Why value Brands?

by R. Krishnaswamy on April 11, 2010

The recent years have witnessed a growing awareness among corporates about the financial power of the brands they own.  There are two reasons for this phenomenon. First, there has been mounting evidence to support the hypothesis that consumers are becoming increasingly brand conscious not just in relation to products which are earmarked for conspicuous consumption, but also about common- place commodities such as salt, edible oils and groceries, etc. which were for a long time, sold as unbranded goods.   This trend is likely to get accentuated with the growing importance of e-commerce where most consumer purchase decisions will be brand driven.  The second reason has been the growing investor interest in companies with strong brand portfolios.  In a recent study conducted in the UK stock market, it has been found that the equities of heavily brand dependent companies have consistently out performed the FTSE 350 index over a fifteen year period between 1982-1997.

Awareness about the financial power of brands leads us to the next logical question:  “Can this power have a value?”  The answer is a clear  “Yes”. Recently there has been a lot of acquisitions and mergers in the international markets.  The UK confectionery firm ROWNTREE company was taken over by NESTLE and the price paid was nearly six times of the value of the tangible assets.  The premium represents the value that Nestle saw in the potential earnings of strong international brands such as KIT KAT, POLO etc.  During the same period CADBURY acquired TREBAR by paying four times the value of tangible assets.  World’s largest computer software firm MICROSOFT‘S market capitalisation at the end 1998 was $ 320 billion which was fourteen times of its book value.  These wide differences represent the market assessment of future earning potential of the company.  The differences are converted into goodwill once the company is sold or acquired.  Goodwill is an umbrella concept covering many aspects of corporate activities that could lead to superior earning power.  Brand value is the most important and prominent part of goodwill. Put differently, brand value constitutes a significant proportion of the difference between market capitalisation and net asset value of the business.  It is therefore clear that the brand has a value.  Actually brand can be defined as an identifiable product/service augmented in such a way that the buyers and users perceive relevant unique “added values” which closely match their needs. Whilst the fact remains that the brand has a value and the market does recognise it, it is not usually incorporated in the financial statements of the company owning the brand.

The next logical question, which arises, is whether the value of the brand can be assessed and quantified in the same manner as other assets. The awareness that if only a value can be placed on the brand, it can create wonders has led to intensive research on the subject worldwide.  Fortunately these studies have proved successful and towards the end of last century several reasonable and credible methods of the brand valuation techniques have emerged.  So the great news is that not only the brands have value, but the same can be quantified with reasonable accuracy. There cannot be any better news than this to greet the birth of the current millennium.

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