The Financial Value of Brands

Debate still continues about whether brands can be included in the balance sheet and views are split on financially accounting for brands. Does the balance sheet with an inclusion of the value of brands represent a subjective appreciation of the brand’s real value or should the balance sheet reflect a more objective assessment including completed financial transactions only when brands are bought?

To be acceptable in financial accounting terms, any brand valuation method should apply to both acquired and internally- created brands. One of the problems is that there are different perspectives on the value of a brand at any one time. For example, prior to market bids Rowntree was worth around £1 bn to its shareholders, yet a few months later was worth £2.4 bn to Nestle. Although the value of a brand becomes much more apparent at the time it is acquired by another company, there remains uncertainty about the firm’s annual valuation of its brands and consequently it has been rare up to now to include the value of created brands in published accounts. In the absence of a generally accepted standard for brand valuation, the internally calculated value is subject to various interpretations.

At the acquisition stage, the brand’s value depends very much on the purchaser, who will probably value it more if the acquisition is expected to bring synergy to the company, as was clearly the case with Nestlé’s purchase of Rowntree. The issue of reparability of the brand is best illustrated by the words of John Stuart, former Chairman of Quaker Oats Ltd – ‘If this business were to be split up, I would be glad to take the brands, trademarks, and goodwill, and you could have all the bricks and mortars. And I would fare better than you.’ He is certainly right! However, a brand’s value is not automatical1y transferable and the purchase of the brand could negatively affect its value. When the acquired brand becomes part of a new firm, it is divorced from the previous firm’s management, culture and system and, without the flair and networks the previous owners had, it may lose its consumer base. Any sales are’ strongly influenced by promotions and shelf visibility, but more importantly there is also the goodwill from the corporation. In new hands, with a different corporate halo, the brand might not be as strong. Brands with unique functional qualities may not be manufactured in the same way by the purchaser of the brand. For example, a new company could not easily offer to consumers of BMW cars the same guarantee of engineering excellence and reliability without the BMW support.

Valuing brands is fraught with different assumptions. For ex ample, the valuations of a marketing consultancy at 8 in the morning when few staff are there is different from its valuation at 11 in the morning. How do you account for a consultant?

Working out his notice that was particularly successful at winning new business? In view of the difficulties in valuing what are essentially clusters of mental associations recognizable through a name, some companies question the usefulness of valuing brands for balance sheet purposes. Nevertheless, the overall trend shows that more companies believe there are benefits in valuing their brands and have accepted this challenge.

It has been argued that valuing brands is a worthwhile exercise because it draws attention to the long-term implications of brand strategies. By including brand values in the company accounts, managers are forced to identify the long-term effects of their marketing decisions. Moreover, being forced to consider long-term effects counterbalances the pressure that usually drives managers who focus on policies to achieve short- term profits, but which pay lip service to brand building. Brand valuation therefore encourages managers to think more about building brands than market share. Where managers’ performance is evaluated on an annual basis by changes in their brand’s equity, they are more likely to emphasize decisions that are beneficial to the long-term growth of their brand and are less inclined to accept quick-fix solutions, such as price-off promotions, or brand extensions which become too remote from the core brand and may undermine the value of the parent brand. The brand represents a major marketing investment which it would be unwise not to evaluate, despite the fact that the assumptions underpinning the brand valuation process affect the resulting figure.

The value of the brand also differs according to whose perspective is considered. From a firm’s point of view, a brand’s value is derived from the incremental cash flow resulting from associating the brand with a product. For example, in a television factory once jointly owned by Hitachi and General Electric, Hitachi was able to sell the same product as GE but labeled Hitachi with a £50 premium, and at twice the volume. A brand brings three competitive advantages to the firm – it provides a platform from which to launch new products and licenses; it builds resilience in times of crisis as seen by the quick sales recovery following the incident when Tylenol was tampered with; and it creates a barrier to entry, for instance, formidable barriers are present through names such as Nike, Rolls-Royce and Chanel. From a trader’s perspective, the value of a brand lies in its ability to attract consumers into their stores. From a consumer’s point of view, the brand has value since it distinguishes the offering, reduces their perceptions of risk and reduces their effort in making a choice.

To manufacturers, retailers’ and consumers’ brands have value and therefore it IS night that some attempt be made to quantify this. While one might argue whether Marlboro’s 1996 valuation of $44.6 bn is precisely correct, the issue really is that this is a multi-billion dollar asset and regular tracking is needed to assess how different branding activities are affecting its value.

The debacle at Saatchi & Saatchi illustrates how the value of a brand is heavily dependent on the intangible goodwill inherent in the brand’s associations, which can fluctuate over time. In 1994 Maurice Saatchi was ousted as chairman of this famous advertising agency after the share price had fallen from £50 in 1987 to £1.50. At the time of his departure the company re- branded itself as Cordiant. As a direct result of his leaving the company, it lost business worth £50 m and during the following six months its market value decreased by another third. However, the Saatchi brand came to life again in the new company founded by Maurice Saatchi, called M&C Saatchi, which benefited from ‘Saatchi’ intangible assets such as their creative employees and the clients he had taken with him.