This answers the question: 'What have you gained?' Brand value is the bottom line of the business of branding. It is the final result of the success or failure of a brand. As indicated earlier, brand value is the end that all the branding elements discussed earlier, including brand equity, aim to reach. While brand equity is based on consumer psychological indicators, brand value occurs when this equity translates into financial gains for the company that owns the brand.
Brand value in the simplest of terms is the financial benefit that a company receives as a result of the strength of its brand. This financial benefit is represented in the company's financial report or balance sheet as a part of its assets, specifically as an intangible asset. It oftentimes contributes substantially to the worth of a company. A high brand value is sometimes the sole reason that some companies are valued at more than ten times their net worth assets. Also it explains why certain companies sometimes generate up to five hundred percent of their actual book price, when they are sold.
The brand value is often represented on a company's balance sheet as a part of its 'goodwill'. The goodwill is the difference between a company's tangible assets and its actual worth, and goodwill often represents a statement of the confidence in the company's current strength and of assured forecast earnings and growth. It is this goodwill that translates into an intangible asset for the company. A major source of goodwill is the brand value. Goodwill could also comprise of other elements such as technology and patents. Consequently, companies with powerful brands have a high intangible asset base, which becomes the brand value when translated into financial worth. The intangible asset is arguably the most important asset for luxury fashion brands because a large proportion of the business value of luxury brands originates from the brand value.
For a long time, the concept of brand valuation as a business aspect has been controversial. This is because a company's asset source was viewed as tangibles such as land, machinery, capital and human resources. Although there was a general awareness that intangible aspects existed in business, there were no methods to measure or quantify these and to directly link them with the benefits that they provided. This was until the wave of mergers and acquisitions of the 1980s and 1990s led to the questions that has been continuously asked in the stock market valuation of companies:
What role do intangibles play in company valuations and how can these be measured?
For example, when Daewoo made a bid to purchase the electronics company, Thomson, it offered to pay an astonishing €1 because, according to Daewoo, the brand Thomson had no value. This extreme view was perhaps because, as a brand, Thomson had little branding weight to substantially contribute profitability to Daewoo. In the luxury fashion scene, Pierre Cardin, one of the pioneers of haute couture and prêt-à-porter put his brand on the market for sale at a price of approximately $500 million but industry sources indicate that buyers were not forthcoming. This could again be because the market believed that this asking price is an over-estimate of the true value of the brand. As a matter of fact, excessive licensing and questionable minimal quality and distribution control have devalued the brand in the luxury market. Although this business strategy has made Pierre Cardin one of the wealthiest men in fashion, it has severely damaged his brand image, brand equity and brand value. These examples provide a clear rationale behind brand valuation.
The process of calculating and determining the intangible asset worth of brands is called brand valuation. This valuation incorporates several business aspects such as branding, marketing, finance and production as well as features of the law of taxation and economics. This gives brand valuation a multi-subject dimension by bringing a synergy between the different business disciplines. It shows a direct co-relation between branding, marketing and finance and how the result of one directly impacts on the other. It also shows that the figures recorded on the balance sheet of companies with strong brands have their origin in marketing and branding. Since a company's brand value is recorded in its financial report as an asset, it is worth asking how this intangible asset is accurately calculated.
The methodology for brand valuation has been in debate ever since the importance of branding rose to the forefront of business strategy and management in the mid-1980s. Brand valuation is linked with accounting methodologies, standards and principles. This is because in financial reporting, a company's worth must be recorded against the specific source(s) of its value, which includes brands. Since accounting standards vary from country to country, it is quite difficult to pinpoint a standard brand valuation methodology that has been accepted internationally. In addition, unlike the measurement of other company assets such as stocks and bonds, which have comparable values, brand valuation lacks a market base from which to draw benchmarks. This makes the exercise of brand valuation both challenging and accuracy-focused.
So how can the value of luxury brands be reliably assessed? When should brand valuation feature in the balance sheet? How often should brands be evaluated? What about depreciated brands? Are they also featured on the balance sheet as lost revenue? The questions regarding brand valuation are endless and have led to intense debate in Western economies.
As much as accounting is complicated and is not the subject of this book, its discussion cannot be avoided in this section because of the major interrelationship between accounting and brand valuation. Accounting principles work on the premise that brands acquire their value through the market. In other words, the true worth of a brand is not known until it is either sold or purchased. This is when the payment that has either been made or received as a result of a company's goodwill is explicitly represented on the balance sheet of the acquiring company. This viewpoint also supports the notion that as long as a brand has not been bought or sold, its brand value cannot be accurately estimated or represented. Therefore, only past and recorded transactions regarding brands are the reference points for the brand value. If this principle is right, then the implication is that several luxury brands that are believed to be of high value such as Louis Vuitton and Gucci can have only an estimated brand value until they're involved in a merger, acquisition or buy-out. It also means that brands that have been acquired by conglomerates and grown internally such as Van Cleef & Arpels of the Richemont Group cannot be accurately evaluated.
