Prophet's Perspective on Brand Valuation

Proprietary and confidential
Do not distribute
London Business School
June 9, 2012
BRAND VALUATION
PARADOXES & PATHWAYS

Proprietary and confidential. Do not distribute.LBS 2
Introducing James and Joerg
James Walker Senior Partner
20+ years Analytics experience, JWT
Europe’s youngest director, part of the
MindShare launch team. Founding
Chairman of Brand Science, sold to
Omnicom. Partner Edge Consulting,
sold to Accenture, 7 years Accenture
partner, International President of AMS.
Partner at MOFILM, director SSA & Co
Joerg Niessing Associate Partner
12+ years Marketing Analytics
experience, 7 years with Prophet building
leading brands and delivering profitable
growth through distinctive customer
insights and analytics, 3 years Director at
the Marketing Research Center Muenster,
MS & PHD in Marketing (CRM), regular
speaker in the MBA program of INSEAD

Introducing Prophet
A unique strategic consultancy. We combine World-class teams in the 6 disciplines that
drive successful businesses in the 21st Century.
Brand Valuation is important for us at Prophet because it embodies the intersection of
these individual capabilities.

Prophet is defined by cutting-edge IP and unrivalled thought leadership
Prophet grew out of Haas School of
Business at Berkeley in the 90s.
Our thought leaders are at the
forefront of finding ways to make
Brands more relevant and we’ve
published more than twenty books
on the topic of Brand.
Global network of 9 offices drives
innovation and new thinking from
across the World.

Prophet builds brands
We’ve built Brands
(literally!) from the ground up
We’ve discovered and applied
deep human truths
We’ve helped companies
compete (again) in a new world
We’ve helped resolve the
tension in customers’ lives

PARADOXES
OF BRAND VALUATION…

The Gillette Brand accounts for 16% of P&G’s Market Capitalization
Acquired brands have a balance sheet value, whereas created brands do not.
At best, this is an anomaly within IFRS 13
At worst, this leads to a perverse allocation of capital decisions
For our Houston Oil/Gas client, this is a $40bn-$100bn decision to Buy/Sell brands

Brands only
have a value
in a specific
industry
context
Brands do not have an intrinsic value per se, but a value when that brand is
applied to a relevant industry, with a given business system, and profit stream.
Some brands DO have more stretch than others… Does that make them valuable?

You might see a very strong Brand, but in a declining industry, eg: Kodak.
Brand Valuation depends more on the industry, than it actually does the brand…
Industries are prone to disruption, and some are more high risk than others.
Brands are very vulnerable – Walmart market capitalization lost $15bn in one day
because of the Mexico bribery scandal

Brand value is contingent not just on the industry the brand is being leveraged in,
but on other brands in its ecosystem, eg: CES Las Vegas 2012 Intel announced
entrance into the handset market… more of a stir than than their partners
announcements, ie: Lenovo, Motorola. The Intel brand is valued at $40bn – more
than the sum of the brand value of ALL of their partners, Dell, Lenovo etc

BRAND
LEVERAGE
Employees
(e.g. consulting)
Governments
(e.g. oil)
Pressure groups
(e.g. automotive)
OCCUPY
THE BOARD
ROOM!!!
Analysts
(e.g. Facebook)
Suppliers / customers / intermed.
(e.g. financial services)
Brand leverage can impact many parts of an organization to add value.
Eg: Thinking of Oil/Gas industry: better employees paid less; the granting of
government licenses; suppliers; franchisees; pressure groups; analysts

Brand valuation is contingent on finding a buyer for your brand.
More importantly, a brand’s value is will vary/depend on the buyer
A brand’s value is different depending on the buyer and how they can use a brand:
Gillette was acquired by P&G, who paid far more than Kraft would have done
Cadbury was acquired by Kraft, who paid far more than P&G would have done

$
$
$
$ Manufacturing
Customers
Distribution
Retailer
We spend all this time calculating the value of a brand, and yet when companies
are acquired, actually virtually all the focus is on EBITDA. Capital market analysts
are trained to be highly skeptical of intangible assets
Brand building is important, yet Capital Markets tend to only look at the
tangible side of the business and EBITDA

WHY IS VALUING A BRAND
MORE DIFFICULT
THAN YOU MIGHT THINK?

SOMETHING
TO CONSIDER

Why even do Brand Valuation?
?

