Report Phase 3

8/3/2019 Report Phase 3

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Brand Value

A brand is the idea or image of a specific product or service that consumers connect with, byidentifying the name, logo, slogan, or design of the company who owns the idea or image. Brand is a

name or trademark connected with a product or producer. Brands have become increasingly

important components of culture and the economy, now being described as "cultural accessories

and personal philosophies.

The amount that a brand is worth in terms of reputation, prestige, income, potential income, and

market value would constitute its brand value. Brands with a high value are regarded as

considerable assets to a company, so that when a company is sold a brand with a high value may be

worth more than any other consideration. On the other hand, Brand value can be defined as the net

present value of future cash flows from a branded product minus the net present value of future

cash flows from a similar unbranded productor, in simpler terms, what the brand is worth tomanagement and shareholders. Brand value is a precious yet intangible asset, which will make a

consumer pay premium price for a product.

The value of every asset, whether tangible or intangible, can be estimated. Some assets are easier to

value than others, and some evaluations are more precise than others. Intangible assets, such as

brands, often fall in the more difficult, less precise valuation category. While the valuation of brands

requires techniques that are quite different from those used to value stocks or fixed assets, the basic

principles are the same. First, from a shareholders perspective, the value of a brand is equal to the

financial returns that the brand will generate over its useful life. Second, any financial returns

attributed to a brand must be discounted to account for market uncertainty and asset-specific risks.

These two principles apply to the valuation of all assets, not just brands.

Successful brands create value through strong business basics, a clear and relevant value proposition

that is communicated powerfully and consistently (avoid positioning the brand exclusively around

price or specific product features), delivery of a great experience that matches the brands promise

and effective leadership of trends or aspirations. The subsequent section details the various

methods of brand valuation.

Why are brands valued?

Although public perceptions of brand valuation are often focused on balance sheet valuations, the

reality is that the majority of valuations are now actually carried out to assist with brand

management and strategy. Companies are increasingly recognizing the importance of brand

guardianship and management as key to the successful running of any business.

The values associated with product or services communicated through the brand to the consumer.

Consumers no longer want just product or service but a relationship based on trust and familiarity.

In return businesses will enjoy an earnings stream secured by loyalty off customers who have

bought into the brand.

The methods of brand valuation undertaken by our group:

Price Premia Model: This model helps to assess how much premium a particular brand cancharge from the consumers. This is more applicable to products, which are more like

commodities.


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Gross Profit Differential Method: The gross-profit differential method compares the profitsof a branded product with that of an unbranded one. It is often used to value brands. The

methodology is to look at the difference in sale prices between the margin after costs,

between the branded product and an unbranded or generic product.

Book to Market Method: This method is ideal for single brand companies like Adidas, Nikeetc. In this method the book value of the company is deducted from its market

capitalization, to arrive at the value of the in tangible asset, i.e. the brand.

Discounted Cash Flow Method: In this method, the cash flows are estimated and discountedto come at the Present Value of the firm.

Approaches to brand valuation

Financial values have to some extent always been attached to brands and to other intangible assets,

but it was only in the late 1980s that valuation approaches were established that could fairly claim to

understand and assess the specific value of brands. So to arrive at an authoritative and valid

approach, a number of brand evaluation models have been developed.

Most have fallen into two categories:

Research-based evaluations, and

Purely financially driven approaches

Research-based approachMethod 1: Price Premia Model

Introduction:

In the price premia method, the value of a brand to charge a premium over an unbranded or generic

equivalent can be tracked. The ultimate purpose of the brand is to secure future demand. The valuegeneration of these brands lies in securing future volumes rather than securing a premium price. The

major advantage of this approach is that it is transparent and easy to understand. It is possible to

determine the market share for a given product at a given price level. The relationship between

brand equity and price is easily explained. For a brand, the model gives the percentage of premium it

can charge its customers over the generic substitutes. The brands can even compare their value of

the brand vis--vis competition. This model works best for products being converted to brands from

commodities.

Rationale for choosing Price Premia Model:

The premise of the price premia approach is that a branded product should sell for a premium over ageneric product. The value of the brand is therefore the discounted future sales premium. The ability


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of a brand which is an intangible asset is tested. By taking out the brand value, the managers can

actually track the performance over time and in case of insolvency, the brand could act as the most

saleable asset. These days people are also pledging the brand value in order to raise debt. In

Mergers and Acquisitions, we usually see a premium being paid over and above the market price.

There is a certain amount of value which the buyer attaches to the company which he is acquiring

and that value is not captured in the balance sheet. Hence, he pays a premium. The reason fortesting this model is Adidas is serving in a category which is undifferentiated; the value of a brand

will actually signify Adidass presence in the category of shoes.

