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Proprietary and confidentialDo not distributeLondon Business SchoolJune 9, 2012BRAND VALUATIONPARADOXES & PATHWAYS
Proprietary and confidential. Do not distribute.LBS 2Introducing James and JoergJames Walker Senior Partner20+ years Analy...
Proprietary and confidential. Do not distribute.LBS 3Introducing ProphetA unique strategic consultancy. We combine World-c...
Proprietary and confidential. Do not distribute.LBS 4Prophet is defined by cutting-edge IP and unrivalled thought leadersh...
Proprietary and confidential. Do not distribute.LBS 5Prophet builds brandsWe’ve built Brands(literally!) from the ground u...
Proprietary and confidential. Do not distribute.LBS 6PARADOXESOF BRAND VALUATION…
Proprietary and confidential. Do not distribute.LBS 7The Gillette Brand accounts for 16% of P&G’s Market CapitalizationAcq...
Proprietary and confidential. Do not distribute.LBS 8Brands onlyhave a valuein a specificindustrycontextBrands do not have...
Proprietary and confidential. Do not distribute.LBS 9You might see a very strong Brand, but in a declining industry, eg: K...
Proprietary and confidential. Do not distribute.LBS 10Brand value is contingent not just on the industry the brand is bein...
Proprietary and confidential. Do not distribute.LBS 11BRANDLEVERAGEEmployees(e.g. consulting)Governments(e.g. oil)Pressure...
Proprietary and confidential. Do not distribute.LBS 12Brand valuation is contingent on finding a buyer for your brand.More...
Proprietary and confidential. Do not distribute.LBS 13$$$$ ManufacturingCustomersDistributionRetailerWe spend all this tim...
Proprietary and confidential. Do not distribute.LBS 14WHY IS VALUING A BRANDMORE DIFFICULTTHAN YOU MIGHT THINK?
Proprietary and confidential. Do not distribute.LBS 15SOMETHINGTO CONSIDER
Proprietary and confidential. Do not distribute.LBS 16Why even do Brand Valuation??
Proprietary and confidential. Do not distribute.LBS 17Just a matter of time: Brands on the balance sheet1989Barwise declar...
Proprietary and confidential. Do not distribute.LBS 18HOW CAN WE VALUEBRANDS?
Proprietary and confidential. Do not distribute.LBS 19Simona Botti, 2011Market Approach Cost Approach Income ApproachBased...
Proprietary and confidential. Do not distribute.LBS 20How do the other guys do it?FinancialmodelDCF Multiple on intangible...
Proprietary and confidential. Do not distribute.LBS 21There are four key steps in our Brand Valuation methodology1 Financi...
Proprietary and confidential. Do not distribute.LBS 22Financials: Economic profit based valuation, based on incomestatemen...
Proprietary and confidential. Do not distribute.LBS 23CATEGORY CCATEGORY BAttribute 1XI would notchooseany oftheseoffersWh...
Proprietary and confidential. Do not distribute.LBS 24Category Evaluation: Determining the expected life of the category3C...
Proprietary and confidential. Do not distribute.LBS 25Brand Evaluation: Determining the expected life of the brand in thec...
Proprietary and confidential. Do not distribute.LBS 26Category and Brand Evaluation: Calculating forecast lifetime bymergi...
Proprietary and confidential. Do not distribute.LBS 27Bringing it all together4Current Brand ValueUS$ MillionsEconomic Pro...
Proprietary and confidentialDo not distributeFor more information, please contactJames Walker: j_walker@prophet.com
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Prophet's Perspective on Brand Valuation

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Prophet's Perspective on Brand Valuation

  1. 1. Proprietary and confidentialDo not distributeLondon Business SchoolJune 9, 2012BRAND VALUATIONPARADOXES & PATHWAYS
  2. 2. Proprietary and confidential. Do not distribute.LBS 2Introducing James and JoergJames Walker Senior Partner20+ years Analytics experience, JWTEurope’s youngest director, part of theMindShare launch team. FoundingChairman of Brand Science, sold toOmnicom. Partner Edge Consulting,sold to Accenture, 7 years Accenturepartner, International President of AMS.Partner at MOFILM, director SSA & CoJoerg Niessing Associate Partner12+ years Marketing Analyticsexperience, 7 years with Prophet buildingleading brands and delivering profitablegrowth through distinctive customerinsights and analytics, 3 years Director atthe Marketing Research Center Muenster,MS & PHD in Marketing (CRM), regularspeaker in the MBA program of INSEAD
  3. 3. Proprietary and confidential. Do not distribute.LBS 3Introducing ProphetA unique strategic consultancy. We combine World-class teams in the 6 disciplines thatdrive successful businesses in the 21st Century.Brand Valuation is important for us at Prophet because it embodies the intersection ofthese individual capabilities.
