets
make up the portion of the iceberg that is under water. They represent
longer-term changes in consumer attitudes and also include earlier
investments in the brand that exist beneath the surface more or less as
assets (Zimmernann et al. 2001, p.49). In the figure, we also can observe the
nine factors of market value that represent the brand image and the brand
assets. These factors can be collected by individual interviews in the relevant
marketing target group. Therefore, the sum of the brand image and the brand
assets represents the brand strength index. The contribution of each
dimension to determine brand value will depend on the brands age. This is
easily perceptible, since the brand assets components take time to develop.
41
According to icons concept (as cited by Zimmernann et al. 2001, p.49)

though brand assets do have a more direct connection with the success of a
brand, they can only be influenced via brand image. The identified brand
values for the individual indicators making up the brand iceberg can be
compared using icons database, which contains corresponding reference
values for the respective sector or product area. This system offers an
indication of the realms in which a brand will be perceived more positively or
less positively than the industry average, making it possible to benchmark.
The second module will validate the iceberg analysis through the
calculation of the discounted price differentials, or price premium. The price
differential p can be measured by comparing the price of a branded product
with that of an unbranded one that is in the same category. According to
Brand Rating, the central task in determining the price bonus is to identify a
suitable benchmark product or group of products, compared to which the
price differential can be measured (Biesalski and Sokolowski, 2008 p.6 as
cited by Salinas 2009, p.160). To avoid distortions, the value of the price
differentials is an average of the past three years. The achieved price
differential arrived at by price analysis in the target market is then validated
against the perceptions of the target group or perceived price differential. The
price differential p is then multiplied by the number of units sold q (Salinas
2009, pp.160-161) to obtain the cumulative sales premium and discounted
using an interest rate i that accounts the industry-specific risk premium, as
well as the brand-specific risk (Salinas 2009, p.161). The final value
obtained represents the earning-capacity value of the brand, i.e., the brand
added value.
The following and last step is the brand future score and according to
Zimmernann et al. 2001 (p. 61) it reflects future values and quantify curves.
The Brand Rating determines an index that describes the brand potential (for
example, in terms of its capacity to access new distribution and expand into
new segments) and represents the existing brand protection. Thus, the brand
future score allows one to forecast the brand added value into future periods
(Salinas 2009, p.161).
42
In the figure below, we can schematically see the Brand Rating

formula to calculate brand value. The icon iceberg index, the discounted
price differential and the brand future score are linked algorithmically
however, Brand Rating does not divulge the combination of these algorithms.
Figure 7. The Brand Rating Formula

Source: BBDO Brand Equity Excellence (Zimmernann et al. 2001, p.62).
5.1.2. Critical Analysis
Since its development, the Brand Rating method had a practical

acceptance in the brand valuation area due to its objectivity, validity and
reliability. The first advantage to notice, that according to this study is an
essential requirement (established in section 4.2) is the balance between
financial and consumers perspective approaches, that is present by the
combination of the discounted price differential with the icon iceberg.
Other positive aspects are related the fact that strategic brand
potential and industry-specific risk premium are taken into account. In
addition, the price-premium is determined based on a three-year average,
avoiding upward or downward distortions. On the other hand, and this time
out as a disadvantage is the fact of being required an unbranded product for
every category of products that we want to evaluate.
43
Another drawback to refer is the time consuming in data collection, by

individual interviews, for the Icon Iceberg analysis.
An arguable statement was in the Brand Rating website, that says that
brand value originates and evolves in the heads and hearts of the target
group. Brand value is therefore independent from current cost structures and
corporate revenue (as cited by Salinas 2009, p.163). This means that Brand
Rating assumes interdependence between brand image and brand assets
and consequently they should not be combined in the determination of brand
value. This assumption can became the model unfeasible, for example, if the
brand image indicators offset the brand asset ones.
To conclude remains the undisclosed question: how are the three

components of Brand Rating algorithmically linked? The table below shows
with which required criteria for brand valuation (see section 3.3) is Brand
Rating complying or not.
Categories Requirements Brand Rating
Validity
Objectivity
Cost-Efficiency
Covering Content
Transparency
Feasibility Limited
Complete Picture Limited
Financial Figure
Table 5. Fulfilled Criteria by Brand Rating Brand Valuation Method
Source: (author).
44
5.2. BBDO Brand Equity Evaluator
The BBDO Germany group has developed two brand valuation

models independently: the Brand Equity Evaluation System (BEES) and the
Brand Equity Evaluator (BEE), in 2001 and 2002 respectively. In 2004, the
BBDO jointly with Ernst & Young created the BEVA, Brand Equity Valuation
for Accounting that such as the name suggests, it was created to satisfy
accounting and marketing requirements.
The model that we chose to analyze is the Brand Equity Evaluator,

that is based in the BEES method. The greater feature of BEE is its modular
design, which allows that the approach to apply varies with the purpose of
the valuation.
Accordingly the established requirement in section 4.2, the BEE is an

integrative approach that includes all dimensions in the valuation of the
brand: the environment or the market in which the brand operates, the
brands position and capacity to control the market, the orientation of the
brand, which connects the brand with its potential for global development, the
consumers perception of the brand and the cash flow the brand generates for
the company.
Hereupon, the brand valuation process consists in four stages: (i)

valuation of the brand equity determinants, (ii) computation of the cash flow,
(iii) calculation of the discount rate and finally, (iv) the determination of the
brand equity. In the picture below, is illustrated the process to calculate the
brand value for acquisition applying the BEE, which we will clarify
subsequently.
45
Figure 8. Process to Calculate Brand Equity for the Purpose of Acquisition Applying the
BBDO Brand Equity Evaluator
Source: BBDO Brand Equity Excellence Vol. 2 (Zimmernann et al. 2002, p.23).
The BEE model references four brand equity determinants, that are:
the market quality, the dominance of the relevant market, the international
orientation and the brand status. The market quality component describes
the environment in which a brand operates. Depending on the brand type,
this includes the brands industry and/or relevant market. This factor is
gauged by means of the following indicators for each industry, or other
relevant market defined on a different scale: sales performance, net
operating margin and degree to which sector is brand-driven (Zimmermann
et al., 2002, p.17). The second determinant is the market dominance that
analyze which market is more important for the brand, that all local and
foreign markets. This factor refers to the brands sales strength relative to
competing companies in the same sector and the resulting value can be
interpreted as an indicator of the brands potential for dominance of the
relevant market (Zimmermann et al. 2002, p.17). The international orientation
is defined as the brand sales at foreign markets relative to the total sales of
the brand and is interpreted as an indicator of the brands potential for
international development. The last component is the brand status and is
expressed as the brand strength and attractiveness perceived by consumers.
46
To determine the brand status, the BEE uses the BBDO Five-level Model
(illustrated in figure 9) however, no distinction is made between industries. At
the end of the analysis, the four components are fused into a weighting
factor.