Limitations of Price Premia Model:

The disadvantages are where a branded product does not command a price premium; the benefit

arises on the cost and market share dimensions. The model may bear little evidence to economic

reality or serve other useful purpose. This method is flawed because there are generic equivalents to

which the premium price of a branded product can be compared. The price difference between a

brand and competing products can be an indicator of its strength, but it does not represent the only

and most important value contribution a brand makes to the underlying business.

Price Premia: Valuation

Objective:

To measure the brand value of Adidas using Price Premia Model.

Methodology:

A sample of 20 people was taken for the purpose of evaluation. The respondents were asked to state

the price which they are willing to pay for unbranded sports shoes. Then they were asked to quote

an amount which they were willing to spend for the shoes if a brand name is attached to it. The

brands were Nike, Adidas, Reebok, Puma. The difference between the amounts which a consumer is

willing to pay for a branded product and an unbranded product is the price premium which a brand

commands.

Q) What is the price you are willing to pay for the below mentioned brands?

Name Gender Unbranded Adidas Reebok Puma Nike

Devdeep Daruka M 700 3000 3000 2500 2500

Spandan Bandhopadhay M 600 2500 3000 2000 2500

Gurcharan Singh M 500 2800 2500 2000 2500

Ranabir Pal M 700 3000 3000 2000 2500

Amit Sura M 450 2500 3000 2000 2500

Zeeshan Mohammad M 400 2600 2500 1500 2500

Ghanshyam Burnwal M 600 2400 3000 2000 2500

Ganesh Agarwal M 450 2500 3000 2000 2500

Adnan Kitabi M 400 3500 4000 1500 3500

Rohit Khattar M 500 4000 3500 2000 5000

Arunachalam Ramanatham M 720 2500 2500 1500 3500

Abinas Mishra M 600 2300 2500 1500 2000


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Shubhankar Sengupta M 600 2800 2700 2000 3000

Varun Tiwari M 700 3000 2500 2000 3500

Anjali Shrikant F 700 3500 3000 2000 3000

Kunal Samanta M 450 2000 2500 1500 3500

Rewati Rane F 400 2500 3000 2000 3500Binayak Das M 400 3500 3200 2500 2000

Aditi F 700 2600 2700 2000 3000

Nabeela Khaled F 700 2500 3000 2000 3500

Total 11270 56000 58100 38500 59000

Average 563.5 2800 2905 1925 2950

Tabulation & Findings:

Unbranded 564

Adidas 2800

Premium 2237

No. of purchase 0.5

Brand Value per customer 1118.3

Brand Co-efficient 0.399375

Brand Revenue(In Million$) 12014.52

Brand Value( In Million$) 4798.299

The average price of a Adidas sports shoe that a customer is willing to pay is Rs 2800 and that for an

unbranded sports shoe is Rs 564. The premium over an unbranded sports shoe for Adidas is Rs 2237.

The number of purchases that we have taken for Adidas is once every six months i.e. 0.5.

Brand Value per customer= Premium*No of purchase

Therefore the Brand Value of Adidas per customer= Rs 1118.3

Brand Revenue (In Million$) = 12014.52

Brand Co-efficient= Brand value per customer/ Average Adidas shoe price

Therefore Brand Co-efficient= 1118.3/2800 = 0.399375

Brand Value= Brand Revenue*Brand Co-efficient

The Brand Value of Adidas through this method was found to be $4.7bn.

Method 2: Gross-Profit Differential


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Introduction:

The gross-profit differential method compares the profits of a branded product with that of an

unbranded one. It is often used to value brands. The methodology is to look at the difference in sale

prices between the margin after costs, between the branded product and an unbranded or generic

product.

Rationale and Methodology:

In this approach, the value of a branded product will be equal to the price of that product minus the

average price of similar non-branded products. This model is very simple but effective and takes into

account the parameters like price premium and the unit sales.

bv = (p n) x

Were bv is the Brand Value,

P is the price of an unbranded unit,

n is the average price of similar, non-branded products and

x is the number of branded units sold

For finding the brand value of Adidas sports shoes, we have taken the average price that the

customer is willing to pay for Adidas sports shoes which is Rs.2800. The average price of non-

branded sport shoes was determined by asking 20 respondents about the amount they are willing to

pay and the value obtained was Rs 564. From the data provided by the company, we have taken thenumber of units of Adidas sports shoe sold during the year 2009-2010 to be 4mn.