Just a matter of time: Brands on the balance sheet
1989
Barwise declares it is:
“impossible to
separate the brand
(value) from the rest
of the business”
2001
SEC calls for disclosure
of intangible assets;
how they are developed,
protected and exploited
2004
FASB removes
SFAS 142 from
research agenda
Australian gov’t
funds a similar item
for IASB (IAS 38)
2007
Australian Accounting
Standards Board is
encouraged by the
chairmen of the IASB
“with particular focus
on... internally
generated intangible
assets”
2011
SEC issues Work Plan
for incorporating IFRS
in U.S financial
reporting system.
Uses IAS38 as
example
2001
FASB launches SFAS 141,
calling for acquired brands
to be on the balance sheet
FASB modifies SFAS 142 to
allow internally generated
brands on the B/S
2005
IASB introduces IFRS 3
recognizing acquired
brands as assets
Brands
on the
balance
sheet

HOW CAN WE VALUE
BRANDS?

Simona Botti, 2011
Market Approach Cost Approach Income Approach
Based on
present value of
earnings attributable
to the brand or costs
avoided as a result of
owning the brand
Based on
reproduction/replace-
ment cost-adjusted
for depreciation and
obsolescence
Based on multiples
or prices from
market transactions
involving the sale
of comparable
brands
Adapted from Tony Hadjiloucas, March 2009
Valuation approaches

How do the other guys do it?
Financial
model
DCF Multiple on intangible earnings
Relief from royalty,
based on third-party
licensing transactions
Brand
strength
“The brand strength
inversely determines,
through a proprietary
algorithm, a discount
rate“
“…the growth potential of these
branded earnings is taken into
account with an earnings
multiple that is aligned with the
methods used by the analyst
community …”
N/A
Brand
contribution
“… qualitative research,
a review of historical
roles of brand for
companies in that
industry, or expert panel
assessment. “
MBO establishes it through
funnel analysis of country-,
market-, and brand-specific
customer research from the
BrandZ database.
N/A
The approaches are very different; use only publicly available data and do not explain their “proprietary” processes
Brand
%
Brand
+
$

There are four key steps in our Brand Valuation methodology
1 Financials 2 Brand Contribution
3 Category and Brand Evaluation 4 Final Valuation
What is the company’s true Economic Profit (EP)? What are the drivers of EP and what portion of EP
does the brand contribute?
What are the category dynamics and the expected
life of the brand in the market?
What is the present value of EP attributable to the brand?
Actuals
Budget
Forecast
Today Peak point = X years* Expected life = Y years*
CATEGORY C
CATEGORY B
Attribute 1
X
I would not
choose
any of
these
offers
Which option
would you
choose?
…
… … … …
…
…
… … …
…
…
… …
Attribute 2
Attribute 3
Channel 1
Price $1 $1.20$1 $1.10
…
CATEGORY A
Brand
Competitor
D
Competitor
A
Competitor
B
Competitor
C
ILLUSTRATION
Discrete Choice Model
(realistic decision-making
scenarios to understand
change in preference
share for different
offerings)
Consumer choice
in interviews
(offer parameters are
being rotated
systematically by the
software based on
previous choices)
Input data Current competitive
environment in category
8%
9%
12%
14%
15%
18%
24%
Attribute 3
Attribute 2
Attribute 1
Service
Channel
Brand
Price
Drivers of Sales
Total
100%

Financials: Economic profit based valuation, based on income
statement and balance sheet financials, in accordance with corporate
finance and accounting principles
$ millions base year year 1 year 2 year 3 …year X
Income from operations $8,446 $8,784 $9,135 $10,231 $
Less tax ($1,632) ($1,697) ($1,736) ($2,558) ($)
Net Operating Profit After
Tax (NOPAT)
$6,814 $7,087 $7,400 $7,674 $
Property, Plant & Equipment $8,326 $8,659 $11,879 $12,768 $
Inventories $2,187 $2,274 $2,365 $2,460 $
Accounts receivable $3,090 $3,214 $3,342 $3,476 $
Accounts payable ($6,205) ($6,453) ($6,711) ($6,980) ($)
Capital Employed (CE) $7,408 $7,694 $10,875 $11,724 $
Discount rate (WACC) 7.50% 7.50% 7.50% 7.50% %
Economic Profit = NOPAT –
(CE × WACC) $6,258 $6,510 $6,584 $6,794 $7,104
WACC = Weighted Average Cost of Capital
Financial Model
1

