As intangible assets become more important as the measure of a company's worth, brand valuation techniques have spread. But how reliable are such assessments? asks Alan Mitchell.
Brand beauty may be in eye of the beholder - but every business leader accepts that nowadays the values placed on brands are increasingly equated to company value. Therefore brand assessment is an exercise attracting growing attention. The latest judgment, from Interbrand, declares that McDonald's has toppled Coca-Cola from pole position as the world's greatest brand. But the value of such a proclamation is questionable, expecially as Coke's sales and profits are twice those of the burger chain.
Most brand valuation techniques work on the simple and uncontroversial assumption that a brand is an asset which, if it were hired out, could generate a royalty for the licence-holder. The size of that royalty would reflect the value of its income, and the value of the brand would reflect the size of that royalty discounted over a future period. Some surveys, like Interbrand's, go further. To judge the security of that future revenue stream, they score brands on a series of tests such as international scope and trade mark protection.
Many similar techniques combine hard measures such as sales and margins with softer indicators of brand health such as brand awareness. It's then a matter of judgment as to how many indicators you choose to measure and what relative weights to give them. And to attract attention, they have to be crunched into a single brand value number. In Interbrand's The World's Greatest Brands, the composite score is made up of four measures: weight (dominance), length (stretch), breadth of franchise in terms of age spread (consumer type), and finally depth (degree of customer commitment to the brand).
There are four problems here. First, if you believe what is coming out of some business schools, the brand value issue is a red herring. It is customer equity, not brand equity that you ought to be focusing on, argues Robert Blattberg, professor of retailing at North-west University's Kellogg Graduate School. 'Brands don't create wealth.
Customers do.' Second, it is very difficult to rigorously apply existing techniques to umbrella brands or corporate brands, where the brand and the total company are virtually indistinguishable.
Third, the subjectivity inherent in assessing brands makes people feel uneasy. McDonald's is greater than Coke because it is an experience and not just a product, according to The World's Greatest Brands. Strangely, Harrods ranks higher than Virgin in terms of stretch even though Virgin has successfully entered countless new markets at home and abroad, while Harrods hardly sells outside of Britain. But the book argues that Harrods is potentially one of the most licensable brands in the world. Yet surely potential and actual shouldn't be conflated like that?
And finally, as professor Tim Ambler of the London Business School argues, there's a big difference between brand valuation and brand evaluation.
You may have to evaluate what a brand is worth when pricing an acquisition or a disposal but reducing such a multi-dimensional beast to a single number 'destroys more information than it reveals'.
The key is not an absolute number but the trend, says Susan Murray, international director of marketing at international spirits firm IDV. 'The question is are we building or eroding our brand assets?' she asks. IDV has developed its own colour-coded brand evaluation grids in order to track these trends.
But Murray's pretty charts don't help the bean counters in the search for that single brand value number. And in a world where intangible assets are outstripping tangible ones as the source of a company's overall value, finding a way to measure their value is becoming urgent. Barring unforeseen accidents, by this time next year UK companies will be required to put brands on their balance sheets.
Balance sheets with brands included will mean that corporate egos and share price shenanigans come into play. Even so, putting a brand's values in a financial report does at least bring the whole issue into the public domain, says Hamish Pringle of K Advertising and chairman of the Institute of Practitioners in Advertising Effectiveness Committee.
With shareholder value increasingly dependent on the 'beauty' of a company's brands, it is a safe bet that someone, somehow, somewhere will come up with a better way of measuring it before too long.