From football clubs to commercial banks, luxury fashion houses to countries – Brand Finance measures the strength and value of brands throughout the world.
Upon joining the IVSC earlier this month, we spoke to CEO and founder, David Haigh, to find out more about their work and the growing importance of brand in assessing and driving business value.
“We are honoured to be the first brand valuation consultancy to become a member of the IVSC. As a chartered accountancy firm, regulated by the ICAEW, we have been training our staff in IVSC standards since we were formed in 1996 and look forward to supporting further development of technical professionalism within the industry as part of the IVSC network. Brand Finance has always been an advocate and active proponent of brand valuation standards from ISO 10668 on monetary Brand Valuation adopted in 2010, to ISO 20671 on qualitative Brand Evaluation which will be officially published next month.” David Haigh, CEO Brand Finance
David, can you tell us a bit about Brand Finance, what valuation services do you provide, who are your clients and where do you operate?
Brand Finance is the world’s leading independent brand insights and valuation consultancy. We use advanced market research analysis combined with financial analysis and valuation modelling to advise clients on technical valuation issues – such as purchase price allocation and transfer pricing – as well as strategic opportunity assessment and performance tracking. We have offices or representatives in over 20 countries and last year worked for clients in 30 countries on all continents. We work for large corporates such as Shell, Citi, Nokia, Etisalat, and Great Wall Motors but also with smaller brands like Asprey, Ferrari, and Aston Martin.
Why is brand valuation so important today? How do the clients you work with use this valuation data?
Brand valuation and brand-related financial analysis is increasingly important for two reasons, one is regulatory and the other is strategic. On the regulatory side, investors and accounting rules increasingly require an understanding of the value of all assets. Also, tax authorities are becoming increasingly aggressive (particularly since the BEPS initiative), demanding that companies charge appropriate rates for the use of their brands by international subsidiaries. On the strategic side, traditional advertising and marketing budgets are under increasing pressure and the rise of digital advertising – with its relative cheapness and depth of performance data – is requiring marketers to prove that their investments are providing a return. Similarly, companies are increasingly understanding the (often negative) impact of major changes to brand structures through brand architecture alignment and want to understand the best way to maximise overall value – particularly after acquisitions.
In the past, popular brands might have been seen as by-products of successful companies; to what extent are brands themselves driving business growth and success today?
What brands are and do has never really changed. There are various different elements that build brand reputation – product and service quality, innovation, aspiration/association, company conduct. Brand reputation, in turn, amplifies demand for the business’s products and sustains demand when one of the drivers of demand is weak. For example, look how price and volume have been sustained in Apple products even when a number of competitors have more or less caught up on product quality and innovation. It is therefore a process of inputs and outputs: replenish brand reputation through investment in product, service and marketing; exploit the value that that reputation creates. In that way it is no different to the way companies spend on capital expenditure to build a factory, depreciate the investment as they exploit its value and then replenish that asset through further capital expenditure.
Unlike tangible assets such as property, brands are sometimes though of as being more nebulous. What is it that makes a successful brand and how do you go about putting a value on it?
People believe intangible assets are nebulous but of course we disagree. Technically one can see and touch brands (i.e. logos) but they are ‘intangible’ because of their reputation or what is known as “brand equity”. The value of this intangible element is contingent on their use. It has an intrinsic impact on the level of demand for a product or service. For example, if a company is selling red caps, it is going to sell a lot more if it puts a Ferrari logo on the front. The increased demand and profitability of that company should be attributed to the value of the Ferrari brand. However, if it does not use the brand on the product, the value is not created and results in a lower brand value overall. In our brand valuation study of the world’s top 500 brands, Ferrari is the strongest but it is not the most valuable, because the company restricts its volume output to maintain its strength on each product sale – it is therefore restricting its short term generation of value in order to maintain it in the long term.
Brand valuation can be done using a number of methods. The most widely accepted method is “Royalty Relief” which estimates the value based on the royalties not foregone by a company as a result of the company owning the brand and not having to licence it to a third party. This fits with the “separability” criteria of the international financial reporting standards. However, it implicitly only identifies the value to a licensor – ignoring any benefit left within a licensee. We supplement this approach with an approach called “Incremental Cash Flow” which identifies the value of the business through a discounted cash flow method and then identifies how demand, free cash and therefore long term value will change in the subject business if it were to use a generic brand. This latter method is usually best used for identifying incremental opportunities, rather than the overall value of the brand, because identifying what a generic brand is can be relatively subjective.
How has brand valuation been advanced in recent years? What developments have supported enhanced accuracy in determining brand values?