Figure 9. The BBDO Five-level Model
The BBDO Five-level Model assumes that a brand with strength will
ascend to higher developmental levels in the model. Accordingly, a brand
must first pass through a lower development level to reach the next highest
level8 (Zimmermann et al., 2002, p.17).
The analytical process of the BEE method starts with the calculation of
the cash flow (formula for cash flow computation in annex 3). Since the
acquisition is the purpose of our valuation, the BEE determined that this
analysis should be based on forecast gross cash flow values for a planning
horizon of three years a period within can be determined in a higher rate of
precision9.
8
Exceptions to this rule are, of course, possible: A brand may on occasion skip a level in
the brand development process and make up for it later (Zimmermann et al., 2002, p.19).
9
According to Zimmermann et al. (2002, p.22), forecasts of cash flow over longer periods
are subject to extreme uncertainty; even experts with far reaching knowledge of their
industries are not in a position to make concrete, well grounded forecasts for such an
extended timeframe. This is particularly true of brands in fast-evolving sectors.
47
Due to the existence of time value of money, the gross cash flow
calculated from the brand in different moments in time must be discounted at
the moment of its valuation. Therefore, the next stage consists in determine
the discount rate through the CAPM (Capital Asset Pricing Model)10.
Finally, the last step consists in multiply the discounted gross cash
flow value (the monetary basis) by the weighting factor to have the brands
value.
The first factor that awoke me interested for choosing this method was
its adaptability to the purpose of the valuation, which make it a more
objective method. Once we will determine the ZARAs brand value for H&M
consider the possibility to acquiring it, this method determines the ZARAs
brand monetary value taking into account the financial data, the consumers
opinions about the brand, the environment in which the brand operates as
well as its future development. That means that BEE regards the brand in a
long-term context, considering the past, the present and the future strength
of a brand.
According to my justification in the choice of the method (in section

4.2), when I regard the Zimmermann et al. (2001 and 2002) papers the most
complete materials that I have found about brand valuation, with a greater
academic rigor and professionalism, I can consider the BEE a reliable and
feasible model for brand valuation.
Notwithstanding by the advantages of the model, the disadvantages

should also be mentioned. Its open to dispute if the described method
includes other brand equity determinants despite the considered four
market quality, market dominance, international orientation and brand status.
This doubt arises because Zimmermann et al. (2002) suggest that the choice
10
CAPM: re = rf + (Rm rf ) * e , where re is the return required by the shareholder, rf is
the risk-free interest rate (generally flat yield), Rm is the expected market return, and e is
the beta factor, i.e., the stocks sensitive to market movements.

48
and weighting of the components or brand value determinants are based on

the purpose of the valuation and the type of brand being valued (corporate
vs. product brand). But it is not clear if any other components are considered
outside of these four. If so, the choice of brand equity determinants would be
arbitrary (Salinas 2009, p.126). Thus, BEE is not transparent and the results
may not represent a complete figure of the brand to be valuated.
In addition to that, and also regarding with the brand value

determinants, more specifically with the determination of the brand status by
the BBDO Five-level Model, is that this model does not distinguish between
industries, which runs counter with the valuation of the others brand equity
determinants.
Another weakness important to mention is the determination of the

market quality weighting factor. To support that, the Salinas (2009, p.126)
explanation is clear: the BBDO model first calculates the present value of
gross cash flow, which would be quite similar to the value of the company (or
identical in the case of the corporate brand). A percentage calculated in
function of the brand equity determinants is then applied to the present value
of gross cash flow. However, no BBDO report makes reference to any
empirical study that supports the validity of this relationship.
The last problem we will refer is related to the cost-efficiency of the

model. All data needed for the analysis are obtained from the publicly
available sources however, some data regarding to the consumers opinion
take time to be achieved. Hereupon, and since we did not find available
information about the costs and time of the BEE application, we consider that
this model is not cost-efficiency.
The following table gives a final overview of the requirements that the
BBDO BEE fulfills and not, in accordance with its objectives set out in section
3.3.
49
Categories Requirements BBDO BEE
Validity Limited
Objectivity
Cost-Efficiency
Covering Content
Transparency
Feasibility Limited
Financial Figure
Table 6. Fulfilled Criteria by BBDO Brand Equity Evaluator Brand Valuation Method
Source: (author).
5.3. Interbrand
Interbrand was founded by John Murphy in 1974, in London, with the

name Novamark. In 1988, Interbrand, jointly with the London Business
School, developed the first brand valuation methodology, known as the
multiplier model (or Annuity model). Some years later, in 1993, they
partially revised it to the discounted cash flow model, and reported that this
second method replaces the first one. Since then, Interbrand, a full-service
brand consulting firm, has valuated some 3500 brands for nearly 400
companies (Interbrand Zintzmeyer & Lux, p.4).
The Interbrand valuation method that we will expose below is the

discounted cash flow model, which has an integrative approach, considering
financial and behavioral aspects (Interbrand Zintzmeyer & Lux, p.4). It is
based on the premise that the value of a brand was the present worth of the
benefits of brands future ownership.
As we can see in figure 10, the method is essentially based in three

economic functions: 1) the brands function to create cost synergies, 2) the
brands function to generate demand for the products and services and, 3)
50
the brands function to secure future demand and thus reduce operative and
financial risks (Interbrand Zintzmeyer & Lux, p.2).
Segmentation of the Brand
Financial Analysis Demand Analysis Strength Analysis
Economic Value Role of Brand Index Brand Strength

Added (EVA) (RBI) Score (BSS)
Brand Earnings Brand Risk

(Discount Rate)
Net Present Value of Brand (segment) Earnings
Figure 10. Overview of the Interbrand Method