CATEGORY C
CATEGORY B
Attribute 1
X
I would not
choose
any of
these
offers
Which option
would you
choose?
…
… … … …
…
…
… … …
…
…
… …
Attribute 2
Attribute 3
Channel 1
Price $1 $1.20$1 $1.10
…
CATEGORY A
Brand
Competitor
D
Competitor
A
Competitor
B
Competitor
C
ILLUSTRATION
share for different
offerings)
Consumer choice
in interviews
being rotated
software based on
previous choices)
Brand Contribution: Discrete choice modeling, based on consumer
data, determines the role each brand plays in driving sales
2
8%
9%
12%
14%
15%
18%
24%
Attribute 3
Attribute 2
Attribute 1
Service
Channel
Brand
Price
Drivers of Sales
Total
100%
Discrete choice
modeling
determines the
role of brand in
driving purchase
behavior in the
market
18%Brand
Role of Brand in the Market
Brand 1
Brand 2
Brand 3 6%
-8%
2%
Brand-specific
Contribution
Calibrating the
DCM by each
brand determines
the brand
contribution

Category Evaluation: Determining the expected life of the category
3
Category growth (stability or volatility) Score 1 2 3 4 5
In the foreseeable future will this category show growth; sustain its current trend; or decline? A score of 3
indicates the category will continue at its historic growth rate. Five is a positive score; 1 is negative.
Category movement (stability or volatility) Score 1 2 3 4 5
Is this category characterized by minor movements in market share between the main competitors or
considerable change in market share between all competitors. A score of 3 would mean that brands at the top
end have generally stable shares while at the bottom end smaller brands have to fight for market share. Scores
above 3 indicate stability ; score below 3 indicate volatility.
Vulnerability Score 1 2 3 4 5
How susceptible is this category to both internal and external pressures?; external could be regulatory; new
technology; fads and fashions; changes in demand. A score of five indicates that category is immune to these
pressures and risks. A score of 1 indicates that the category is highly vulnerable to these pressures.
Competiveness Score 1 2 3 4 5
Do brands in the category compete on price and promotion thus affecting profit and stable pricing? A score of 5
would indicate stability in this regard; a score of 1 would imply considerable pressure on profits due to constant
price and discount movements.

Brand Evaluation: Determining the expected life of the brand in the
category
Attribute ratings
Consumer perceptions based on
brand ratings
Funnel performance
The performance of the brand in
driving market
3

Category and Brand Evaluation: Calculating forecast lifetime by
merging Category Expected Life & relative strength of the brand (BKS)
Category Example
Smart
Phones
Dominant Brand
33 years
Client Brand
29 years
Marginal Brand
7 years
The category expected life defines the
forecast period for the category
The brand knowledge structure defines the
forecast period of the evaluated brand
relative to its competitors
Oil &
Gas
Dominant Brand
18 years
Client Brand
7 years
Marginal Brand
3 years
Illustrative
3

Bringing it all together
4
Current Brand Value
US$ Millions
Economic Profit (base year)
Brand Contribution
Brand Life Yrs
%
$
Input Source
$ millions base year year 1 year 2 year 3 …year X
Income from operations $8,446 $8,784 $9,135 $10,231 $
Less tax ($1,632) ($1,697) ($1,736) ($2,558) ($)
NetOperating ProfitAfter
Tax (NOPAT)
$6,814 $7,087 $7,400 $7,674 $
Property,Plant& Equipment $8,326 $8,659 $11,879 $12,768 $
Inventories $2,187 $2,274 $2,365 $2,460 $
Accounts receivable $3,090 $3,214 $3,342 $3,476 $
Accounts payable ($6,205) ($6,453) ($6,711) ($6,980) ($)
CapitalEmployed (CE) $7,408 $7,694 $10,875 $11,724 $
Discountrate (WACC) 7.50% 7.50% 7.50% 7.50% %
Economic Profit= NOPAT –
(CE × WACC) $6,258 $6,510 $6,584 $6,794 $7,104
CATEGORY C
CATEGORY B
Attribute 1
X
I would not
choose
any of
these
offers
Which option
would you
choose?
…
… … … …
…
…
… … …
…
…
… …
Attribute 2
Attribute 3
Channel 1
Price $1 $1.20$1 $1.10
…
CATEGORY A
Brand
Competitor
D
Competitor
A
Competitor
B
Competitor
C
ILLUSTRATION
share for different
offerings)
Consumer choice
in interviews
being rotated
software based on
previous choices)
8%
9%
12%
14%
15%
18%
24%
Attribute 3
Attribute 2
Attribute 1
Service
Channel
Brand
Price
Drivers of Sales
Total
100%
Brand Value $
Dominant Brand
18 years
Client Brand
7 years
Marginal Brand
3 years

Proprietary and confidential
Do not distribute
For more information, please contact
James Walker: j_walker@prophet.com

Prophet's Perspective on Brand Valuation

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