Doreen Wang says financial analysts should give a company’s brand a bigger line item in investment valuations
Investment banks, financial analysts and private equity investors are well versed in reviewing financial and market data on the companies and sectors they cover. But how often is the value of a company’s brand taken into consideration?
Most business owners and CEOs acknowledge that strong brands help generate a price premium and increase sales volumes. In fact, it is the brand that drives the market success of many of the leading performers in the stock market.
Take Apple, the most valuable brand in the world, as an example. Its brand generates a sales volume and price premium that has improved revenues and margins significantly over the years. As one of the top brands in our top 100 ranking of the most valuable global brands, its brand is valued at $148bn (€133bn).
Over the past 30, years brand has become one of the most valuable financial asset types of modern corporations. It contributes more to shareholder value creation than any other asset. Our research shows the additional value realised by brands to be as much as 50% of intangible capital.
Further analysis of our own ranking as a stock portfolio over the past nine years shows a highly favourable performance compared with the S&P500. While the value of the companies in the S&P500 index grew by 44.7%, our portfolio grew by 81.1%, demonstrating that companies with strong brands are better at delivering higher value to their shareholders.
Although brand is not a passive asset, like the goodwill that is left over when the value of other assets has been subtracted, its role in business success is far too important to be ignored. In fact, brand valuation analysts should quantify the financial value that brand adds to the business using metrics that give insight into how trusted the company is, its value and its future potential. This is crucial information for IPOs, mergers and acquisitions, as well as share buying and selling.
How to measure value of a brand? Brand valuation should not be based on expert opinions but on rigorous financial analysis to quantify the financial value that brand and marketing add to the business. However, it is more than just the financial number as it sets up a model of how brand creates value in the business through its impact on the customer purchase decision.
Brand awareness, customer loyalty, and recommendation are some of the more common measurements to show how marketing and branding activities provide the business with return on investment (ROI). Whilst these indicators are all part of the brand toolkit, they do not provide sufficient financial rigour to translate directly into how brand truly drives business value, alongside other things that affect business performance such as sales activities and business partnerships.
First of all, a business should isolate branded earnings, because any brand should only be given credit for the earnings that are created under its banner.
Next, the branded business needs to be segmented to the point at which the brand behaves differently across customer segments, geographies and lines of business.
It is also important to evaluate the net present value of future branded earnings, not its past performance. For each segment it is recommended to forecast a brand’s performance using financial analysis techniques employed by equity analysts.
And we also need to quantify the role that brand plays in creating that value, which is defined as brand contribution. We evaluate the strength of brand based on the market share and the premium a brand can expect within the sector. This is expressed as a percentage and is used as a proportion of financial value to calculate the final brand value figure.
It is time for financial analysts to give brand a bigger line item in a company’s investment valuations alongside other financial performance metrics, and as a value-added item rather than another marketing expense. Brand valuations should be considered as one of the key drivers, alongside other direct sales activities and business partnership, as part of the financial and business success.
Doreen Wang is global head of BrandZ at WPP’s brand research agency Millward Brown