Brand Valuation

An Umbrella Term - Brand valuation is a subject all senior marketers should be familiar with, though it often remains confusing. This confusion largely stems from the various concepts under the umbrella term ‘brand valuation’. A brand valuation can encompass branded business valuation, trademark asset valuation, brand asset valuation, brand evaluation, brand due diligence, and various analytical techniques valuers use.

Introduction

Brand valuation is not just a theoretical concept, but a practical tool that can significantly impact a marketer's strategy. It provides insights that guide long-term marketing effectiveness and models brand growth. By understanding the financial value of a brand, marketers can make informed strategic decisions. A robust brand valuation framework can be the difference between success and failure in today's competitive market. In this article, I will delve into the relevance and utility of brand valuation for marketers, explaining its fundamental concepts, methodologies, and real-world applications.
Brand valuation provides a quantifiable measure of a brand’s worth, integrating tangible and intangible assets. It empowers marketers by bridging the gap between marketing strategies and financial outcomes, enabling them to confidently justify investments and align them with business goals. Moreover, it supports a range of activities, from internal performance assessments to external transactions like mergers and acquisitions, further bolstering their strategic decision-making.

Definitions

A simplified overview of key terms:

Trademark Valuation: The narrowest form, focusing on the legal rights of a trademark. Accountants typically use this valuation method to determine the value of a trademark for balance sheet purposes. Trademarks are valued based on their ability to generate future economic benefits, often using a technique known as Royalty Relief. This method estimates the value of a trademark by calculating the cost savings from owning the trademark instead of licensing it.

Brand Valuation: A broader concept including trademarks, certifications, copyrights, design rights, and associated goodwill. Brand valuation looks beyond the trademark to include the brand’s overall market presence, customer loyalty, and perceived value. This method provides a more comprehensive view of the brand’s worth, considering factors such as brand equity, market position, and the competitive landscape.

Branded Business Valuation: The most comprehensive form of valuing the entire business operating under a brand, including all tangible and intangible assets. This valuation encompasses the value of the brand itself, as well as all associated business operations. It provides a holistic view of the brand’s contribution to the overall business value, integrating financial performance with brand strength and market potential.

Why It’s Important

Understanding brand valuation is not just important, it's strategic. Its implications for marketing investment and strategic decision-making are significant. The share index created by LGIM with Brand Finance’s data and our Brand Finance//IPA equity analyst study highlight the profound impact of brand value on market performance. For instance, the LGIM index demonstrates how businesses with brands with higher valuations tend to outperform in the stock market, showing resilience during economic downturns and achieving higher growth rates during economic upturns. Similarly, our joint Brand Finance//IPA equity analyst study found that strong brands contribute to sustained business performance, enhancing shareholder value and providing a buffer against market volatility. This underscores the strategic role of brand valuation in shaping business outcomes, making marketers feel more involved in the overall business strategy.

Brand valuation is not just a tool, it's a responsibility. It helps marketers identify and leverage the key drivers of brand strength, enabling them to focus on activities that enhance brand equity. This focus on brand equity drives long-term growth and ensures that marketing investments deliver measurable financial returns. By linking brand performance to economic outcomes, brand valuation provides a powerful tool for justifying marketing budgets and securing executive support for brand-building initiatives. This underscores the role of marketers in shaping brand equity and growth, making them feel more responsible for the brand's success.

How the Analysis is Done/What it Shows

Brand valuation analysis typically involves:

Drivers Analysis involves identifying the key factors driving brand performance. This includes examining brand awareness, customer loyalty, market share, and competitive positioning. Marketers can develop strategies to enhance brand strength and value by understanding these drivers.

Financial Analysis: Connecting brand image research to financial outcomes and using modified discounted cash flow models to quantify brand value. This involves projecting future cash flows the brand generates and discounting them to present value. The economic analysis provides a monetary estimate of the brand’s worth, which can be used for various strategic purposes.

Steps in Brand Valuation Analysis:

1. Data Collection: Gathering relevant data on brand performance, market conditions, and financial metrics. This includes quantitative data (e.g., sales figures, market share) and qualitative data (e.g., brand perception, customer satisfaction).

2. Market Analysis: Assessing the competitive landscape and identifying trends that could impact the brand’s performance. This includes analysing market growth rates, competitive dynamics, and regulatory factors.

