BRAND EQUITY

Brand Equity
# Is BE the price at which a brand can be sold.

# Is it measured by level of awareness / buying intention for next 10 purchases

# Is Br.Loyalty straight measure of BE

Misconceptions about Valuation

Myth 1: A valuation is an objective search for true value
Truth 1.1: All valuations are biased. The only questions are how much and in which direction. Truth 1.2: The direction and magnitude of the bias in your valuation is directly proportional to who pays you and how much you are paid.

Myth 2.: A good valuation provides a precise estimate of value

Truth 2.1: There are no precise valuations Truth 2.2: The payoff to valuation is greatest when valuation is least precise.

Myth 3: . The more quantitative a model, the better the valuation

Truth 3.1: Ones understanding of a valuation model is inversely proportional to the number of inputs required for the model. Truth 3.2: Simpler valuation models do much better than complex ones.

Why Brand name valuation matters

From a Valuation perspective : Sale of a brand name Legal disputes over brand names Accounting fair value

From a Marketing perspective : Advertising spending and evaluation Pricing and product decisions

The Power of a Brand Name

Bunch together all of the competitive advantages possessed by a company into the brand name category

isolating brand name from other competitive advantages

Brand Equity Defined

Brand Equity - Valuation

Cost Based Methods Price Based
Customer Based

Cost Based Methods

Historical Cost
Replacement Cost Market Value Discounted Cash Flow Brand Contribution Inter Brand Method

Price Based
Price Premium Price Equalization Indifferent Price

Customer Based
Brand Knowledge Attribute Rating Blind tests

Historical Cost Method

The money spent on the Br. till date.

- ve : Prospective buyers interested in future cash flows

cost incurred is no measure on efficiency of money spent

Replacement Cost Method

How much would it cost to create a brand today - with similar turnover , profits , distribution , loyalty etc RC = Launch cost + Prodn. & Administration cost + Brand premium

Market Value Method

Obtained by comparing with realisation value in a comparable current acquisition Eveready McLeod 2900 Kelvinator Whirlpool 2500 Farex Heinz 2100 Thums Up Coke 1800 Cibaca Colgate 1310 Good Night Godrej 800

Cibaca was taken over by Colgate for Rs. 1310 lacs. Colgate has turn over 17 times higher than Cibacas. Calculate brand value of Colgate using market value method.

How would you calculate Colgates Equity Colgate has turn over 17 times higher than Cibacas (1310)
1310 * 17 = 22,270

DCF Method
- Estimate CF that would accrue to the brand in the future - Convert these to PV using TVM

PV = S1 + (1.15)

S2 + S10 (1.15) (1.15)

S : sales estimate 10 years Discounting @ 15% pa

Inter Brand Method

BE = Br. Profits * PE * Br Strength
Steps : 1.Compute 3 years Profits ( Wt. Avg) of the brand 2.Multiply Companys PE with a Brand Strength factor & Profits

X ltd., top notch FMCG companys Net profits for last 3 years was Rs 15, 20 & 30 million. The price earning ratio was 15. For brand valuation purpose leadership, stability, internationality, trade mark protection and brands future trend was considered as important components of brand strength. The scores of Xs brand strength are as follows Max. Score Brand Xs Score Leadership 25 13 Stability 15 7 Internationality 15 1 Trade mark protection 15 2 Future trend 30 20

Calculate Brand Equity of Brand X.

Example: Br. Eq. for Brand X

Average profits (15*1)+(20*2)+(30*3) = 24.2mn 1+2+3 Yr 01 02 03 Profits (Mn) 15 20 30 Weight 1 2 3

Brand Strength
Factors Implication Max. Score Br. X Score 25 15 15 15 30 13 7 1 2 20 Leadership Is the Br. leader Stability Extent of loyalty Inationality INational acceptance Protection Trade mark Trend Long term future

Brand Strength Score 43/100 = 0.43

PE ratio : 15 Brand Equity = 24.2 * 0.43 * 15

156.09 million

Brand Contribution Method

Compares the Profits earned by the brand with the profits of an unbranded product.
Difference is measure of Brand Value

Damodarans Brand Valuation

Comparing two companies making similar products comparing the market capitalization will tell you little about brand name value comparison of pricing multiples (PE, EV/Sales) between companies are more useful, there are still too many unknowns to control for

Intrinsic valuation model

identify the drivers of value and then look at how brand name and generic companies differ on those drivers, with consequences for value.

key number driving the valuation is the companies : Operating margins & ROI

Coca Colas Brand Value

Following are the beverage industry & economic numbers :

Current Tax Rate = 23.57% Current Revenues = $47,579.00 Capital Invested $49,104.00 Length of high-growth period = 5 Reinvestment Rate 40% Growth rate during period 6.62% (Coke ) 3.09% (Cott) Cost of Equity during period 8.35% After-tax Cost of Debt 1.89% Debt Ratio 17.56% Growth rate in steady state 2.75% Return on capital in steady state 12.50% (Coke ) 6.90% (Cott) Reinvestment Rate in Stable growth 22.00% (Coke ) 39.87% (Cott) Cost of Equity in steady state 8.15% After-tax Cost of Debt 1.89% Debt Ratio (D / (D + E) 20.00%

Coca Cola Vs Cott : Differences on key valuation metrics between Coca Cola and a generic counterpart, Cott
Coca Cola
After-tax operating margin Sales/ Invested Capital
17.07%
0.97 16.54% 7.31%

Cott
4.08%
1.89 7.73% 8.51%

Measures
Pricing power
Revenue productivity Investment success Cost of funding

Return on capital
Cost of capital

Excess return

9.23%

-0.78%

Value added

Coke's ROIC = Cott's ROIC

Coke's margin = Cott's margin

Price Based
Price Premium Method Compare difference between retail price of the Brand & that of an unbranded in the same Cat. Unrealistic : Babool Vs Colgate

Mrkt. Share Equalisation Method Sample Size of 100 Customers of tooth paste
Colgate 65 Promise 10 Close Up 20 Babool 5

Brand Colgate Close Up

Prices ( per 100 No. of gm ) Customers 18 65 22 20

Promise Babool

18 13

5 10

At what price Mrkt. Share be equal

Brand Colgate Close up Prices 24 20 Customers 25 25

Promise
Babool

16
10

25
25

Now divide the price in paise 10 We get the number for the brand equity map
Colgate 240 Close Up 200 Promise 160 Babool 100

Customer Based Method

Brand Knowledge Method Expressed as a sum of Br. Awareness & Br. Image Brand Awareness Recall + Recognition

Brand Image 1. Types of Br. Association (Attributes + Benefits + Attitude)

2. Favorability of Br. Assn.

3. Strength of Br. Assn 4. Uniqueness of Br. Assn

How to measure Brand Recall Example : Nirma 1.Which br. Comes to your mind when I say Detergent powder 2.What comes to your mind for Low price 3.What comes to your mind White /cream detergent cake 4. The Ad. For which Brand says Do you now understand why I buy this

Scoring 1St Ans : Nirma 10 pts 2nd Ans : Nirma but fails to answer the first question 6 points 3rd answer Right but 1& 2 wrong 4 points 4th right answer but fails on first three 2 points