  4. 4. Proprietary and confidential. Do not distribute.LBS 4Prophet is defined by cutting-edge IP and unrivalled thought leadershipProphet grew out of Haas School ofBusiness at Berkeley in the 90s.Our thought leaders are at theforefront of finding ways to makeBrands more relevant and we’vepublished more than twenty bookson the topic of Brand.Global network of 9 offices drivesinnovation and new thinking fromacross the World.
  5. 5. Proprietary and confidential. Do not distribute.LBS 5Prophet builds brandsWe’ve built Brands(literally!) from the ground upWe’ve discovered and applieddeep human truthsWe’ve helped companiescompete (again) in a new worldWe’ve helped resolve thetension in customers’ lives
  6. 6. Proprietary and confidential. Do not distribute.LBS 6PARADOXESOF BRAND VALUATION…
  7. 7. Proprietary and confidential. Do not distribute.LBS 7The Gillette Brand accounts for 16% of P&G’s Market CapitalizationAcquired brands have a balance sheet value, whereas created brands do not.At best, this is an anomaly within IFRS 13At worst, this leads to a perverse allocation of capital decisionsFor our Houston Oil/Gas client, this is a $40bn-$100bn decision to Buy/Sell brands
  8. 8. Proprietary and confidential. Do not distribute.LBS 8Brands onlyhave a valuein a specificindustrycontextBrands do not have an intrinsic value per se, but a value when that brand isapplied 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?
  9. 9. Proprietary and confidential. Do not distribute.LBS 9You 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 daybecause of the Mexico bribery scandal
  10. 10. Proprietary and confidential. Do not distribute.LBS 10Brand 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 announcedentrance into the handset market… more of a stir than than their partnersannouncements, ie: Lenovo, Motorola. The Intel brand is valued at $40bn – morethan the sum of the brand value of ALL of their partners, Dell, Lenovo etc
  11. 11. Proprietary and confidential. Do not distribute.LBS 11BRANDLEVERAGEEmployees(e.g. consulting)Governments(e.g. oil)Pressure groups(e.g. automotive)OCCUPYTHE BOARDROOM!!!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 ofgovernment licenses; suppliers; franchisees; pressure groups; analysts
  12. 12. Proprietary and confidential. Do not distribute.LBS 12Brand valuation is contingent on finding a buyer for your brand.More importantly, a brand’s value is will vary/depend on the buyerA 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 doneCadbury was acquired by Kraft, who paid far more than P&G would have done
  13. 13. Proprietary and confidential. Do not distribute.LBS 13$$$$ ManufacturingCustomersDistributionRetailerWe spend all this time calculating the value of a brand, and yet when companiesare acquired, actually virtually all the focus is on EBITDA. Capital market analystsare trained to be highly skeptical of intangible assetsBrand building is important, yet Capital Markets tend to only look at thetangible side of the business and EBITDA
  14. 14. Proprietary and confidential. Do not distribute.LBS 14WHY IS VALUING A BRANDMORE DIFFICULTTHAN YOU MIGHT THINK?
  15. 15. Proprietary and confidential. Do not distribute.LBS 15SOMETHINGTO CONSIDER
  16. 16. Proprietary and confidential. Do not distribute.LBS 16Why even do Brand Valuation??
