Product and brand management

Session 8 Joel Cyclo Xavier

If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you. John Stuart, Chairman of Quaker (ca. 1900)

What brand value?

When did people sit up and take notice of Brand value?
Huge gap in book values of companies and their valuations Spate of mergers and acquisitions where the only way to explain the seemingly unexplainable was brand value

Situation today?
Major part of business value is derived from intangibles

 Brands influence the choices of

Consumers Employees Investors Government authorities

They are durable, sometimes living beyond the life of the company itself

Effect on strategic decision-making

Ford had taken a step to consciously reduced its physical asset base without taking a hit on the market valuation, how?
By increasing its intangible assets Purchasing Jaguar, Land Rover, Aston Martin, Volvo.

Where did the problem arise?

A company purchasing another and giving due importance [and paying money for] goodwill faced a strange problem Accounting practices required them to write-off intangibles over a period of time But these intangibles were different Not like a $10,000 license for 10 years which you can write off $1000 at a time The value of the intangible asset was actually growing!

 Then, to begin with, some companies started putting the value of brands they had acquired on the balance sheet. This prompted them to also put the value of internally generated brands on the balance sheet as well In 1988, Rank Hovis McDougall (RHM), a leading UK food conglomerate, played heavily on the power of its brands to successfully defend a hostile takeover bid by Goodman Fielder Wattie (GFW).

 They did this by putting the value of internal as well as external brands on the balance sheet The LSE endorsed this method in 1989 and most companies latched on to the opportunity Today, most companies include brand performance as a financial indicator.

Social Value of Brands

Cons
Branding and exploitation of workers Homogenization of cultures They encourage monopoly Stifle competition and restrict consumer choice

Pros
Increased competition Improved product performance Pressure on brand owners to behave in socially responsible ways

 the potential costs of behaving unethically far outweigh any benefits, and outweigh the monitoring costs associated with an ethical business.

Approaches to brand valuation

Research based brand equity valuations Purely financially driven approaches

Research based approaches

Purpose:
Explain, interpret and measure Consumer perceptions that influence purchase behaviour

Perceptive measures
Awareness levels
Aided, unaided, top of mind

Knowledge, familiarity, relevance, Specific image attributes, purchase consideration Preference, satisfaction, recommendation

Market share, relative price

Financially driven approaches

Cost based approaches
Historic costs incurred Replacement costs required To bring the brand to its current state

Why it fails
No direct correlation made between financial investment and value added If financial investment is not made in the right direction, it is practically useless

Financially driven approaches

The approach of using comparables
The word itself goes against it!
The whole point of a brand is to be different

Comparables more used as a cross check Never to be relied upon solely

Financially driven approaches

Premium price method
NPV of future premiums commanded by a branded product over generic/unbranded products Is primary purpose of brand to achieve price premium?
No. rather it is to generate future demand

How do you define a generic equivalent?

Financially driven approaches

Economic use method
Combines brand equity and financial measures Most widely used Based on basic marketing principles and financial principles
Brands help in generating customer demand
Individual Corporate

Based on financial principles

NPV of future earnings

Value creation of a brand

Step 1: Market segmentation
Product/service, distribution channels, consumption patterns, purchase sophistication, geography, existing and new customers, and so on. Total value of brand = segment valuations

Step 2: Financial analysis

Identify and forecast revenues and earnings from intangibles generated by the brand for each of the distinct segments determined in Step 1 Intangible earnings= brand revenue [operating costs + taxes + cost of capital]

Value creation of a brand

Step 3: demand analysis
Determine what percentage of intangible earnings is attributable to the brand referred to as the role of branding index. Identify drivers which influence demand Determine to what level brand influences each driver Brand earnings= intangible earnings * role of branding index

Value creation of a brand

Step 4: Competitive benchmarking
Competitive strengths and weaknesses of brand that influence
The specific brand discount rate it gives the risk profile of expected future earnings

Brand strength score This comprises

Extensive competitive benchmarking A structured evaluation of the brands market, Stability, Leadership position, Growth trend, Support, Geographic footprint and Legal protectability.

Value creation of a brand

Step 5: Brand value calculation
Brand Value = NPV of forecast brand earnings, discounted by the brand discount rate

Got it?

Value creation of a brand

Where is it useful?
Predicting the effect of marketing and investment strategies; Determining and assessing communication budgets; Calculating the return on brand investment; Assessing opportunities in new or underexploited markets; and Tracking brand value management.

Role in strategic brand management

Directed towards internal audiences
Making decisions on business investments Measuring return on Return on brand investments Measuring performance against targets related to value of brand asset Making decisions on brand investments Decisions on licensing Marketing centre remains a cost centre no long but becomes a profit centre Allocating marketing expenditure based on benefit derived by each unit from brand asset

Role in strategic brand management

Organising and optimising use of different brands corporate, product and subsidiary Assessing co-branding initiatives according to economic benefits and risks Deciding on branding after mergers Managing brand migrations successfully Establishing brand value scorecards Managing brand portfolios effectively Communicating in appropriate forums the creation of brand capital to influence share prices.

Role in Financial transactions

Assessing fair transfer prices Determining brand royalty rates Capitalizing brand assets on balance sheet according to various standards Determining prices for brand assets in M&A transactions Determining contribution of brands to JVs to establish profit sharing, investment ratios and shareholding Using brands for securitization of debt facilities in which the rights for the economic exploitations of brands are used as collateral.

The future
Managers could end up managing the brand entirely by the value method.
Bad for creative communication and the underlying freshness necessary for brand communication The quaker takeover of Snapple

Brand value performance is not reported by many companies.

With a major component of the balance sheet going unreported, there is a lot of uncertainty Even Coca-cola does not report it

Accounting regulations need to evolve faster

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