brand equity modelling

Brands are names or symbols intended to identify the goods or services provided by a specific company, and to differentiate those goods or services from those supplied by any competitors. When relating to a brand (whether transacting with, or even thinking about the brand), a (potential) consumer is engaging with the values associated with that brand on a rational and emotional level. This represents an ongoing relationship between the company and the consumer, which provides the company with some confidence as to future demand, and hence revenue. It would be wrong, however, to perceive of brands purely in an abstract sense: instead, they are “defensible legal property that can be sold, transferred or licensed.” [Brand Finance (2001]

what is brand equity?
There are two fundamental approaches to defining brand equity. The first such approach is descriptive rather than concerned with measurement. For example, brand equity may be described in the form of a brand equity hierarchy, or pyramid, in which various components contribute to equity. This approach appraises the significance of the contributory elements of brand, rather than assigning a value to those elements. Click on the button below to see an example:

In this example, the brand equity is simply the qualitative answers to the questions posed. The alternative approach is a quantitative one: either a value is ascribed on an arbitrary scale (say, 1 to 100) or the brand equity is somehow assigned a monetary value. In this second approach – of which BRAVO is an example – brand equity is not merely a range of perceptions about a brand, but the translation of such perceptions into a financial value.

Such measurement of brand equity in financial terms has allowed the publication of brand values and, at times, the buying and selling of brands. A selection of examples include Lonrho, which valued its newspaper titles at £117 million; funeral group Hodgson Holdings, which spent £42 million on more than 80 funeral companies; Grand Metropolitan being valued at more than £500 million; and Cadbury Schweppes spending £307 million acquiring brands since 1985. Coca-Cola, estimated by most brand valuation experts to be the most valuable brand in the world, has been rated at some $85 billion in 1999, up markedly from $39 billion in 1995.

brand equity and company accounts
The question of whether a brand should feature in a company’s balance sheet remains controversial, although experts argue that because of their size, brand values cannot reasonably be left out: in several sectors brands may contribute the majority of shareholder value.

Historically, the financial value of brands was rarely considered before the 1980s, and any understanding of a brand’s strength was not turned into a value which was entered into company accounts. This state of affairs changed dramatically in the 1980s when a number of hostile takeovers of companies with strong brands indicated that these companies were seriously undervalued as a result of their brands being omitted from the balance sheet. It was at this point that, for different reasons, Grand Metropolitan and RHM put the value of their brands in their balance sheets: RHM as an essentially defensive move against a hostile takeover threat; and Grand Metropolitan in order to lower the amount of goodwill that it would have been necessary to write off after the purchase of Pillsbury Foods, if the brand value had not been included in the balance sheet.

In the UK, the standard rules to be applied are laid down in Financial Reporting Standard 10 - Goodwill and Intangible Assets. FRS10 permits the inclusion of internally generated intangible assets, including brands, where they have a market value that can be readily ascertained. However, the International Accounting Standard 38 - Intangible Assets (1998) doesn’t allow internally generated brands to be included in a company’s balance sheet on the grounds that they cannot be distinguished from the general cost of developing that company; the possibility remains, under IAS38, however, for intangible assets to be recognised at cost where future benefits from those assets can be reliably measured.

Significantly, in a recent survey by Brand Finance, 82% of City analysts believed that all acquired intangible assets should be capitalised on company balance sheets – with a majority also agreeing that internally generated intangible assets should be capitalised too. The difference between these two views is significant, with the anomaly that, for example, Diageo can capitalise Smirnoff as an acquired brand, but not Baileys, which was generated internally, even though the two brands may be of equal value. The majority of City analysts also thought that any brand valuations to be included in company accounts should be conducted by independent third-party analysts and not by the company’s auditors.

For further insight into how this model would apply to your brand(s) please call us on 020 7317 2770 or email info@valueyourbrand.com to set up a meeting now.