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

1989Barwise declares it is:

“impossible to

separate the brand

(value) from the rest

of the business”

2001SEC calls for disclosure

of intangible assets;

how they are developed,

protected and exploited

2004FASB removes

SFAS 142 from

research agenda

Australian gov’t

funds a similar item

for IASB (IAS 38)

2007Australian Accounting

Standards Board is

encouraged by the

chairmen of the IASB

“with particular focus

on... internally

generated intangible

assets”

2011SEC issues Work Plan

for incorporating IFRS

in U.S financial

reporting system.

Uses IAS38 as

example

2001FASB 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

2005IASB introduces IFRS 3

recognizing acquired

brands as assets

Brandson 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?

Actu

als

Bu

dg

et

Fo

recast

Today Peak point = X years* Expected life = Y years*

CATEGORY CCATEGORY B

Attribute 1

X

I would not

choose

any of

these

of fers

Which option

would you

choose?

…

… … … …

…

…

… … …

…

…

… …

Attribute 2

Attribute 3

Channel 1

Price $1 $1.20$1 $1.10

…

CATEGORY A

BrandCompetitor

D

Competitor

A

Competitor

B

Competitor

C

ILLUSTRATION

Discrete Choice Model(realistic decision-making

scenarios to understand change in preference

share for differentofferings)

Consumer choicein interviews

(offer parameters are being rotated

systematically by the software based on previous choices)

Input dataCurrent competitive

environment in category

8%

9%

12%

14%

15%

18%

24%

Attribute 3

Attribute 2

Attribute 1

Service

Channel

Brand

Price

Drivers of Sales

Total100%


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



Attribute 1

X

I would not

choose

any of

these

of fers

Which option

would you

choose?

…

… … … …

…

…

… … …

…

…

… …

Attribute 2

Attribute 3

Channel 1

Price $1 $1.20$1 $1.10

…

CATEGORY A

BrandCompetitor

D

Competitor

A

Competitor

B

Competitor

C

ILLUSTRATION









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) ($2,558) ($)

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


Attribute 1

X

I would not

choose

any of

these

of fers

Which option

would you

choose?

…

… … … …

…

…

… … …

…

…

… …

Attribute 2

Attribute 3

Channel 1

Price $1 $1.20$1 $1.10

…

CATEGORY A

BrandCompetitor

D

Competitor

A

Competitor

B

Competitor

C

ILLUSTRATION









8%

9%

12%

14%

15%

18%

24%

Attribute 3

Attribute 2

Attribute 1

Service

Channel

Brand

Price

Drivers of Sales

Total100%

Brand Value $

Dominant Brand 18 years

Client Brand7 years

Marginal Brand 3 years

Proprietary and confidential

Do not distribute

For more information, please contact

James Walker: [email protected]

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