Goodwill worth its weight in gold

There was a time, not so long ago, when goodwill was a dirty word. In the minds of accountants and finance directors, the less of it on the balance sheet the better. Those companies with huge physical assets (never mind that they were rusting away somewhere in the North-east) had little goodwill and were therefore judged sound. Those with lots of goodwill – companies that prospered through such intangible and unintelligible assets as their corporate brain- and brand-power, were urged to jettison it as quickly as possible.

Clearly this was a nonsense. It put service industry companies (particularly ad agencies, which had little else to offer but their goodwill) at a comprehensive disadvantage to manufacturing. Their shares were undervalued and the process of market competition – takeovers to you and me – was seriously compromised. This at a time when the service sector was beginning to dwarf manufacturing.

Then, ten years ago almost to the month, a small consultancy called Interbrand produced the first known brand valuation. Its premise? That far from being a write-off on the balance sheet, brands were a major asset that actually enhanced shareholder value. The effect was stunning. Beleaguered Ranks Hovis McDougall, which had commissioned the valuation, was able to persuade its investors that the company had been seriously undervalued and so repel the predatory embrace of Goodman Fielder Wattie.

Today, brand valuation has become a commonplace, central to the performance of many marketing-led companies. Interbrand (now Interbrand Newell & Sorrell) has provided Marketing Week with some exclusive insights into the changing patterns of the past ten years. Many leading companies, such as Unilever, Cadbury Schweppes, Boots and Bass have seen their goodwill value – and consequently market capitalisation – balloon as a result of powerful brand performance.

But the good news has not been universal. Supermarkets, utilities and financial services have blossomed as sectors, but the record of packaged goods companies is patchier. Bass’ innovative record, enshrined in such brand launches as Caffrey’s and Hooper’s Hooch, clearly shines through in the balance sheet, but for Allied Domecq and United Biscuits, once brand bellwethers, the going has been rougher.

And that’s not all. Brands have now become so integral to business success that their stewardship itself has become a focal management issue. Too important to be left to the marketing directors, many chief executives would now say. A belief which has, of course, opened many a door to ambitious management consultant….

Cover Story, page 28