When Sir David Tweedie valued the Smirnoff brand in 1987 and other brands were put on balance sheets for the first time in the late 1980s, it caused an uproar because the concept was new, with many claiming it was creative accounting. Following that, financial reporting bodies worked to update accounting standards that everyone could agree on. In 2003, IFRS 3 (Business Combinations), IAS 38 (Intangible Assets), and IAS 36 (Impairment Reviews) were all created to overcome the issues, and most local GAAPs followed suit with similar standards and rules. IFRS 3 mandated that the value of an acquired business should be split between all assets – tangible and intangible – plus general goodwill; IAS 38 defined intangible assets; IAS 36 stated that the value of all of these identified assets should be reviewed for impairment every year. These standards – while stopping short of allowing internally generated intangibles being put on the balance sheet – formally endorsed the idea that intangible assets have value and can be valued accurately.
IVSC’s own valuation standards from 2008 helped to formalise the various approaches to valuation which were then used to help create ISO 10668, the international standard in monetary brand valuation which was published in 2010. Crafted by Brand Finance in conjunction with all of the main parties in brand valuation (including the Big Four accountancy firms), ISO 10668 constitutes a meta-standard that lays down the general framework for doing brand valuations. It states that brand valuations should be based in Behavioural Analysis (how brand reputation impacts behaviour), Financial Analysis (how that behaviour impact business performance) and Legal Analysis (whether or not the supposed owner really has rights over that benefit). It also states that brand valuations should be transparent (i.e. all the assumptions are clear and auditable), consistent (i.e. easily replicable), and independent.
This standard is now being supplemented by ISO 20671 (Brand Evaluation), which looks more closely at the behavioural aspect of this analysis, and independent standards from the likes of MASB in the US, and qualifications like the “Certified in Entity and Intangible Valuations” which was created by AICPA, ASA, and RICS. All of these are professionalising the industry and we at Brand Finance feel it is important for anyone involved in this area to support these initiatives for the benefit of all businesses as well as the valuation industry.
How have you seen businesses change the way they think about brand as a strategic asset over the last decade?
In the past there has been a tendency to think of brands simply as logos and of marketing as a necessary cost. Increasingly, businesses are noticing that branding and marketing can be used as a differentiator to build volume, price, and numerous other benefits to businesses. They also note that with the emergence of big databases and much cheaper market research, it is easier to find out what works in building value. Coupled with the fact that many businesses are having to confront this for financial reporting and tax reasons, businesses are getting on board with the idea that brands and other intangibles can and should be valued.
Why is it important that there is professionalism and transparency in the standards underpinning brand valuation around the world? (i.e. presumably company brands straddle national boarders; the marketplace is interconnected and brand values are important to company performance etc…)
As with all valuations, people are using brand valuations to make important and often financially consequential decisions on where to put their money or how to use their assets to generate returns. If you cannot trust valuations, you will not know if you are spending your money efficiently, and so you put yourself at risk of losing it or wasting an opportunity to generate a good return.
What can you tell us about the Brand Finance Institute? What does it aim to do?
The Brand Finance Institute is the education and training division of Brand Finance plc in which theoretical and practical issues surrounding brands are explored. The BFI organises events around the world featuring thinkers in the area of brand strategy, brand building, and brand valuation. Its purpose is to promote the practice of brand valuation and the financial analysis of brands’ effects in order to help businesses build and use brands to generate more value.
What sort of skillsets and experience can you find across the Brand Finance teams and offices?
Brand Finance is a finance and insights first company. Our focus is on analysing brand activities and brand perceptions through structured brand evaluations including market research, in order to identify the financial effects and value of brands to businesses. We therefore have a strong capability in market research, brand tracking but also in accountancy and valuation. We are, in fact, an accountancy firm regulated by the ICAEW and train ACAs, CFAs, and CIMAs. However, in order to identify how brands are and should be used there is a need for an understanding of brand strategy and design, meaning our teams are generally a mixture of all three: valuation, brand insights, and brand strategy.
The Brand Finance Global 500 league table will be familiar to many readers. What trends have you identified in recent years and are there any impressive stats you can give us in relation to the current table?
Every year, Brand Finance values around 5,000 brands. The world’s 500 most valuable brands are included in the annual Brand Finance Global 500 report, which this year was launched at the World Economic Forum in Davos. Then throughout the year, we roll out around 80 rankings of the most valuable and strongest brands in all sectors and countries.
This year, Amazon defended its position as the world’s most valuable brand following 25% growth to US$187.9 billion, with Apple and Google placed 2nd and 3rd. With tech brands dominating the ranking, Microsoft made a comeback to top 5 with 47% brand value growth, but Facebook saw its brand strength tarnished by scandals.
Looking at regional trends, brands from China continued to climb up the ranking as the country’s total brand value in the Brand Finance Global 500 broke US$1 trillion for the first time. Interestingly, China’s answer to Netflix, iQiyi was the world’s fastest-growing brand of 2019, up a whopping 326% year on year, three times the 105% hike by its US counterpart.
In brand strength analysis, Ferrari claimed the title of the world’s strongest brand, with a score of 94.8 out of 100. Only 14 among the 500 brands posted the elite AAA+ rating, including McDonald’s, Coca-Cola, and three of the Big Four brands: Deloitte, PwC, and EY.