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How important or valuable is your brand? In the last quarter of the 20th century there was a dramatic shift in the understanding of the creation of shareholder value. For most of the century, tangible assets were regarded as the main source of business value. These included manufacturing assets, land and buildings or financial assets such as receivables and investments. They would be valued at cost or outstanding value as shown in the balance sheet. The market was aware of intangibles, but their specific value remained unclear and was not specifically guaranteed. Even today, the evaluation of profitability and performance of businesses focuses on indicators such as return on investment, assets or equity that exclude intangibles from the denominator. Measures of price relatives (for example, price-to-book ratio) also exclude the value of intangible assets as these are absent from accounting book values. This does not mean that management failed to recognize the importance of intangibles. Brands, technology, patents and employees were always at the heart of corporate success, but rarely explicitly valued.
Brand Equity is a phrase used in the marketing industry to describe the value of having a well-known brand based on the idea that the owner of the brand can generate more money from products with that brand than from products with a less well-known brand. Consumers generally believe that a product with a well-known brand is better than products with a less well-known brand.
Some marketing researchers have concluded that brands are one of the most valuable assets a company has, as brand equity is one of the factors which can increase the financial value of a brand to the brand owner, although not the only one. Elements that can be included in the valuation of brand equity include (but not limited to): changing market share, profit margins, consumer recognition of logos and other visual elements, brand languages, associations made by consumers, consumers' perceptions of quality and other relevant brand values.
A brand encompasses the name, logo, image, and perceptions that identify a product, service, or provider in the minds of customers. It takes shape in advertising, packaging, and other marketing communications, and becomes a focus of the relationship with consumers. In time, a brand comes to embody a promise about the goods it identifies—a promise about quality, performance, or other dimensions of value, which can influence consumers choices among competing products. When consumers trust a brand and it relevant, they may select the offerings associated with that brand over those of competitors, even at a premium price. When a brand's promise extends beyond a particular product, its owner may leverage it to enter new markets. For all these reasons, a brand can hold tremendous value, which is known as Brand Equity.
Evidence of brand value
The brand is a special intangible because of the economic impact that brands have. When valuing a brand we must first determine what the brand embodies. A brand can include a trademark, logo, and packaging, marketing strategy, colours and all the elements that consumers associate with the brand image. They influence the choices of customers, employees, investors and government authorities. In a world of abundant choices, such influence is crucial for commercial success and creation of shareholder value. Even non-profit organizations have started embracing the brand as a key asset for obtaining donations, sponsorships and volunteers.
The increasing recognition of the value of intangibles came with the continuous increase in the gap between companies’ book values and their stock market valuations, as well as sharp increases in premiums above the stock market value that were paid in mergers and acquisitions in the late 1980s. Today it is possible to argue that, in general, the majority of business value is derived from intangibles. Management attention to these assets has certainly increased substantially.
In 1997 the Coca-Cola brand had an estimated value of $65.3 billion, giving it the number one rank among brands worldwide. By comparison, the net book value of the intangible assets recorded on Coca-Cola’s financial statements was a mere $3.7 billion, which shows that the brand’s value goes largely unrecognised on the balance sheet. What’s more, Coca-Cola’s market capitalisation (i.e. the stock markets valuation of the company) was an estimated $140 billion, which, when compared with the brand value of $65.3 billion, shows that the market attributed value to intangible assets well over and above the estimated brand value.
Brands on the balance sheet
A brand can be a business’s most valuable asset, yet its value is generally not reflected in the financial statements. As with other intellectual property, its value is accounted for on the balance sheet only when acquired from another business or as a result of a business combination, but not when generated internally. How, then, is management to track brand value and make informed decisions with respect to what could be the company’s most valuable asset?
The wave of brand acquisitions in the late 1980s resulted in large amounts of goodwill that most accounting standards could not deal with in an economically sensible way. Accounting practice for so-called goodwill did not deal with the increasing importance of intangible assets, with the result that companies were penalized for making what they believed to be value enhancing acquisitions. They either had to suffer massive amortization charges on their profit and loss accounts (income statements), or they had to write of the amount to reserves and in many cases ended up with a lower asset base than before the acquisition. Early brand acquisitions were not shown on the balance sheet because it had a detrimental impact on the company’s return on capital assets.
In terms of accounting standards, the UK, Australia and New Zealand have been leading the way by allowing acquired brands to appear on the balance sheet and providing detailed guidelines on how to deal with acquired goodwill. The principal stipulations of all these accounting standards are that acquired goodwill needs to be capitalized on the balance sheet and amortized according to its useful life. However, intangible assets such as brands that can claim infinite life do not have to be subjected to amortization. The accounting treatment of goodwill upon acquisition is an important step in improving the financial reporting of intangibles such as brands.
Are you making the most of your brand?
In the current competitive environment many people are interested in learning how to create strong, enduring brands. One essential part of this process is to identify the brands value drivers, that is, the basic parameters for creating, managing and measuring a brand’s value.
A brand can be considered as an asset that currently provides certain margins per unit that are higher than those of an unbranded product and a differential volume, and which also provides the brand’s owner certain real options for future growth. These real options may be geographical growth, growth through the use of new distribution channels, growth through additional differentiation, growth through the use of new formats, growth through the possibility of gaining access to new market segments, or withdrawal facilitated by the use of franchises.
Today, leading companies focus their management eorts on intangible assets. For example, the Ford Motor Company has reduced its physical asset base in favour of investing in intangible assets. In the past few years, it has spent well over $12 billion to acquire prestigious brands such as Jaguar, Aston Martin, Volvo and Land Rover.
"It’s about brands, brand building and consumer relationships. Decapitalised, brand owning companies can earn huge returns on their capital and grow faster, unencumbered by factories and masses of manual workers. Those are the things that the stock market rewards with high price/earnings ratios." John Akasie - Forbes Magazine.
Written by Dave Morgan General Manager - LINK Wellington 021 471 992 / 04 472 7602 firstname.lastname@example.org