Brands are increasingly recognised as assets that confer significant long-term competitive advantage. However, many companies regard the quantification of these values as tedious compliance with accounting legislation, rather than as an opportunity to better manage their business.
Advanced valuation techniques can now be used to better understand, plan and maximise the value of brands and other intangible assets, increase accountability and improve share price.
This week Brand Finance, an independent global brand valuation consultancy, releases its BrandFinance250 (BF250) report – a ranked index of the world’s 250 most valuable brands. This valuation includes “Brand Ratings” – a credit agency-style assessment of each brand – calculated using the “royalty relief” approach. This is used for three reasons.
First, it is the approach favoured by accounting, tax and legal sectors, because it calculates brand values by reference to comparable, third-party transactions. Methodologies that attempt to apportion varying degrees of company profit to brand are not considered sufficiently robust for review by accounting or tax authorities.
Second, it relates to the commercial reality of brands – specifically their ability to command a premium in an “arm’s length” transaction. Finally, royalty relief can be performed on the basis of publicly available financial information. No other brand valuation tables can make equivalent claims.
The total value of the BF250 most valuable global brands is $2,087tr (£1.06tr). Much of this is not in conventional consumer goods sectors, underlining the point that brands create significant economic value in all sectors, from utilities to finance.
The BF250 analysis rates Coca-Cola as the world’s most valuable brand. Originally created for medicinal purposes, it is globally ubiquitous and the most-widely distributed brand of all time. Created in 1888, Coke is the second most globally understood English word, and is consumed in over 200 countries.
With a brand value of $43.1bn (£21.8bn) it has survived health scares, the commercial failure of New Coke in the mid-1980s, the Dasani scandal and becoming a focus for anti-capitalist and anti-American sentiment in various parts of the world. It has sufficient brand equity to extend to multiple flavour variants, including Diet Coke, Cherry Coke, Vanilla Coke, Raspberry Coke, Coca-Cola with Lime and, most recently, Coke Zero, all contributing additional revenue to the total value.
The world’s largest company by market capitalisation, General Electric, sees its corporate brand rate seventh place. Despite not being a recognised brand in the traditional sense, it makes a significant contribution to the business-to-business activities of GE-owned companies. Google, as the most valuable internet brand (in 15th position), earns its place through a strong, cohesive brand proposition in a growing market, underpinned by outstanding financial performance.
The Brand Rating – one of the outputs of Brand Finance’s methodology – represents a summary opinion on a brand, benchmarked against its competitors, and can be used as a key identifier of brand equity.
The top 12 brands all receive an “AAA ” rating. The recurrent theme among them is their consistent focus on brand in all key decision-making. All 12 are clear market leaders, and rigorously enforce their intellectual property rights to protect their brands against imitation, passing off or dilution, all of which erodes brand equity. These leaders also have a reputation for continuous brand-focused innovation, be it technology-related for Google Earth, or aesthetically, as embodied by Prada’s new flagship store in Tokyo.
Another key measure for brand value is comparing it to the overall value of the business (enterprise value). This provides insight into how much of the company’s value is derived from the brand, and essentially quantifies how effectively the brand is working.
Fashion and cosmetic brands comprise the majority of the top ten: a fact that is testament to the emotional nature of consumer behaviour. Within these sectors, brands represent and appeal to consumers’ aspirations. Imagery, price, positioning and then product are the key. Thus Chanel, in order to maintain its price points, exclusivity and consumer demand, prefers to destroy old stock rather than sell it at a discount, to avoid undermining the brand’s position by making it more accessible.
Brand values represent, on average, 18% of the total enterprise value of the businesses represented within the BF250, confirming the importance of brands to the overall value and success of the businesses they symbolise. This evidence supports calls for brands to be strategically managed by both marketing and financial departments in collaboration with senior management.
In the past, much of the scepticism shown towards brand valuation stemmed from the lack of clarity concerning its practical benefits, other than when applied through necessity for technical purposes.
At its best, brand valuation analysis can provide the basis for better decision-making and actions. A surge in the number of blue chip companies adopting Brand Scorecard tracking systems (analysing effectiveness of marketing expenditure), a rise in the number of offshore brand holding and management companies, and the increased application of brand valuation to inform portfolio architecture decision-making, is testament to the benefits in connecting marketing activity to financial performance.
David Haigh, chief executive officer of Brand Finance, contributed to this week’s Trends Insight