MAJEURE FINANCE Brand Valuation A case study on Lindt & Sprüngli Daniel Llobet & Alejo López-Balcells, supervised by Professor Patrick Legland June 2019 2 ABSTRACT Typically absent from financial statements, the brand of a company remains most times in the dark of finance. After all, it is the unconscious rationale behind consumers´ or employees´ choices for a product or a company, and how would you capitalize that? Some would say it is even esoteric. Nevertheless, its importance cannot be undermined. Brands are the most important individual asset of many companies and, as such, to know its value can be key for the company´s decision making. Built through years of investments in recognition, the brand is associated with certain product characteristics such as quality or price, but also eco- friendliness or fair trade. Perception, therefore, is key to understand its value. We have tried in this research paper to gather the predominant valuation methods in the industry, using them to value Lindt as brand. The broad range of results yielded by the different methods must not come as a surprise; as mentioned, the value is dependent on the evaluator´s perception of the brand. While some of the methods provide different solutions to try to objectivize this perception, this remains a subjective task after all. As a result, the main objective of this paper is to evaluate the relevance of each method, providing recommendations on the conditions to use one or the other. 3 TABLE OF CONTENT 1. INTRODUCTION ..................................................................................................................................... 10 1.1 THE IMPORTANCE OF BRAND VALUATION ......................................................................... 10 1.1.1. THE CONCEPT OF BRAND ................................................................................................... 10 1.1.2 THE GROWING RELEVANCE OF BRAND VALUE ........................................................... 11 1.2 SCOPE OF THE THESIS ................................................................................................................ 15 2. OVERVIEW OF EXISTING BRAND VALUATION METHODS ......................................................... 16 2.1. COST-BASED METHODS ............................................................................................................. 16 2.1.1 Historical cost of creation .......................................................................................................... 16 2.1.2 Replacement cost ....................................................................................................................... 17 2.1.3 Cost to recreate .......................................................................................................................... 17 2.2. MARKET-BASED METHODS ...................................................................................................... 18 2.2.1. Brand sale ................................................................................................................................... 18 2.2.2. Residual method ......................................................................................................................... 18 2.2.3. Price to sales ratio – Damodaran ............................................................................................... 18 2.2.4. Interbrand’s valuation method – Differential earnings .............................................................. 20 2.2.5. Simon & Sullivan (1993) brand equity method ......................................................................... 23 2.3. INCOME-BASED METHODS ....................................................................................................... 25 2.3.1. Discussion around the discount factor for brand valuation ....................................................... 25 2.3.2. Price premium ............................................................................................................................ 27 2.3.3. Gross margin and operating profit comparison methods ........................................................... 29 2.3.4. Royalty relief ............................................................................................................................. 30 2.3.5. Brand strength analysis .............................................................................................................. 33 2.3.6. Excess cash flow ........................................................................................................................ 35 2.3.7. Real options ............................................................................................................................... 38 3. CASE STUDY: LINDT & SPRÜNGLI .................................................................................................... 41 3.1. MARKET OVERVIEW ................................................................................................................... 41 3.2. DESCRPITION OF LINDT & SPRÜNGLI .................................................................................... 44 3.2.1. History of Lindt & Sprüngli ....................................................................................................... 44 3.2.2. Company overview .................................................................................................................... 45 3.2.3. Lindt & Sprüngli business strategy ............................................................................................ 47 3.2.4. SWOT analysis .......................................................................................................................... 49 3.2.5. Financial statements analysis ..................................................................................................... 51 3.2.6. Branding ..................................................................................................................................... 53 3.3. COMPARABLE NON-BRANDED COMPANIES ........................................................................ 54 4 3.3.1. Natra ........................................................................................................................................... 54 3.4. BRAND VALUATION ................................................................................................................... 57 3.4.1. Justification of the choice .......................................................................................................... 57 3.4.2. Valuation common assumptions ................................................................................................ 58 3.4.2.1. Tax rate, inflation and other common hypotheses ................................................................. 58 3.4.2.2. Discount factor computation .................................................................................................. 59 3.4.3. COST-BASED APPROACHES ................................................................................................ 62 3.4.3.1. Historical cost of creation method ......................................................................................... 62 3.4.3.2. Replacement cost method ...................................................................................................... 64 3.4.3.3. Cost to recreate method ......................................................................................................... 66 3.4.4. MARKET-BASED APPROACHES ......................................................................................... 67 3.4.4.1. Brand sale method .................................................................................................................. 67 3.4.4.2. Residual method ..................................................................................................................... 69 3.4.4.3. Price to sale ratio – Damodaran method ................................................................................ 70 3.4.4.4. Interbrand’s valuation method – differential earnings ........................................................... 74 3.4.4.4.1. Brand differential earnings .................................................................................................... 75 3.4.4.4.2. Brand strength analysis .......................................................................................................... 75 3.4.4.4.3. Brand profits multiplier .......................................................................................................... 78 3.4.4.4.4. Brand Value & Sensitivities ................................................................................................... 79 3.4.4.5. Simon & Sullivan (1993) brand equity method ..................................................................... 80 3.4.5. INCOME-BASED APPROACHES .......................................................................................... 82 3.4.5.1. Price premium method ........................................................................................................... 82 3.4.5.1.1. Lindt & Natra product prices ................................................................................................. 82 3.4.5.1.2. Superior charges and brand value .......................................................................................... 83 3.4.5.2. Gross margin and operating profit comparison methods ....................................................... 86 3.4.5.3.