How realistic and applicable is this viewpoint in the current business scene and is it relevant for the global luxury goods industry? The answer is simple. Brands must be evaluated, whether grown internally or acquired externally. This especially provides a thorough perspective of the success and failure of the branding efforts made by a company. This is imperative for luxury brands that desire to remain competitive. It might seem contrary to the accounting system, which is based on the reliability of data, as the subjective nature of brand valuation creates a problem in accounting rules. However, this prudence is losing its bearing in certain business aspects including branding.
All brands are grown internally until they are sold and then they become external brands for the owners. As a result, all brands have internal value or the potential of attaining value without external transactions. For example, in 2001 private equity firm Equinox bought 51 per cent of Jimmy Choo. Equinox later sold this stake in 2004 to venture capital firm Hicks Muse now known as Lion Capital, in a transaction that valued the company at £101 million, although Jimmy Choo's annual sales at the time were about £40 million. This sum was justifiable because of the efforts made by the owners of Jimmy Choo to develop the brand strength internally before external transactions.
On another level there are brands like Armani, which remains a privately held company under the ownership of Giorgio Armani and hasn't yet been involved in acquisitions and buy-outs. How can such a brand that has been meticulously nurtured since its launch in 1974 be accurately evaluated based on its brand value if the principle of accounting were to be followed? Also since brand value does not remain static but either appreciates or depreciates, it is quite impossible to wait for a transaction to determine the result of a company's branding efforts. What if there is no transaction? Will the value of the brand never be evaluated?
Accounting and finance serve as a structure for accountability in terms of income, expenses, investments and taxation. When costs are accrued by a company with respect to brand promotion, for example print advertising, they are recorded as expenses and are often tax deductible. This was until accounting standards authorities realized that these expenses are rather investments, which yield enormous results in terms of assets for the companies in question. Thus these expenses began to be treated as investments and their returns as assets. This led to the identification that the same system that uses the value of a company's assets generated by investments to estimate the future earning potential could be applied to brands. So brands began to be evaluated through a method using forecast earnings projections.
The major problem with this method was that the objective of forecasting was different from the objective of brand valuation. Forecasting methods were used to evaluate the market value of fixed assets, while brand valuation represented the market value of intangible assets. Above all, the role of brand valuation in mergers or acquisitions is significantly different from the role of brand valuation for a company's internal use in strategy development. These factors have contributed to the ongoing debate of the brand valuation of companies, particularly luxury brands.
The exercise of brand valuation is necessary for brand-auditing purposes, that is to carry out a health-check for the brand. Another function of brand valuation is to aid in the creation, revision and implementation of effective marketing and corporate strategies. In addition, brand valuation when carried out frequently, helps to assess the short-term results and long-term impact of current strategies. However, this frequent evaluation shouldn't undermine the long-term nature and benefits of the brand. For example, luxury brands such as Prada have seen a significant rise in their brand value in recent years, compared to twenty years ago, as a result of efforts made towards brand value creation. However the high brand equity and long-term brand growth potential of Prada shouldn't hamper frequent brand valuation.
Several brand valuation methods have been devised by different companies and groups specializing in brand management strategy, as a result of the inconsistencies created by accounting methods and the need for constant brand valuation. These groups have differing approaches but have all recognized three important facts that accounting fails to reflect:
1 The importance of understanding how brands work, how they can be grown and how they can increase or decrease in value in the short and long terms.
2 The importance of creating synergy between all the departments involved in creating and sustaining brands within a company such as finance, marketing, operations, product development, e-commerce and audit.
3 The significant role of brand valuation in marketing, branding and corporate strategy formulation.
The methodologies created for brand valuation include the technique developed by brand consulting company, Interbrand Corp. This method recognizes brands as assets that have value through a projection of their future earning potential using current sales turnover and historical financial data. This projected figure is then discounted to a present value, creating what accountants call a Net Present Value (NPV). The NPV is arrived at after deducting operating costs, capital, taxes and other intangibles. Other factors such as the management capability, market position, global scale of operations and stability are considered in calculating the net present value.
Another brand valuation method is that of brand consultancy company
2 Ogilvy. This method views brands as a means to an end, the end being higher earnings, revenues, cash-flows and profits. The significant difference between this method and that of Interbrand is that the latter puts an absolute value on brands as intangible assets and represents them on the balance sheet, while the former indicates that brands cannot be absolutely valuated and should only feature on the Profit and Loss accounts because their contribution to a company are clearly represented there. The method use by Ogilvy uses the regressed Compound Annual Growth Rate (CAGR) to measure strength through its growth potential and the Capital Asset Pricing Model (CAPM) to calculate the discount rate of companies with strong brands.
In addition to these methods, several branding experts such as Jean-Noel Kapferer also propose that different methodologies can be utilized according to the specific objective of the brand valuation. For example, if a brand is being valuated in order to generate capital funding from a financial institution, then it is worthwhile to use a brand valuation method that places an emphasis on the future earning potential of the brand.
Although the brand valuation methods that have been discussed can be applied to companies in various sectors, the method that is most relevant for the luxury sector is that which emphasizes the brand as an asset to companies. This is because the luxury sector does not only have branding as one of its core competences but also draws a high percentage of its value from the power in the concept of branding. The complete branding process, which has been discussed extensively in this chapter, is represented in Figure 5.4.
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