3. Brand Strength Analysis: This step evaluates the brand’s strength based on various dimensions, such as brand loyalty, awareness, perceived quality, and associations. It involves using brand equity models and consumer surveys to gauge the brand’s market position.

4. Financial Forecasting: Projecting future revenues and cash flows generated by the brand. This involves estimating the brand’s contribution to overall business performance and identifying key growth drivers.

5. Discounted Cash Flow (DCF) Analysis: Calculating the present value of future cash flows using an appropriate discount rate. The DCF method accounts for the time value of money, providing a realistic estimate of the brand’s financial worth.

6. Sensitivity Analysis: This step assesses the impact of different assumptions on the brand valuation. It helps understand the valuation's robustness under various scenarios and identifies key risk factors.

Applications and Importance for Marketers

Brand valuation is an essential part of a marketer’s toolbox, used for:

- Marketing Investment Allocation: Optimising spending to enhance brand growth and value. By understanding the financial impact of different marketing activities, marketers can allocate budgets more effectively, prioritising initiatives that deliver the highest return on investment.

- Brand Architecture involves structuring brand portfolios for maximum impact. Brand valuation helps make strategic decisions about brand extensions, sub-brands, and hierarchies. This ensures a coherent brand strategy that leverages the strengths of each brand within the portfolio.

- Securitisation, Licensing, and Franchising: Leveraging brand value in financial transactions and strategic partnerships. Brands with high valuations can be used as collateral for loans, licensed to generate additional revenue streams, or franchised to expand market reach. This provides flexibility in financing and growth strategies.

- Mergers and Acquisitions: Facilitating strategic transactions by clearly understanding the brand’s worth. In M&A scenarios, accurate brand valuation is crucial for negotiating fair deals and ensuring that the acquired brands contribute to overall business goals.

- Performance Measurement involves tracking the impact of marketing activities on brand value. By regularly assessing brand valuation, marketers can measure the effectiveness of their strategies and make data-driven adjustments to improve performance.

- Strategic Planning: Informing long-term strategic decisions by integrating brand valuation insights into business planning. This helps set realistic growth targets, identify new market opportunities, and align marketing initiatives with overall business objectives.

Case Study: Unilever

With a current Enterprise Value (EV) of about £125 billion, Unilever demonstrates the practical application of branded business valuation. Unilever’s portfolio includes around 400 branded businesses, including Knorr, Hellmann’s, Magnum, Dove, Sunsilk, Lynx, and Persil. Over its nearly 100-year history, Unilever has constantly bought and sold brands to optimise its portfolio.

For instance, Unilever’s decision to sell its ice cream business, including brands like Magnum, Wall’s, and Ben and Jerry’s, was based on branded business valuation. This division was estimated to be worth about £10 billion. The sale was driven by strategic imperatives to reinvest in higher-value nutrition and beauty brands, demonstrating how brand valuation guides strategic portfolio management.

Unilever’s approach involves creating separate discounted cash flow models for each branded business, informing advertising, promotion, distribution, and innovation decisions. This method, known as ‘Path to Growth,’ launched by former CEO Niall Fitzgerald, used branded business portfolio techniques to identify winners in the portfolio. Despite some criticisms of investment and divestment decisions, this approach highlights marketers' critical role in providing data and assumptions for valuation models.

Case Study: Courvoisier

In 1999, Brand Finance conducted a branded business valuation of Courvoisier for Allied Domecq. The Board believed Courvoisier was in a low-growth, low-profit trap. However, the valuation analysis and the CMO demonstrated a path to growth by redirecting the marketing budget to new markets and customer segments. As a result, Courvoisier was not divested and proliferated, becoming a star brand in Allied Domecq’s portfolio. This example illustrates how brand valuation can inform strategic marketing decisions and drive business growth.

Conclusion

Brand valuation is a powerful tool that bridges marketing and finance, enabling marketers to quantify and leverage brand value for strategic advantage. By integrating brand valuation into marketing practices, businesses can optimise their brand portfolios, justify marketing investments, and make informed strategic decisions. Understanding and applying brand valuation principles is essential for marketers seeking to drive long-term growth and enhance brand equity.

Authored by David Haigh, Fellow of The Marketing Society

Published on 7 August 2024