Source: on the basis of (Interbrand Zintzmeyer & Lux).
The segmentation consists on determining homogenous costumer

groups for which we will determine, on an individual basis, the brand value. It
means that the brand value must be calculated for each individual segment
and, at the end, the sum of all brand values segments constitutes the final
brand value.
The first analytical step of the Interbrand model is the financial

analysis. It aims is to determine the Economic Value Added (EVA)11 which
tells whether a company is able to generate returns that exceed the costs of
capital employed, by isolating brand earnings from other forms of income
(Interbrand Zintzmeyer & Lux, p.2). To avoid a distorted view of reality, the
forecast of future revenues is based on historical profits.
11
Interbrand, in its commercial literature, used synonymously the terms "EVA, intangible
earnings and economic profit.
51
Once determined the intangible earnings, the following step is to

isolate the earnings that are specifically attributable to ZARA brand. For this,
we will examine what factors influence demand and motivate customers to
purchase, such as quality, location, availability, image, service, value for
money, recommendation, among others. These factors are weighted in terms
of their bearing on demand and for each, the contributions of the specific
associations with the brand are statistically calculated. Them sum of these
brand contributions on the demand drivers is expressed as the Role of Brand
Index (RBI) which, multiplied with EVA, yields the brand earnings (Interbrand
Zintzmeyer & Lux, p.3). To date, Interbrand does not reveal how the index
could be exactly calculated.
The following step of our valuation is known as brand strength

analysis. The purpose of this stage is to analyze the risk of a brand by
comparing it with its competitors on the basis of seven factors - i.e. market,
stability, brand leadership, trend, brand support, diversification, and
protection (Interbrand Zintzmeyer & Lux, p.3). From here results the Brand
Strength Score (BSS), which measures the competitive strength of the brand.
To determine the brand risk profile, i.e., the brand discount rate, we
need to transform the BSS into an S-curve (see figure 11). According to
Salinas (2009, p.228), the model assumes a relationship between brand
strength and discount rate, the higher the brand strength score, the lower the
discount rate, ceteris paribus. Interbrand Zintzmeyer & Lux (p.3) added that
the S-curve procedure reflects the dynamism of the market, where brands at
the extreme ends of the scale react differently from brands in the middle
range as regards changes in their strength.
The value of the brand is then the future brand earnings discounted at
present value (by the brand discount rate) and an annuity or perpetuity is
added as a terminal value. Note that this is the value of the brand segment.
To conclude the valuation, we will need to sum all of brand segments values.
52
Brand Risk/
Discount Rate
0 Brand Strength Score 100
Figure 11. S-curve

Source: (author).
Starting with the positive aspects, Interbrand is a universal valid and

reliable method, that have a practical acceptance. Similarly to the previous
methods analyzed, the model has an integrative approach, that considers the
costumers feelings and opinions related to the brand but at the same time
takes into account the past, present and future financial data.
A point to highlight is the fact of the method only considers in its

calculation the intangible earnings allocated to the brand. This is a
controversial topic and according to that Seetharaman el al. (2001) argued
that the calculation of brand earnings within the framework of this model
should only consider factors related to brand identity. However, this condition
is rather restrictive, as it is difficult to separate certain functions from the
brand. For example, even when a distribution system is not a component of a
brands identity, it supports the brand by contributing to its success.
The first drawback pointed out by several authors, such as Salinas

(2009, p.230), Fernndez (2001, p.15) and Zimmernann et al. (2001 p. 56) is
the higher subjectivity of some parameters. For Salinas (2009, p.230), the
determination of the number of demand drivers, their relative importance and
the role of the brand in each one, is rather subjective, even when based on
statistical analysis of market research data. Beyond the subjectivity of the
53
brand strength analysis, is important to emphasize that future earnings are

also speculative however, they are an important part on brand valuation,
especially when its main purpose is a case of acquisition.
Still relatively to subjectivity, Pablo Fernndez (2001, p.15) stated that

valuing any brand using this method seems highly subjectivity, not only
because of the parameters used but also because of the methodology itself.
About it, the only thing that we can say is that the method was not fully
disclosed and its implementation seems to be complex. Hereupon, we can
also appoint its lack of transparency as a disadvantage.
We cannot find information about the cost-efficiency of the Interbrand

model. What we can deduce is that the method requires a lot of external
information (especially for the analysis of the consumers behaviors) and how
much information is needed, the more time it takes to determine the brand
value. On table 7 is summarized our critical analysis of the Interbrand
method, accordingly with the requirements that a brand valuation model must
to fulfill to be suitable for the case of acquisition.
Categories Requirements Brand Rating
Validity
Objectivity Limited
Cost-Efficiency
Covering Content
Transparency
Feasibility
Financial Figure
Table 7. Fulfilled Criteria by Interbrand Brand Valuation Method
Source: (author).
54
5.4. The Choice
The choice of the three methods presented and critically analyzed,

had the essential requirement to be an integrated approach (chapter 4.2),
i.e., a balance between financial and consumers perspective approaches.
Following that, and taking into account the case of Zara acquisition, probably,
the main advantage of the three brand valuation methods discussed is that
all of them give a financial value. In addition, the Brand Rating, the BBDO
Brand Equity Evaluator and the Interbrand are brand valuation methods
that have a practical acceptance by the market, which could facilitate the
negotiations between Zara and H&M.
A critical and curious point that we feel important to emphasize is that

the three methods studied can be applied for different purposes, including
the acquisition. However, none of the methods takes into account the
elimination of a competitor. For our case in study, that aspect seems to be
relevant, since H&M would eliminate its biggest competitor by taking over
ZARA.
Returning to the objective of this work, we want to value ZARA brand

for inform H&M what should be the value of its offering to take over ZARA. In
this way, the next step is to choose a method, between the three presented
models, that we will apply to valuate ZARA.
To apply a model of brand valuation is important that its methodology

has been disclosed. Additionally to that, is essential a good practical
acceptance by the market for the method. Thus, the method that seems to
be the most appropriate to value ZARA brand is the Interbrand Model.
Although its methodology has not been disclosed in full, this is one of the
most recognized methods by the market (Interbrand Zintzmeyer & Lux, p.3),
which contributed for the success of Interbrands brand valuation method.
Throughout the next chapter, in section 6.1, we will value ZARA brand
applying the Interbrand model and thereafter, in 6.2, we will analyze the
results obtained and test its sensitivity to (some) input variables.
55
6. ZARA BRAND VALUATION BY INTERBRAND METHOD
6.1. Calculation of Brand Value
As we saw in section 5.3, the Interbrand model, to calculate brand