  17. 17. Proprietary and confidential. Do not distribute.LBS 17Just a matter of time: Brands on the balance sheet1989Barwise declares it is:“impossible toseparate the brand(value) from the restof the business”2001SEC calls for disclosureof intangible assets;how they are developed,protected and exploited2004FASB removesSFAS 142 fromresearch agendaAustralian gov’tfunds a similar itemfor IASB (IAS 38)2007Australian AccountingStandards Board isencouraged by thechairmen of the IASB“with particular focuson... internallygenerated intangibleassets”2011SEC issues Work Planfor incorporating IFRSin U.S financialreporting system.Uses IAS38 asexample2001FASB launches SFAS 141,calling for acquired brandsto be on the balance sheetFASB modifies SFAS 142 toallow internally generatedbrands on the B/S2005IASB introduces IFRS 3recognizing acquiredbrands as assetsBrandson thebalancesheet
  18. 18. Proprietary and confidential. Do not distribute.LBS 18HOW CAN WE VALUEBRANDS?
  19. 19. Proprietary and confidential. Do not distribute.LBS 19Simona Botti, 2011Market Approach Cost Approach Income ApproachBased onpresent value ofearnings attributableto the brand or costsavoided as a result ofowning the brandBased onreproduction/replace-ment cost-adjustedfor depreciation andobsolescenceBased on multiplesor prices frommarket transactionsinvolving the saleof comparablebrandsAdapted from Tony Hadjiloucas, March 2009Valuation approaches
  20. 20. Proprietary and confidential. Do not distribute.LBS 20How do the other guys do it?FinancialmodelDCF Multiple on intangible earningsRelief from royalty,based on third-partylicensing transactionsBrandstrength“The brand strengthinversely determines,through a proprietaryalgorithm, a discountrate““…the growth potential of thesebranded earnings is taken intoaccount with an earningsmultiple that is aligned with themethods used by the analystcommunity …”N/ABrandcontribution“… qualitative research,a review of historicalroles of brand forcompanies in thatindustry, or expert panelassessment. “MBO establishes it throughfunnel analysis of country-,market-, and brand-specificcustomer research from theBrandZ database.N/AThe approaches are very different; use only publicly available data and do not explain their “proprietary” processesBrand%Brand+$
  21. 21. Proprietary and confidential. Do not distribute.LBS 21There are four key steps in our Brand Valuation methodology1 Financials 2 Brand Contribution3 Category and Brand Evaluation 4 Final ValuationWhat is the company’s true Economic Profit (EP)? What are the drivers of EP and what portion of EPdoes the brand contribute?What are the category dynamics and the expectedlife of the brand in the market?What is the present value of EP attributable to the brand?ActualsBudgetForecastToday Peak point = X years* Expected life = Y years*CATEGORY CCATEGORY BAttribute 1XI would notchooseany oftheseoffersWhich optionwould youchoose?…… … … ………… … ………… …Attribute 2Attribute 3Channel 1Price $1 $1.20$1 $1.10…CATEGORY ABrandCompetitorDCompetitorACompetitorBCompetitorCILLUSTRATIONDiscrete Choice Model(realistic decision-makingscenarios to understandchange in preferenceshare for differentofferings)Consumer choicein interviews(offer parameters arebeing rotatedsystematically by thesoftware based onprevious choices)Input data Current competitiveenvironment in category8%9%12%14%15%18%24%Attribute 3Attribute 2Attribute 1ServiceChannelBrandPriceDrivers of SalesTotal100%
  22. 22. Proprietary and confidential. Do not distribute.LBS 22Financials: Economic profit based valuation, based on incomestatement and balance sheet financials, in accordance with corporatefinance and accounting principles$ millions base year year 1 year 2 year 3 …year XIncome from operations $8,446 $8,784 $9,135 $10,231 $Less tax ($1,632) ($1,697) ($1,736) ($2,558) ($)Net Operating Profit AfterTax (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 $7,104WACC = Weighted Average Cost of CapitalFinancial Model1
