“If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you.” — John Stuart, Chairman of Quaker (ca. 1900)
In the evaluation of profitability and performance of businesses, tangible assets are regarded as the main source of business value. In the process of business valuation, focus is always on indicators such as return on investment, assets or equity all of which exclude intangibles such as brand value and goodwill of the business.
Technology, patents, employees and the overall brand value have always been an integral part of any corporate success story. In the past few years we have witnessed a dramatic shift in the sources of value creation from tangible assets (such as property, plant, equipment and inventory) to intangible assets (such as brands, goodwill, skilled employees, customer base, business systems). In his time tested book on investing, “The Intelligent Investors”, Benjamin Graham surely ignored these intangible benefits when he recommended a “price to assets” (or price-to-book-value ratio) of no more than 1.5. In recent years intangible benefits from assets like patents, trademarks and brand value have started contributing progressively more to the value of companies. Since these factors are excluded from the standard definition of book value, most companies today are priced at price-to-book multiples which are much higher than in Graham’s days (the first edition of Intelligent Investor was published in 1949).
Understanding Brand Value
A brand is a special intangible asset that in many businesses is the most important asset. This is because of the economic impact that brands have. A brand creates a set of perceptions and images which represent a company, its products or services. So much so that oftentimes people blindly buy a particular product because of its brand value, ignoring better and more economically available products. For example, many companies tried to launch competing products to Cadbury’s Bournvita, (such as Nestle, which launched Nestle Milo and aggressively advertised for it) but most of them had to be taken off the shelf while Bournvita has maintained its market leading position over the years. Similarly other iconic brands such as Colgate which has almost become synonymous with toothpastes in India and Nescafe for coffee enjoy remarkable brand value.
While many people refer to a brand as a logo or tag line, it is actually much larger than that. Brands convey a uniform quality, credibility and experience which is delivered by the company’s products or services. Many companies put the value of their brand on their balance sheet. Companies regularly invest in brand creation and can buy and sell brands and borrow against them.
A majority of the world’s most valuable brands have been around for more than 40 years. Coca-Cola, the world’s most valuable brand, is more than 118 years old. Below is the list of 10 of the most valuable brands of 2012, globally:
In 2008, Tata Motors Limited bought Jaguar Land Rover from Ford Motors for US $2.56 billion. In addition to the employees and raw materials, Tata Motors acquired two iconic British car brands Jaguar and Land Rover. These brands at that time were worth more than all other intangible assets acquired for the deal price. Strong brands enhance business performance primarily through their influence on three key stakeholder groups: customers (current and prospective), employees, and investors. The influence of brands on current and prospective customers is particularly a significant driver of economic value. Brands help shape perceptions and customer behavior making products and services less replaceable, allowing their owners to enjoy higher returns and continuity of demand in future. This makes expected returns more likely — or less risky.
Intangible Benefits – Companies with strong brands benefit in multiple ways
► Strong customer backing: Strong brands create the kind of perception which makes a customer sub-consciously biased towards buying a particular product or service offered by the brand owner (such as Apple and Blackberry phones). Oftentimes this also leads to repeat purchases (for example in case of Nestle Maggi noodles).
► Long term competitive advantages: Brands create differentiation in the market and advertising helps to position the brand in the mind of the targeted audience. Once a company manages to create brand awareness in the minds of its consumer, it is far easier to reach out to them. New methods of advertising including social media and other forms of online advertising, in addition to newspapers, magazines and television commercials have an immense impact on people’s psyche and decision making.
► Higher & premium pricing: Strong brand allows the brand owner to command higher pricing and gives it the advantage of slashing the prices when faced with potential competition.
► Investor confidence: Investors who are themselves a patron of the products or services of a company are more likely to show strong confidence in that company.
The increasing recognition of ‘Brand value’ becomes evident by the continuous increase in the gap between companies’ book values and their stock market valuations. Companies endowed with successful brand names enjoy future earnings and cash flows over and above the ones generated by companies with unbranded products. As global competition becomes tougher and the competitive advantages of technology become short lived, well known brands will surely create sustainable shareholder value. It is no surprise then that managements have started investing heavily in creating brand awareness with an eye on long term competitive advantages.
What’s in a brand? – The Kingfisher debacle
‘Kingfisher’ has a strong brand recall in the alcoholic beverages (beer) segment. However, Kingfisher Airlines is almost at the verge of bankruptcy. The ‘Kingfisher’ brand, under which both i.e. the airlines and beer business operates enjoys a high brand value. The consortium of banks which extended credit to Kingfisher Airlines has an outstanding of more than Rs. 7,000 Cr owed to them by Kingfisher Airlines. The total collaterals including shares of other group entities such as United Spirits as are valued at approximately Rs. 500 Cr. On February 14th 2013, SBI claimed that they have the brand ‘Kingfisher’ as security for this outstanding amount, a claim fiercely disputed by United Breweries Limited (“UBL”), the owner of brand Kingfisher who claim that they have never hypothecated or pledged the brand to any lender.
If Kingfisher Airline is liquidated, It is unlikely that any other airline company would pay to buy the ‘Kingfisher’ brand to run an airline company. However, the last thing that UBL would want is to lose the brand ownership of Kingfisher. Assuming (hypothetically) that Kingfisher brand was up for sale, would you think that the consortium of banks will find prospective buyers? May be other companies in the liquor industry?