value, uses a five-stage process that comprises: segmentation, financial
analysis, demand analysis, brand strength analysis, and, finally, the
calculation of the net present value of brand earnings (Interbrand Zintzmeyer
& Lux, p.2).
6.1.1. Segmentation
According to Interbrand, consumers purchasing behaviors and

attitudes towards brands differ from one market sector to another, depending
on product type, distribution and other market factors. For this reason, the
value of a brand can only be determined precisely through the separate
assessment of individual segments that represent a homogenous customer
group.
Following this, we can segment ZARA market, for example, by

separate its different channels (women, men, trafaluc and kids) from the
different 77 countries (Inditex Annual Report 2010) where the brand is
present (see figure 12).
After brand valuation has been made for each segment, the overall
value of a brand is the sum of the different segment values. In this
particularly case of ZARA brand valuation, we cannot consider the market
segmentation because we will not have access to the necessary detailed
information. Thus, we will just value ZARA brand as a whole.
56
France
Women Portugal
etc.
France
Men Portugal
etc.
Brand
France
Trafaluc Portugal
etc.
France
Kids Portugal
etc.
Figure 12. Example of ZARAs Market Segmentation

Source: (author).
6.1.2. Financial Analysis
As mentioned, the financial analysis is the first analytical step of the

method in application. What we want to determine is the Economic Value
Added (EVA) that indicates if ZARA is capable of create returns above the
cost of capital employed, by isolating brand earnings from other forms of
income.
As valuation may be distorted by an unrepresentative profit in the

present year - 2010, the brand value calculation includes a three-year
weighted average of historical profits to project the four following years.
On the table below is analytical represented the process used to

determine EVA.
57
Years 2007 2008 2009 2010 2011 2012 2013 2014

1 2 3 4 5
Branded Revenues 6264 6824 7077 8088 8412 8748 9098 9462
% Growth of Branded Revenues 8% 4% 13% 8% 8% 8% 8%
(-) Operating Costs 5173 5757 5972 6554 6990 7283 7546 7813
(=) EBIT 1091 1067 1105 1534 1422 1465 1552 1649
EBIT Margin 17,5% 15,5% 15,6% 19% 17% 17% 17% 17%
(-) Tax 257 224 265 383 333 337 357 379
% Tax 24% 21% 24% 25% 23% 23% 23% 23%
(=) NOPAT 834 843 840 1151 1089 1128 1195 1270
Capital Employed 2661 3334 3810 4321 4004 4128 4373 4645
% Return on Capital Employed 41% 32% 29% 35,5% 35,5% 35,5% 35,5% 35,5%
(-) CAPM 6,2% 165 207 236 268 248 256 271 288
(=) EVA 669 636 604 883 841 872 924 982
Thousands of Euros
Table 8. ZARAs Financial Analysis Applying the Interbrand Valuation Method

Source: on the basis of (Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
For forecast the branded revenues, we will assume an average of the

growth from the last three years, which was 8%. Since the branded revenues
growth was considerably higher in 2010 than the previous years, 2008 and
2009, does not make much sense to consider only the growth of the last
year.
The figure operating costs are not described in Inditex Annual Report
but we can deduce it from subtracting to the branded revenues the earnings
before interest and taxes (EBIT).
For predict the EBIT from 2011 to 2014, we assumed the EBIT margin
average for the past years, which was 17%.
Subtracting to the EBIT the applicable taxes we have the net

operating profit after tax (NOPAT). The tax rate (23%) is based on the
average taxes paid from 2007 to 2010. In turn, the taxes paid were found by
dividing the value of the income tax for the respective income before taxes,
which are represented in the Inditex consolidated income statement of each
year.
The final step of the financial analysis is to subtract a capital employed

charge from the NOPAT. The Zaras capital employed can be defined by a
percentage of the return of capital employed by the EBIT (Inditex Annual
58
Reports 2007, 2008, 2009 and 2010; p.257, p.278, p.221 and p.193,
respectively). Therefore, a charge from the capital employed, based on the
cost of capital is subtracted to NOPAT, to arrived at EVA.
To determine the cost of capital, we will use the unlevered CAPM

(whose discount rate is a proxy of WACC) and thus, we will assume that
ZARA only uses equity to finance its activity, i.e., its an unlevered company
(on the basis of Fernndez 2011, pp.22-25).
The formula of the CAPM applied was:
E(ru) = rf + E [(rm rf)] "u

where,
E (ru) - represents the cost of capital i.e.,

! the expected rate of return on equity
assuming only equity financing,
rf - is the risk free interest rate,
rm - the expected market return and,
u - is the assets beta factor, i.e., the stocks sensitive to market movements.
Therefore, to compute the cost of equity capital, we have considered
as the risk free rate the Germany 10-year Government Bonds issued on
September 5th 2011, which was 2,2% (Financial Times Markets Data). The
long-term equity risk premium was based on the London Business School
study of Dimson et al. 2006 (p.19) about equity risk premium. The value
6,08% is an average of an arithmetic mean of historical equity premium
relative to bonds for 17 countries from 1900-2005. The ZARAs adjusted beta
(0,67) was taken from Damodarans European database, which as been the
last updated on January 2011.
Replacing the values in the formula, we have:
E (re) = 2,2% + 6% * 0,67
E (re) = 6,2%
59
Returning to the table 8, and since EVA is a positive value; we can

conclude that ZARAs brand earnings exceed its costs of capital, i.e., ZARAs
brand creates value!
6.1.3. Demand Analysis
Since the intangible earnings calculated in previous step include the

returns of all intangibles employed in the business, we will need to determine
what proportions of the earnings are specifically attributable to the brand.
This figure that represents the percentage of intangible earnings that are
generated by the brand (Interbrand 2004, p.7) is called the role of brand
index (RBI).
To determine the RBI, Interbrand firstly identifies the various drivers of

demand for the branded business, such as quality, location, availability,
image, service, value for money, recommendation, among others.
Thereafter, Interbrand determines the degree to which each driver is directly
influenced by the brand (Interbrand 2004, p.7). At the end, the sum of the
brand contributions on the demand drivers is expressed as the RBI which,
multiplied with EVA, yields the brand earnings.
In figure 8 is represented an example of a role of brand, which shows

a retail industry benchmark analysis of Interbrand (the correspondent values
were not available), derived from its database of more than 5.000 brand
valuations conducted over the course of 20 years (Interbrand 2008, p.10).
The total length of each bar indicates the drivers importance for the case in
study (called by the key as unbranded) and the lighter bars (denominated as
branded) represents the brands role or influence on the perception of the
driver (Salinas 2009, p.227).
60
Figure 13. Branded Own Label Drivers/ Role of Brand

