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Appendix A: Interbrand Brand Valuation

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Appendix A: Interbrand Brand Valuation Appendix A: Interbrand Brand Valuation Overview Compared to when Interbrand first pioneered brand valuation in the 1980s, global business leaders now widely accept the importance and value of strong brands – and the significant role they can play in enhancing business performance. Strong brands enhance business performance primarily through their influence on three key stakeholder groups: (current and prospective) cus- tomers, employees, and investors. They influence customer choice and create loyalty; attract, retain, and motivate talent; and lower the cost of financing. There are three key components to all of Interbrand’s valuations: an analysis of the financial performance of the branded products or services, the role brand plays in the purchase decision on segmentation, and, at the end of the process, the bringing together of these to calculate the financial value of the brand. 1. Segmentation Segments are typically defined by geography, business unit, product, service, or customer group. Why is segmentation important? A robust valu- ation requires a separate analysis of the individual parts (or segments) of a business to ensure that differences between those segments in terms of the three key components of the brand valuation (financial performance, role of brand, and brand strength) can be taken into consideration. 2. Financial Analysis Interbrand starts by forecasting the current and future revenue that is due to the branded products. They subtract operating costs (the cost of doing business) to arrive at the branded operating profit. Interbrand then apply a discount rate to the branded profit that is based on the capital a business spends, versus the money it makes. This gives them the brand’s economic profit. 297 Appendix A: Interbrand Brand Valuation 298 Financial performance measures an organization’s raw financial return to the investors. For this reason, it is analyzed as economic profit, a concept akin to the standard accounting measure of Economic Value Added (EVA). To determine economic profit, we remove taxes from net operating profit to get to net operating profit after tax (NOPAT). From NOPAT, a capital charge is subtracted to account for the capital used to generate the brand’s revenues; this provides the economic profit for each analyzed year. For pur- poses of the ranking, the capital charge rate is set by the industry weighted average cost of capital (WACC). The financial performance is analyzed for a five-year forecast and for a terminal value. The terminal value represents the brand’s expected performance beyond the forecast period. 3. Role of Brand Role of Brand measures the portion of the purchase decision that is attrib- utable to the brand, relative to other factors (for example, purchase driv- ers like price, convenience, or product features). The Role of Brand Index (“RBI”) quantifies this as a percentage. Customers rely more on brands to guide their choice when competing products or services cannot be easily compared or contrasted, and trust is deferred to the brand (e.g. computer chips), or where their needs are emotional, such as a statement about their personality (e.g. luxury brands). RBI tends to fall within a category- driven range, but there remain significant opportunities for brands to increase their influence on choice within those boundaries, or even extend the category range where the brand can change consumer behavior. RBI determinations can be derived in three ways (and are described in order of preference below): Primary research. Specifically designed research, such as choice mod- eling (although other techniques are available), where RBI is statistically derived Existing research plus Interbrand opinion. Existing research addressing the relative importance of purchase drivers is combined with Interbrand’s opinion on the extent to which the brand influences perception of how the product or service will perform against each driver Qualitative assessment. Based on management discussions and past experience. This is used where no market research is available RBI findings are cross- checked against historical roles of brand for compa- nies in the same industry. Finally, RBI is multiplied by the economic profit of the branded products or services to determine the earnings attributable to the brand (“brand earnings”) that contribute to the valuation total. Appendix A: Interbrand Brand Valuation 299 4. Brand Strength Brand Strength measures the ability of the brand to create loyalty and, therefore, to keep generating demand and profit into the future. Brand Strength is scored on a 0 to 100 scale, where 100 is a perfect score, and is based on an evaluation across 10 key factors (see below) that Interbrand believes make a strong brand. Performance on these factors is judged relative to other world- class brands. The strength of the brand is inversely related to the level of risk associated with the brand’s financial forecasts (a strong brand creates loyal customers and lowers risk, and vice versa). A formula is