Asset tests

Ten years ago this month Interbrand, as it was then known, conducted the first ever brand valuation for Ranks Hovis McDougall. The exercise succeeded in putting the worth of the company’s brands as a figure at the bottom of its balance sheet.

RHM’s management wanted this information to fight a hostile takeover bid from Goodman Fielder Wattie, which they considered undervalued. With the brand valuation information the RHM board was able to go back to investors and argue that the bid was too low, and eventually repel it.

Brand valuation is now seen as a key measure for brand owners and ad agencies attempting to justify the value of their work to investors. The Institute of Practitioners in Advertising has just produced a report called “Understanding the financial value of brands”, written by Leslie Butterfield, chairman of advertising agency Partners BDDH and David Haigh, managing director of Brand Finance. It shows how new accounting standards – UK Financial Reporting Standard 10 and international equivalent International Accounting Standards 38 and 36 – are propelling the subject of brand valuation to the top of the agenda for many companies, not least ad agencies.

Former Quaker food business chairman John Stuart puts this in layman’s terms. He says: “If this company were to split up, I would give you the property, plant and equipment and I would take the brands and the trademarks and I would fare far better than you.”

Interbrand Newell & Sorrell, as it is now known, has prepared exclusive research for Marketing Week charting the rise in brand values for some top US and UK companies over the past ten years.

The mathematics are complex but basically Interbrand works out brand valuation by setting a company’s market capitalisation against its net tangible or physical assets. The difference between these two figures denotes a company’s goodwill gap, where investors value a company over and above its tangible assets. Some of this value is accounted for by a particularly strong management or profitable patents. However, the bulk of the figure represents the worth of a company’s brands.

The tables overleaf supplied by Interbrand Newell & Sorrell shows how a number of corporations have seen their goodwill figures double over the past ten years as their brands have become more central to the performance of the company. The 1988 goodwill figures for NatWest and Barclays are negative because of the high foreign and domestic bad debt the banks wrote off in the late Eighties. Investors did not believe banks were worth what they claimed.

But the brand boom has not been good news for everybody. Some sectors which had previously done little brand building have exploded onto the market. And other sectors, particularly packaged goods, which were once considered past masters at branding, are finding it hard to keep brand images contemporary.

United Biscuits’ launch into making own-label food for retailers has led to a diminution of its brand over the years. “Customers notice over time that there is little difference between UB’s brands and supermarket own label,” says one branding specialist.

One packaged goods company which has performed well over this period is Bass Brewers. Marketing director Mark Hunter puts this down to three things. Bass’ new product development over the past three years has created a number of strong brands like Hooper’s Hooch and Caffrey’s. The company also owns its brands, rather than licensing others, which maximises revenues and makes for more involved and inspired management of them. Bass has also chosen to focus on a smaller number of brands and provide them with high-profile support in the market – Carling sponsors the Premier League, Tennent’s sponsors the T In The Park music festival.

Hunter says: “We have changed from a manufacture-driven company to a consumer-focused one. We understand that brands are the wealth creators.”

Shell, a highly profitable company, has seen its brand stand still over the past decade. The brand has lost its confident “You can be sure of Shell” image. It now has a grimmer image after its perceived involvement with Nigeria’s political problems, and the environmental saga of the Brent Spar oil rig. In that time the company failed to do much brand-building activity.

Shell International branding and communications director Raoul Pinnell contends that this image really only affects the UK and certain other European markets. In many other places around the world he contends, “the brand is still regarded as an icon.”

Pinnell admits that although the Shell symbol is one of the most recognised in the world “the image of what we stand for is not as high”. He says there will be more co-ordinated communications work across borders in the coming months.

Three areas that have grown enormously over the past ten years are supermarkets, utilities, and financial services. The catalyst for growth for all three sectors was the privatisation and deregulation that the Conservatives carried out throughout the Eighties.

As Raymond Perrier, Interbrand’s worldwide brand valuation director, puts it: “The effect of this change was that instead of consumers simply asking what kind of bread or coffee do I buy, they asked where do I get my pension? Where do I buy my electricity? So many of these new choices are about services.”

Graham Leigh, the marketing director of Barclays’ new B2 consumer investment division, has spent 25 years marketing financial services and is well-placed to chart the changes in the industry.

He says: “The industry was dominated by the people who made the products. The products were complex and the people who made them could hide behind them and did not have to explain them to the customer. It was an inward, not an outward, looking industry.” In the face of these difficult circumstances, Lloyds TSB has managed to forge a brand while, less successfully, NatWest has struggled to maintain any brand image at all.

However, deregulation brought new entrants into the market: from supermarkets like Tesco to diversified companies like Virgin or even car companies like Volkswagen entering financial services. Reputable retailers or manufacturers which had a strong relationship with their customers and a good database could join this market.

Disappointingly, with only a handful of exceptions, this has led to a succession of poor branding campaigns.

Perrier comments: “After ten years, with a lot of expenditure and few exceptions, we have a situation where most people think that banks are interchangeable, and where pensions are sold on price.”

He warns of the danger of confusing awareness with branding.

Interbrand was retained by a Scottish financial services company to track its awareness among consumers against its competitors. The branding consultancy found that awareness of the company, and rivals such as Scottish Widows and Scottish Amicable, was high.

But then Interbrand invented some likely names to see how they played with the public. It found that fictitious names like Scottish Assurance or Scot Life achieved almost as high a level of recognition. People may have heard of a brand, but unless they attach any values to it, it merely becomes one of a number of companies they have, or think they have, heard of.

Contrast this situation with Coca-Cola where it is difficult to confuse it with anything else – an indication of the singular power of the brand.

The value of brands and their management may have become increasingly important but the salaries of marketing directors have relatively speaking fallen even further behind their managing directors’.

The average wage of a managing director in a large company has risen from 42,000 ten years ago to 100,000 in 1998, according Marketing Week’s salary survey carried out with Michael Page (MW January 15) survey – a rise of 138 per cent. A marketing director in a comparable company has seen his pay rise from 35,000 to 68,000 in the same period, up 94 per cent.

These figures raise questions about the corporate value of the marketing director.

Observers say there will be more brand directors appointed over marketing directors in the future. And these posts may be drawn not only from the marketing department but from corporate strategy departments and management consultants.

Yorkshire Bank finance director Martin Moorehouse, who worked with Interbrand on the brand valuation exercise when he was group chief accountant at RHM, thinks that brand management is bigger than the marketing department.

Moorehouse says: “Branding has become so important that the whole the executive team gets involved, not just the marketing director. It’s too important to leave to one department.”

B2’s Leigh disagrees and thinks ultimate responsibility for the brand does fall to one person, but it is not him. He says: “The brand is owned by the chief executive. Only that person can provide the right culture to build strong brand values. He has to be the brand czar.”

Shell’s Pinnell is in no doubt that the marketing director’s position has changed. He says: “I manage up and down. My chief executive must realise that he is the brand manager. And we get other staff to understand they are at the frontline of brand delivery. Our role is less of a department and more of a champion of the brand. The marketing director’s position has shifted, but that is not a negative thing.”

However, Bass’s Hunter has little time for speculation about who controls the brand. He says: “This is a senseless debate. In a branded culture the executive team and whoever comes into contact with the brand has responsibility for it.”

This may be the case. But increasingly, it will be finance directors and accountants who come into contact with brands as their valuation assumes a new importance on the balance sheet.

It will be the job of marketers – whatever their job titles – to ensure the number crunchers are steered in the right direction when it comes to branding and advertising.

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