Findings:-

p = Rs 2800

n = Rs 564

x = 4000000

bv = (2800-564)*4000000

bv = 8.944 billion

Brand Value of Adidas is 8.944 billion

Purely financially driven approaches

Method 3: Book to Market


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Introduction:

Book to market model embraces the intangible asset that the company as Brand Value is calculated

by deducting Market Value of company with the Book Value. Book to market method is very

important these days because of more and more deals of mergers & acquisitions. This model takes

into account the Book Value of the company. It also considers the Market Capitalization of the

company, i.e. what is the current market price if the company were to be sold today. The difference

between the Market Capitalization of a company and its Book Value is assigned to Intangible Assets.

In case of a single branded company like Adidas, this difference is the value of the Brand.

Rationale for choosing Book to Market Model

For most of the century, tangible assets were regarded as the main source of business value. These

included manufacturing assets, land and buildings or financial assets such as receivables and

investments. They would be valued at cost or outstanding value as shown in the balance sheet.

Categories of intangible asset that support the superior market performance of business are:

Knowledge intangibles: for example patents, software, recipes, specific knowhow, includingmanufacturing and operating guides and manuals, product research etc.

Business process intangibles: these includes trade names, trademarks and trade symbols,domain name, design rights, logotypes, associated Goodwill general predisposition of

individuals to do business with brand are included.

Market position intangibles: for example, retail listings and contracts, distribution rights,licenses such as landing slots, production or import quotas, third generation telecom

licenses government permits and authorizations and raw materials sourcing contracts.

Adidas, a single brand company has shown good brand strength and people regard the brand. Since

the brand is so famous we want to check out the book value and the difference between its Book

value vis--vis Market value.

Book to Market: Valuation

Objective:

To measure the brand value of Adidas using Book to Market Model, estimating the total financial

value of the brand.

Methodology:

The book value of the companyhas been calculated by adding the Reserves and Surplus for the year

2009-10 and the Equity of the company.

The formula for calculating the Book Value is given below:

Book Value = Equity + Reserves and Surplus

The market capitalization of Adidas has also been calculated by multiplying the total number of

Issued Shares into the average Share Price of Adidas over the last one year.


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The formula for calculating the market capitalization is given below:

Market Capitalization = No. of issued shares * market price of each share

The brand value of the brand through this method can be found out by the following

formula

Brand value= Market Capitalization Total Equity

Tabulation & Findings

Average Share Price Of Adidas (in $) 67.418

Particulars(Figures in Million $) 2010 2009

EquityShare capital 288.15888 288.1589

Reserves 776.2363 292.295

Retained earnings 5299.915 4618.813

Total share holders Equity(million$) 6364.31 5199.266

Non-controlling interest 9.65125 6.89375

Total Equity (million $) 6373.96125 5206.16

Total No. Of outstanding Shares(in million) 209.216 209.216

Market Capitilization(in million $) 14104.92429 14104.92

Brand Value(in million $) 7730.963038 8898.765

The brand value of Adidas in the year 2009 was calculated at $8.89 billion which has reduced to

$7.73 billion in the year 2010. This is because the market capitalization has remained the same for

the past two years but the total equity has increased in the year 2010, therefore the brand value of

Adidas has decreased from the previous year using the book to market method.

Method 4: Discounted Cash Flow

Introduction:

The model focuses on the return earned as a result of owning the brand the brands contribution

to the business, both now and in the future. The framework is based on a discounted cash-flow

(DCF) analysis of forecast financial performance, segmented into relevant components of value. The

DCF approach is consistent with the approach to valuation used by financial analysts to value

equities and by accountants to test for impairment of fixed assets (both tangible and intangible) as

required by new international accounting standards.

DCF valuation is the most widely accepted approach to brand valuation and provides a greater depthof understanding of the dynamics of the brand. While brand valuations can be based on a multiple of


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historical earnings it is clear that past performance is no guarantee of future performance and that

investors base value judgements on expected future returns rather than actual historical returns.

However, historical results are crucial for accurate valuation mainly because they provide

information and data relationships which help to more accurately forecast the future.

Rationale:

Discounted cash flow method helps us at arriving at the present value of the future cash flows. From

the DCF method we have tried to arrive at the present value of Adidas and from the present value of

the company we will attribute a share to brand value, which will be earnings from the brand value

and derive the brand value of brand Adidas. The rationale behind using this method is that it helps in

arriving at comparatively a precise value of brand Adidas.

Valuations based on projected earnings are therefore our preferred approach with the

caveat that forecasts must be credible. Where forecasts are credible the valuation results

are both robust and actionable.

Brand Forecasts

Economic Value Added

Brand Value Added

Market

data

Risk

Factors

Discount Rate

Brand Value

Financial

Data

Demand

Drivers

Brand Beta

Analysis

Brand Value Added

(BVA) Index

Report Phase 3

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