used to connect the Brand Strength Score to a brand- specific discount rate. The brand-specific discount rate is used to discount brand earnings back to a present value, reflecting the likelihood that the brand will be able to withstand challenges and deliver the expected earnings into the future. This is equal to brand value. Interbrand’s experiences show that brands that are best placed to keep generating demand and profit into the future are those performing strongly (relative to competition) across a set of 10 factors, shown below. Four of these factors are internally driven, and reflect the fact that great brands start from within. The remaining six factors are more visible externally, acknowledging the fact that great brands change their world. Internal Factors Clarity: Clarity internally about what the brand stands for and its values, positioning, and proposition. Clarity, too, about target audiences, cus- tomer insights, and drivers. Because so much hinges on this, it is vital that these are articulated and shared across the organization Commitment: Internal commitment to brand, and a belief internally in the importance of brand. The extent to which the brand receives support in terms of time, influence, and investment Protection: How secure the brand is across a number of dimensions: legal protection, proprietary ingredients or design, scale, or geographical spread Responsiveness: The ability to respond to market changes, challenges, and opportunities. The brand should have a sense of leadership inter- nally, and a desire and the ability to constantly evolve and renew itself External Factors Authenticity: The brand is soundly based on an internal truth and capability. It has a defined heritage and a well- grounded value set. It can deliver against the (high) expectations that customers have of it Appendix A: Interbrand Brand Valuation 300 Relevance: The fit with customer/consumer needs, desires, and decision criteria across all relevant demographics and geographies Differentiation: The degree to which customers/consumers perceive the brand to have a differentiated positioning distinctive from the competition Consistency: The degree to which a brand is experienced without fail across all touch points or formats Presence: The degree to which a brand feels omnipresent and is talked about positively by consumers, customers, and opinion formers in both traditional and social media Understanding: The brand is not only recognized by customers, but there is also an in- depth knowledge and understanding of its distinctive quali- ties and characteristics. (Where relevant, this will extend to consumer understanding of the company that owns the brand) 5. Brand Value Calculation The parts come together so that the forecasted financial performance pro- jects economic profits that are multiplied by the role of the brand to reveal branded earnings. These branded earnings, which are based on the brand strength, are discounted back to a present value and totaled to arrive at a brand value. A strategic tool for ongoing brand management, the brand value calculation brings market, brand, competitor, and financial data into a single, value- based framework within which the performance of the brand can be assessed, areas for improvement identified, and the financial impact of investing in the brand quantified. This calculation is also used in a wide variety of Brand Value Modelling situations, such as: Predicting the effect on marketing and investment strategies Determining and assessing communications budgets Calculating the return on brand investment Assessing opportunities in new or underexploited markets Tracking brand value management Source: Interbrand Appendix B: Interbrand’s 2014 Best Global Brands 2014 2013 Brand Sector 2014 Brand % Change Rank Rank Value in brand (USD $billion) value 1 1 Apple Technology 118.863 21% 2 2 Google Technology 107.439 15% 3 3 Coca- Cola Beverages 81.563 3% 4 4 IBM Business Services 72.244 - 8% 5 5 Microsoft Technology 61.154 3% 6 6 GE Diversified 45.480 - 3% 7 8 Samsung Technology 45.462 15% 8 10 Toyota Automotive 42.392 20% 9 7 McDonald’s Restaurants 42.254 1% 10 11 Mercedes- Benz Automotive 34.338 8% 11 12 BMW Automotive 34.214 7% 12 9 Intel Technology 34.153 - 8% 13 14 Disney Media 32.223 14% 14 13 Cisco Technology 30.936 6% 15 19 Amazon Retail 29.478 25% 16 18 Oracle Technology 25.980 8% 17 15 HP Technology 23.758 - 8% 18 16 Gillette FMCG 22.845 - 9% 19 17 Louis Vuitton Luxury 22.552 - 9% 20 20 Honda Automotive 21.673 17% 21 21 H&M Apparel 21.083 16% 22 24 Nike Sporting Goods 19.875 16% 23 23 American Financial Services 19.510 11% Express 301 Appendix B: Interbrand’s 2014 Best Global Brands 302 2014 2013 Brand Sector 2014 Brand % Change Rank Rank Value in brand (USD $billion) value 24 22 Pepsi Beverages 19.119 7% 25 25 SAP Technology 17.340 4% 26 26 IKEA Retail 15.885 15% 27 27 UPS Transportation 14.470 5% 28 28 eBay Retail 14.358 9% 29 52 Facebook Technology 14.349 86% 30 29 Pampers FMCG 14.078 8% 31 34 Volkswagen Automotive 13.716 23% 32 30 Kellogg’s FMCG 13.442 4% 33 32 HSBC Financial Services 13.142 8% 34 31 Budweiser Alcohol 13.024 3% 35 33 J.P.
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