Source: Brands that have the Power to Change the Retail World Top Performing
European Retail Brands 2008 (Interbrand 2008, p.10).
To date, Interbrand does not reveal how the index could be exactly
calculated, which will make our valuation more subjective from this point.
According to Interbrand study (2008), about brands that have the

power to change the retail world, ZARA was ranked in sixth position (p.26).
The same study stated that international expansion is more successful when
brand is a key business driver and ZARA prove that in the most fickle world
of fashion, you can get it right (p.19). Beyond that, the best global brands
interim report (Interbrand 2009) says that a change in the role of brand in a
category requires innovation: new business models, delivery infrastructure,
and radical product benefit intensification and ZARA have done this
successfully (p.8). The report also refer that while all retail has suffered, fast
fashion brand ZARA has suffered less due to its low-cost to quality quotient
and ZARA as become a truly global force over the last few years (p.14).
Thinking together with the information presented in the previous

paragraph, we can conclude that ZARAs brand is one important purchase
driver amongst others, such as: the low-cost to quality of the products, the
stores preferred locations, that also include unique internal and external
architecture design (Inditex Annual Report 2009, p.16), the products image,
61
the quick delivery infrastructure under 48 hours from the distribution centre
to the stores (Inditex Annual Report 2009, p.16), the innovation, for example,
when in 2009 developed applications for iPhone and other smartphones,
the excellent costumer service and the rapid response to market needs. In
this sense, we can deduce that ZARAs brand contribution to demand is only
one important factor compared with others intangibles figures. For this
reason, and for be possible to continue with ZARAs brand valuation we will
assume that RBI is 30%. It should be stressed that this is a very subjective
value, which in turn will have a large impact on brand value, as we will
analyze in the chapter 6.2.
Years 2010 2011 2012 2013 2014

1 2 3 4 5
EVA 883 841 872 924 982
(x) RBI 30% 30% 30% 30% 30%
(=) Brand Earnings 265 252 262 277 295
Thousand of Euros
Table 9. ZARA Demand Analysis Applying the Interbrand Valuation Method

As mentioned above, the result of the demand analysis is the brand

earnings and it is calculated by multiplying EVA for the RBI. Since RBI is
30%, it means that 30% of EVA is extracted as brand earnings.
6.1.4. Brand Strength Analysis
The projected brand earnings are required to be discounted to a

present value using an appropriate discount rate. The discount rate is
determined by a brand strength score (BSS) that represents the risk factor,
i.e., the brands relative capacity to guarantee demand and in this way
sustains future earnings (Salinas 2009, p.227). Similar to what happened in
the previous point, the brand strength analysis is subjective, once the
components that we are analyzing are qualitative. To go on with the
valuation, we will attribute scores according to the information available. Note
62
that these procedures require a lot of information about the brand, at which
Interbrand has access but we (for obvious reasons) dont have.
In this step, we will compare the brand against a notional ideal and
score it against common factors of brand strength (Interbrand 2008, p.33).
The following table shows the seven brand strength factors and their
evaluation criteria, as well as their maximum score and ZARAs brand score.
Brand Strength Maximum ZARAs

Evaluation Criteria
Factors Score Brand Score
Market share, market position,
Leadership 25 22
market segment, brand awareness
History, current position, satisfaction,
Stability 15 12
customer loyalty
Competitive structure, market growth,
Market 10 8
volume, sales
Presence in foreign markets, export
Internationality 25 19
history
Consideration, attractiveness
Trend 10 8
Quality, consistency, share of
Support 10 7
advertising, identity
Date of registration, legal coverage
Protection 5 5
and monitoring
Brand strength 100 82
Table 10. The ZARAs Brand Strength Score and their Evaluation Criteria
Source: on the basis of (Salinas 2009, p.228 and Fernndez 2001, p.14).
The maximum score that can be reached is 100 points. The ZARAs
brand scores are differently weighted as different maximum scores for each
of them are given.
According to Interbrand (2011, p.40), ZARA is growing and leading the

sector, due to international expansion, excellent local adaptation, and the
constant update of its collections based on runway fashion and urban trends.
Following this, we can confirm that ZARA is a leading and stable brand, that
continues to expand, increasing its sales through a clear, consistent, and
differentiated value proposition (Interbrand 2011, p.42). As to its international
expansion, we can add that ZARA is present in 77 countries all over the
world (Inditex Annual Report 2010). Its tendency to keep up-to-date
63
(Fernndez 2001, p.14) is a constant relevant factor that always increases

ZARAs value. Certainly the greatest recent success of the brand has been
its expanding online presence, with more than seven million Facebook fans
(Interbrand 2011, p.42) and the creation of its online store, in beginning
September 2010, that was available in 11 different countries at the end of the
year (Inditex Annual Report 2010). To conclude, ZARA has become a truly
global force over the last few years (Interbrand 2009, p.14), which explains
its brands robustness and protection (Fernndez 2001, p.14).
6.1.5. Net Present Value Calculation
The brand value is the net present value (NPV) of the forecast brand
earnings, discounted by the brand discount rate (Interbrand 2004, p.7).
To get the brand discount rate, Interbrand Zintzmeyer & Lux (p.3)
suggest to use the industry WACC as the benchmark for the companys
overall risk however, and accordingly to our assumption in section 6.1.2, we
will apply the unleverd CAPM, and so, the brand discount rate is 6,2%. The
brand strength score (BSS) can also be transformed into a discount rate
using an S-curve (see figure 11 in section 5.3.1). Following this, note that the
discount rate expresses the brand risk and the higher is the BSS, the lower is
the discount rate, ceteris paribus.
The NPV calculation comprises both the forecast period and the
period beyond, reflecting the ability of brands to continue generating future
earnings (Interbrand 2004, p.7). The table below shows the final step of the
brand valuation.
64
Years 2010 2011 2012 2013 2014