  23. 23. Proprietary and confidential. Do not distribute.LBS 23CATEGORY CCATEGORY BAttribute 1XI would notchooseany oftheseoffersWhich optionwould youchoose?…… … … ………… … ………… …Attribute 2Attribute 3Channel 1Price $1 $1.20$1 $1.10…CATEGORY ABrandCompetitorDCompetitorACompetitorBCompetitorCILLUSTRATIONDiscrete Choice Model(realistic decision-makingscenarios to understandchange in preferenceshare for differentofferings)Consumer choicein interviews(offer parameters arebeing rotatedsystematically by thesoftware based onprevious choices)Input data Current competitiveenvironment in categoryBrand Contribution: Discrete choice modeling, based on consumerdata, determines the role each brand plays in driving sales28%9%12%14%15%18%24%Attribute 3Attribute 2Attribute 1ServiceChannelBrandPriceDrivers of SalesTotal100%Discrete choicemodelingdetermines therole of brand indriving purchasebehavior in themarket18%BrandRole of Brand in the MarketBrand 1Brand 2Brand 3 6%-8%2%Brand-specificContributionCalibrating theDCM by eachbrand determinesthe brandcontribution
  24. 24. Proprietary and confidential. Do not distribute.LBS 24Category Evaluation: Determining the expected life of the category3Category growth (stability or volatility) Score 1 2 3 4 5In the foreseeable future will this category show growth; sustain its current trend; or decline? A score of 3indicates 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 5Is this category characterized by minor movements in market share between the main competitors orconsiderable change in market share between all competitors. A score of 3 would mean that brands at the topend have generally stable shares while at the bottom end smaller brands have to fight for market share. Scoresabove 3 indicate stability ; score below 3 indicate volatility.Vulnerability Score 1 2 3 4 5How susceptible is this category to both internal and external pressures?; external could be regulatory; newtechnology; fads and fashions; changes in demand. A score of five indicates that category is immune to thesepressures and risks. A score of 1 indicates that the category is highly vulnerable to these pressures.Competiveness Score 1 2 3 4 5Do brands in the category compete on price and promotion thus affecting profit and stable pricing? A score of 5would indicate stability in this regard; a score of 1 would imply considerable pressure on profits due to constantprice and discount movements.
  25. 25. Proprietary and confidential. Do not distribute.LBS 25Brand Evaluation: Determining the expected life of the brand in thecategoryAttribute ratingsConsumer perceptions based onbrand ratingsFunnel performanceThe performance of the brand indriving market3
  26. 26. Proprietary and confidential. Do not distribute.LBS 26Category and Brand Evaluation: Calculating forecast lifetime bymerging Category Expected Life & relative strength of the brand (BKS)Category ExampleSmartPhonesDominant Brand33 yearsClient Brand29 yearsMarginal Brand7 yearsThe category expected life defines theforecast period for the categoryThe brand knowledge structure defines theforecast period of the evaluated brandrelative to its competitorsOil &GasDominant Brand18 yearsClient Brand7 yearsMarginal Brand3 yearsIllustrative3
  27. 27. Proprietary and confidential. Do not distribute.LBS 27Bringing it all together4Current Brand ValueUS$ MillionsEconomic Profit (base year)Brand ContributionBrand Life Yrs%$Input Source$ millions base year year 1 year 2 year 3 …year XIncome from operations $8,446 $8,784 $9,135 $10,231 $Less tax ($1,632) ($1,697) ($1,736) ($2,558) ($)NetOperating ProfitAfterTax (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 $7,104CATEGORY CCATEGORY BAttribute 1XI would notchooseany oftheseoffersWhich optionwould youchoose?…… … … ………… … ………… …Attribute 2Attribute 3Channel 1Price $1 $1.20$1 $1.10…CATEGORY ABrandCompetitorDCompetitorACompetitorBCompetitorCILLUSTRATIONDiscrete Choice Model(realistic decision-makingscenarios to understandchange in preferenceshare for differentofferings)Consumer choicein interviews(offer parameters arebeing rotatedsystematically by thesoftware based onprevious choices)Input data Current competitiveenvironment in category8%9%12%14%15%18%24%Attribute 3Attribute 2Attribute 1ServiceChannelBrandPriceDrivers of SalesTotal100%Brand Value $Dominant Brand18 yearsClient Brand7 yearsMarginal Brand3 years
  28. 28. Proprietary and confidentialDo not distributeFor more information, please contactJames Walker: j_walker@prophet.com

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