1 2 3 4 5
Brand Earnings 265 252 262 277 295
Brand Strenght Score 82
Brand Discount Rate 6,2%
(=) Discounted Brand Earnings 249 224 218 218 218
(=) NPV of Discounted Brand Earnings (Years 1-5) 1127
Long Term Growth Rate 1,8%
(=) NPV of Terminal Brand Value (beyond year 5) 5044
(=) Brand Value 6172
Thousand of Euros
Table 11. ZARAs Brand Value Calculation by Applying the Interbrand Valuation Method
The formula used to calculate the NPV of discounted brand earnings

was:
N
CFt
NPV = " t
t =1 (1+ i)
were
!
N - total time of the calculation (forecast of the cash flow)
t - time of the cash flow (the year)
CF - cash flow (the brand earnings)
i - discount rate (brand discount rate)
Although the brand value has an infinite life, the cash flow forecast cannot be
infinite. According to our assumptions, a five-year forecast will be assumed
(N=5), i.e., the present year 2010 and the four following years.
To calculate the net present value of terminal brand value beyond

year 5, we will use a long term growth rate (g), as follows:
# 1+ g &
CFN % (
$ i " g'
NPVbeyondyearsN =
(1+ i) N
65
There seems not to be a precise way of estimating the cash flows

growth rate in perpetuity. Thereby, we will consider the Euro area (17
countries) GDP (gross domestic product) growth rate our reference.
As a final step, to get the brand value, we need to add the two
expressions above. The complete formula to calculate the net present value
is as follows:
$1+ g '
t =N CFN& )
CFt %i # g(
NPV = " t +
t =1 (1+ i) (1+ i) N
!
6.2. Analysis of the Result
In 2010, Interbrand has valuated ZARAs brand in 7.468 thousands of

dollars (p.22). The result of our valuation was 6.172 thousands of euros. For
be possible to compare our valuation with the Interbrand result, we will
convert the euros to dollars using the average exchange rate verified in
2010, that was 1,46136 EUR/USD (X-rates website). In this way, our result in
dollars was 7.197 thousands; which means that the difference by the
obtained value compared with the Interbrand result was 3,6%12.
Years 2010
Brand Value (EUR) 6172

Exchange Rate (EUR/USD)* 1,1661
Brand Value (USD) 7197
Thousand of Euros and Thousand of Dollars
* Average exchange rate verified in 2010 (source: x-rates)
Table 12. ZARAs Brand Value in Euros and Dollars

Source: (author).
Throughout the valuation and according to the information available,

we adopted some assumptions and speculated some values to be possible
12
3,6% = 1 - (7.197 / 7.468) x 100
66
to reach a result. The role of branding index and the brand strength score
were not totally revealed by Interbrand and a small change in the value of its
figures would lead to a very different result from that obtained. For example,
a change of the role of branding index from 30% to 40% increases the
ZARAs brand value from 6.172 to 8.229 thousands of euros (appendix 2).
Following this, we can better understand why several authors pointed out as
the first drawback of Interbrand valuation model the higher subjectivity of
some parameters, especially those regarding to consumers view (section
5.3.2).
In the same way, we highlight the impact that the estimated variables,
brand discount rate and long term growth rate, have on brand value. For this,
we construct the following table that gives a short overview of how the
ZARAs brand value can vary if both variables had assumed slightly different
values.
Brand Discount Rate

6% 6,1% 6,2% 6,3% 6,4%
Growth Rate
1,6% 6216 6076 5943 5815 5693

1,7% 6339 6194 6055 5922 5795
1,8% 6468 6316 6172 6033 5901
1,9% 6604 6445 6294 6150 6012
2,0% 6746 6580 6422 6272 6128
Thousand of Euros
Table 13. ZARAs Brand Value by Assuming Different Brand Discount Rates and Long
Term Growth Rates
Source: (author).
The processes of estimating the brand discount rate and the cash
flows growth rate in perpetuity are rather uncertain and subjective however,
as we can understand by the impact that they have on ZARAs value, they
are an important part on brand valuation, especially when its purpose is the
acquisition.
67
7. PROBLEMS AND LIMITATIONS FACED THROUGHOUT

ZARAS BRAND VALUATION
Sharing the same opinion of Sattler (2002, p.33 as cited by Sattler et

al. 2002, p.2), it is crucial to be able to determine particularly the financial
value of brands as comprehensively and understandably as possible. But,
when taking a look at scientific literature dealing with the brand evaluation
issue, it turns out that until today a valid and comprehensible financial brand
evaluation might not be possible.
In fact, valuing ZARAs brand was a long road of options and reviews.
The first problem encountered soon began with the fact that there are no
standardized definitions neither perspectives for brand and brand equity.
After an exhaustive research of the different approaches, we chose one that
seemed to be more objective and appropriate to this case study, the
integrative approach, which considers in simultaneously the financial
perspective and the consumers vision about the brand.
When we start to deeply analyze the integrative approach, some

questions about these models began to emerge: what should be the
preponderance of each parameter (financial and consumers vision) in these
models? Which should be the selected determinants for brand valuation?
And what should be their relative weightings? To these issues, we cannot
reach any conclusion.
Since the purpose of our study is valuate ZARAs brand, we had to

choose a valuation methodology to apply. However, from the (at least) 39
different propriety models (Salinas, 2009, p.57) which method to choose?
Firstly, and to be coherent with the definition of brand equity adopted, we
decided that the method to take must belong to the integrative methodology.
Following this, we construct a table with a list of requirements that a valuation
methods must to fulfill for be suitable for the case of ZARAs acquisition
(section 3.3).
68
After selecting three valuation models, each one for its reason, we
present them theoretically and then we analyze them in a critical way,
exposing its main advantages and disadvantages. Following this, we
concluded that all methods have their own limitations. Despite the BBDO
Brand Equity Evaluator takes into consideration the purpose for which the
brand valuation is performed, this method together with the Brand Rating and
Interbrand methods still have lack of adaptation according to the purposes of
its applications. For example, none of the methods takes into consideration
the elimination of one competitor with the acquisition. This seems to be
extremely important for our case, since H&M by acquiring ZARA will
eliminate its biggest competitor. Will be ZARAa value to H&M the same as
for a company in a different sector, for example, in the food industry?
Another common limitation is that all methods are very opaque. The
information collected about the consumers view as well as the way it is
handled and incorporated in the model represent a high degree of complexity
and lack of transparency. In addition, is important to include the brand future
earnings in its calculation however, its determination is rather speculative.
For be possible to valuate ZARAs brand, by Interbrand model, we had

to take some values that seemed consistent with reality, netherless they are
subjective and some of the procedures for its determination are not fully
disclosed by Interbrand. Beyond that, these procedures require a lot of
information about brands (essentially qualitatively data), which Interbrand
has but we dont have.
As summary note, the thematic of financial brand valuation is still

recent. From the definition of brand to the application of a valuation model,
appearing problems and limitations, which means that there is even a long
way to go in this area. Hereupon, we leave an open question, how can we
optimised Interbrand brand valuation method to the case of acquisition?
69
CONCLUSION
There is nothing better to propel the theoretical knowledge we have

been developing over the years than practice and, reached the final step of
this work, we are certain that it was a very important tool to improve our skills
inside the thematic of brand valuation.
To ensure the validity and recognition of this study, we try to support

all the postulations, calculus and database from credible sources, using
scientific books, papers of reliable authors and database from published
reports.
The way up here was long, often we did not know what the best route
we should go through to get the final result. In fact, as we have stand out
throughout this paper, there is no way to be sure about the final number,
since we had to adopt some assumptions to confront limitations found thus
far. Nevertheless, we are confident about the final outcome as we tried to be
as consistent as possible.
After valuing ZARAs brand by Interbrand model, we have obtained

the result of 6.172 thousand of euros, which is a very close result of that
calculated by Interbrand for the same period, 2010. The difference of 3,6%
can be explained by many different reasons. As we pointed out in throughout
the work, slightly different values in input variables can considerably alter the
final value of the brand.
To conclude, the result of 6.172 thousand of euros should be taken

into consideration by H&M in its proposal for ZARAs acquisition, once its
deviation from Interbrand value is not significant. Neverthless, is important to
highlight that H&M may be willing to make an offer much higher than ZARAs
brand value as, if this transaction become a reality, H&M will eliminate its
strongest competitor.
70
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APPENDICES
Appendix 1
ZARAs Brand Valuation based on Interbrand Model
Years 2007 2008 2009 2010 2011 2012 2013 2014

1 2 3 4 5
Operating Costs 5173 5757 5972 6554 6989,973 7282,694 7545,571 7812,799
EBIT 1091 1067 1105 1534 1421,547 1465,287 1552,329 1649,017
EBIT Margin 18% 16% 16% 19% 17% 17% 17% 17%
Tax 257 224 265 383 333 337 357 379
% Tax 24% 24% 21% 24% 23% 23% 23% 23%
NOPAT 834 843 840 1151 1089 1128 1195 1270
% Return on Capital Employed 41% 32% 29% 36% 36% 36% 36% 36%
CAPM 6,2% 165 207 236 268 248 256 271 288
EVA 669 636 604 883 841 872 924 982
RBI 30%
Brand Earnings 265 252 262 277 295
Discounted Brand Earnings 249 224 218 218 218
NPV of Discounted Brand Earnings (Years 1-5) 1127
NPV of Terminal Brand Value (beyond year 5) 5044
Actual Year: 2010
Values in millions of euros
* Average Exchange Rate verified in 2010 (X-rates website)
Table 14. ZARAs Brand Valuation based on Interbrand Model

Source: author (on the basis of Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
77
Appendix 2
ZARAs Brand Valuation based on Interbrand Model by changing RBI to 40%
Years 2007 2008 2009 2010 2011 2012 2013 2014

1 2 3 4 5
Operating Costs 5173 5757 5972 6554 6989,973 7282,694 7545,571 7812,799
EBIT 1091 1067 1105 1534 1421,547 1465,287 1552,329 1649,017
EBIT Margin 18% 16% 16% 19% 17% 17% 17% 17%
Tax 257 224 265 383 333 337 357 379
% Tax 24% 24% 21% 24% 23% 23% 23% 23%
NOPAT 834 843 840 1151 1089 1128 1195 1270
% Return on Capital Employed 41% 32% 29% 36% 36% 36% 36% 36%
CAPM 6,2% 165 207 236 268 248 256 271 288
EVA 669 636 604 883 841 872 924 982
RBI 40%
Brand Earnings 353 336 349 370 393
Discounted Brand Earnings 332 298 291 291 291
NPV of Discounted Brand Earnings (Years 1-5) 1503
NPV of Terminal Brand Value (beyond year 5) 6726
Actual Year: 2010
Values in millions of euros
* Average Exchange Rate verified in 2010 (X-rates website)
Table 15. ZARAs Brand Valuation based on Interbrand Model by changing RBI to 40%
Source: author (on the basis of Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
78
ANNEXES
Annex 1
H&M and its other Brands
Source: (H&M - Investor Relations).
79
Annex 2
Best Global Brands, 2010 Rankings
Rank Brand Change in

Previou Country of
Brand Sector Value Brand
s Rank Origin
($m) Value
1 1 United States Beverages 70,452 2%
2 2 United States Business Services 64,727 7%
3 3 United States Computer Software 60,895 7%
4 7 United States Internet Services 43,557 36%
5 4 United States Diversified 42,808 -10%
6 6 United States Restaurants 33,578 4%
7 9 United States Electronics 32,015 4%
8 5 Finland Electronics 29,495 -15%
9 10 United States Media 28,731 1%
11 8 Japan Automotive 26,192 -16%
12 12 Germany Automotive 25,179 6%
13 13 United States FMCG 23,298 2%
16 16 France Luxury 21,860 4%
18 17 United States Tobacco 19,961 5%
19 19 South Korea Electronics 19,491 11%
80
20 18 Japan Automotive 18,506 4%
21 21 Sweden Apparel 16,136 5%
23 23 United States Beverages 14,061 3%
24 22 United States Financial Services 13,944 -7%
25 26 United States Sporting Goods 13,706 4%
26 27 Germany Business Services 12,756 5%
27 25 Switzerland Beverages 12,753 -4%
28 28 Sweden Home Furnishings 12,487 4%
29 37 United States Financial Services 12,314 29%
30 30 United States Alcohol 12,252 4%
31 31 United States Transportation 11,826 2%
United
32 32 Financial Services 11,561 10%
Kingdom
33 33 Japan Electronics 11,485 10%
34 29 Japan Electronics 11,356 -5%
38 39 Japan Electronics 8,990 -2%
39 40 Canada Media 8,976 6%
40 36 United States Financial Services 8,887 -13%
41 35 United States Electronics 8,880 -14%
81
42 42 Netherlands Electronics 8,696 7%
44 41 Italy Luxury 8,346 2%
45 44 France FMCG 7,981 3%
47 45 United States Business Services 7,481 -3%
48 50 Spain Apparel 7,468 10%
49 47 Germany Diversified 7,315 0%
50 49 United States Automotive 7,195 3%
54 63 Canada Electronics 6,762 32%
55 54 United States Media 6,719 3%
56 53 France Financial Services 6,694 3%
57 58 Switzerland FMCG 6,548 4%
58 60 France FMCG 6,363 7%
59 56 United States Electronics 6,109 -5%
82
61 NEW United States Beverages 5,777 N/A
62 62 Germany Sporting Goods 5,495 2%
65 69 South Korea Automotive 5,033 9%
66 64 United States Internet Services 4,958 -3%
67 81 Germany Financial Services 4,904 28%
68 NEW Spain Financial Services 4,846 N/A
70 66 United States Diversified 4,704 -6%
73 75 Japan Electronics 4,351 3%
United
74 NEW Financial Services 4,218 N/A
Kingdom
76 76 United States Luxury 4,127 3%
78 NEW United States Alcohol 4,036 N/A
83
79 82 France Alcohol 4,021 7%
80 NEW Switzerland Financial Services 4,010 N/A
81 92 Netherlands Energy 4,003 24%
84 78 United States Apparel 3,961 1%
85 NEW Mexico Alcohol 3,847 N/A
86 72 Switzerland Financial Services 3,812 -13%
87 86 Germany FMCG 3,734 5%
88 95 United States Computer Software 3,626 15%
United
89 84 Alcohol 3,624 -2%
Kingdom
90 NEW United States Diversified 3,586 N/A
91 88 Italy Automotive 3,562 1%
United
92 NEW Alcohol 3,557 N/A
Kingdom
93 NEW Netherlands Alcohol 3,516 N/A
94 NEW Switzerland Financial Services 3,496 N/A
95 89 Italy Luxury 3,443 4%
96 91 France FMCG 3,403 5%
84
98 73 United States Automotive 3,281 -24%
United
100 98 Luxury 3,110 0%
Kingdom
Table 16. Best Global Brands of Fashion Industry 2010 Rankings

Source: (Interbrand).
85
Annex 3
Cash Flow Computation
Figure 14. Cash Flow Computation

86

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CATHOLIC UNIVERSITY OF PORTUGAL

Rita Leo Furtado Gomes

Rita Leo Furtado Gomes

Master Thesis Advisor:

Porto, September 2011

Hereupon, and motivated by the chance of ZARAs brand acquisition by

Keywords: brand valuation, brand valuation methods, Interbrand.

I couldnt forget to present my sincere compliments to all of those who have

LIST OF TABLES ...................................................................................................... 7

PARTE I LITERATURE REVIEW AND ZARAS PRESENTATION..................... 11

APPENDIX 1: ZARA'S BRAND VALUATION BASED ON INTERBRAND MODEL .77

APPENDIX 2: ZARAS BRAND VALUATION BASED ON INTERBRAND MODEL

ANNEX 1: H&M AND ITS OTHER BRANDS ........................................................... 79

ANNEX 2: BEST GLOBAL BRANDS, 2010 RANKINGS ......................................... 80

ANNEX 3: CASH FLOW COMPUTATION ............................................................... 86

Figure 1. ZARA's Sales Contribution by Sales Format ........................................... 17

Figure 2. ZARAs Business System ........................................................................ 18

Figure 3. A Product Market Positioning Map .......................................................... 19

Figure 4. Characteristics of Brand Valuation Approaches ...................................... 33

Figure 5. Financial Approaches .............................................................................. 34

Figure 6. Icon Iceberg ............................................................................................. 41

Figure 7. The Brand Rating Formula .................................................................... 43

Figure 9. The BBDO Five-level Model ................................................................. 47

Figure 10. Overview of the Interbrand Method ....................................................... 51

Figure 11. S-curve .................................................................................................. 53

Figure 12. Example of ZARAs Market Segmentation ............................................ 57

Figure 13. Branded Own Label Drivers/ Role of Brand........................................... 61

Figure 14. Cash Flow Computation ........................................................................ 86

Table 1. Best Global Brands of Fashion Industry 2010 Rankings ........................ 22

Table 2. Examples of Goodwill Payments in the Eighties. ..................................... 24

Table 3. Perspectives and Reasons for Brand Valuation ....................................... 26

Table 5. Fulfilled Criteria by Brand Rating Brand Valuation Method ...................... 44

Table 6. Fulfilled Criteria by BBDO Brand Equity Evaluator Brand Valuation

Table 7. Fulfilled Criteria by Interbrand Brand Valuation Method ........................... 54

Table 12. ZARAs Brand Value in Euros and Dollars ............................................. 66

Table 14. ZARAs Brand Valuation based on Interbrand Model ............................. 77

BBS Brand strength score

BEE Brand Equity Evaluator

BEES Brand Equity Evaluation System

BEVA Brand Equity Evaluation Accounting

CAPM Capital Asset Pricing Model

EBIT Earnings before interest and taxes

EVA Economic value added

GDP Gross domestic product

i.e. this is; in other words

IAS International Accounting Standard

IFRS International Financial Reporting Standards

ISO International Organization for Standardization

NOPAT Net operating profit after tax

NPV Net present value

RBI Role of brand index

WACC Weight average cost of capital

In the late 1980s, with the series of acquisitions of strong branded

Beyond that, the strong development of new technologies has allowed

This case study, about brand valuation, will be critically developed

ZARAs presentation, we will classify by different approaches the numerous

Nevertheless, brand valuation is far from being a consensual subject

PARTE I LITERATURE REVIEW AND ZARAS

1. THE CONCEPTS APPROACH

To date, there is no standardized definition of brand. Over the past

In literature, for Leuthesser, a brand is a product additional value (for

In an formal perspective, the dictionary of business and management

1.2. Brand Equity