![](\"..\/images\/spacer.gif\"){kind=spacer}
Rashmi Pratap, The Hindu\nBusinessline\n<\/i><\/p>\n
Rashmi Pratap, The Hindu\nBusinessline
\n<\/i><\/p>\n
Mumbai, 6 May 2016<\/i><\/p>\n
![\"\"](\"..\/images\/on-the-shoulders-of-brands.jpg\")
When\nthe 119-year-old Godrej group decided to go for an image makeover eight\nyears ago, it roped in international advisory Interbrand for a\nvaluation of its brand. The idea was to not just gauge the financial\nprowess of brand Godrej (valued at $3 billion by Interbrand in 2010)\nbut also facilitate strategic decisions such as rejigging product\nportfolios and connecting more deeply with consumers. The valuation\nexercise and its diagnostics were a means to help grow the brand value.
On\nthe other hand, for industrialist Vijay Mallya, the valuation of ₹4,100\ncrore for the Kingfisher Airlines brand served another purpose. The\nbrand became the single largest collateral for loans exceeding ₹9,000\ncrore. That valuation, carried out by Grant Thornton in 2011, is now\nunder scrutiny.
Mallya is certainly not alone in using a\nwell-known brand to raise money. New Delhi-based LT Foods also used its\nDaawat rice brand to raise debt back in 2008-09.
As things\nstand, companies across sectors are opting for brand valuation to meet\nvarious objectives. The hospitality sector, including hotel chains and\nairlines, is using it to improve customer connect while the engineering\nsector focuses on intangible value creators like intellectual property\n(IP) and research and development. The biggest users, however, are the\nFMCG and consumer durables firms, which seek to unlock their brand\nportfolio and optimise marketing investment.
“Consumers today\nhave far more choices and their attention is divided. Brands need to\ncut through this. Moreover, the cost of marketing is escalating and is\na big consideration when introducing a new brand or extending an\nexisting one,” says Shireesh Joshi, COO, strategic marketing group at\nGodrej. Brand valuation allows the company to assess the brand’s\nstrength, both qualitatively and quantitatively, by putting a science\nbehind it. This, in turn, impacts the company’s strategic decisions\nincluding international forays or acquisitions.
Parts of a brand<\/span>
Brands\ninclude the names, terms, signs, symbols and logos that identify goods,\nservices and companies. But brand value is not just a financial number.\n“It is a measure of several factors like loyalty of customers, the\nability of a brand to keep offering newer products and technology, and\nthe connect with consumers, who give it a premium,” says Ajimon\nFrancis, India head and CEO for global brand consultancy Brand Finance.
“A\nbrand is an image, comprising a bundle of promises on the company’s\npart and expectations on the consumer’s part that have been met. If a\ncustomer perceives a higher value in a brand, she will be ready to pay\na premium for it,” says Devangshu Dutta, chief executive of consultancy\nThird Eyesight.<\/span>
The UK’s\nReckitt Benckiser knows this all too well. In 2010, it paid ₹3,260\ncrore to buy Ahmedabad-based Paras Pharmaceuticals, the maker of brands\nlike D’Cold, Krack and Moov. The deal valuation was eight times Paras’s\nsales of ₹401.4 crore and largely attributed to the strength of the\ncompany’s key brands.
Interbrand MD Ashish Mishra says brand is\na key factor in calculating the premium pricing in M&As. “Often, it\nis the latent potential of the brand that is driving this premium,\nthrough its ability to enter new markets and extend into adjacent\ncategories. A broad skill set — combining market research, brand, and\nbusiness strategy with business case modelling — is required to\nquantify the latent financial potential of the target brand,” he says.
Additionally,\nthe brand valuation methodology can be used to complement the other\nprocesses involved in setting royalty rates. “By identifying the value\ncreated by a brand for its business, combined with an evaluation of the\nrelative bargaining power of the parties involved, we can determine the\nproportion of brand value that should be paid out as a royalty rate in\nreturn for the right to exploit the brand,” he adds.
A case in\npoint is the Tata group. Brand Finance had valued the Tata brand at\n₹1.3 lakh crore in 2015. While Tata Sons, the brand’s owner, has not\nvalued it, group companies have to pay royalty for using it. Under a\n1996 agreement, Tata Brand Equity and Business Promotion companies\nusing the Tata name directly pay 0.25 per cent of the annual revenue or\n5 per cent of the profit before tax, whichever is less, as royalty.\nCompanies using the brand indirectly pay 0.15 per cent of the turnover.\nThe overall annual payout has now been capped at ₹75 crore.
Through thick and thin<\/span>
While\nMallya may have made the cleverest use of brand valuation, the Godrej\ngroup used it to the hilt to reposition itself and connect better with\nyouth. It came up with the new proposition of ‘Brighter Living’ in 2008\nand launched newer products like door cameras, air fresheners and\npersonal repellents to target younger consumers. More importantly, the\nvaluation exercise helped Godrej reinvent its design language. “For\nlong, Godrej has been known to be a sturdy engineering brand and one of\nthe important directions it needed to become much stronger was\nemotional attachment with its customer base,” says Joshi.
Over\nthe last few years it has greatly focused on design across its\ndivisions and offerings, be it Godrej properties, furniture or consumer\nproducts. “Great design, in addition to great function, ends up\ncreating a great bond with consumers. The valuation exercise added\nscientific support to what people had been feeling all along,” he adds.
Not\njust in stepping up business, brand comes into play equally in shutting\ndown unviable ones, as Raymond did with its Zapp! kidswear brand.\nLaunched with much fanfare in 2006, the brand didn’t take off as the\nmarket was not ready to pay premium pricing (starting at ₹2,000) for\nkidswear.
“Brand valuation helps the management understand how a\nbrand is moving along with other brands and whether it is able to keep\npace. They can accordingly decide its future,” says Francis.
For a reliable yardstick
Despite the growing need for brand valuation, there is no standard methodology in use.
The\nISO 10668 standard specifies a framework for brand valuation, including\nobjectives, bases and methods of valuation besides sourcing of data and\nassumptions. It also specifies methods for reporting the results of\nsuch valuation. But it remains a voluntary standard as of now.
“It\nis globally accepted by large valuation firms as well as regulators and\nfinancial institutions. But following it is a subjective matter,” says\nFrancis.
His firm, Brand Finance, follows the Royalty Relief\nmethod, which determines the value a company would be willing to pay to\nlicense its brand as if it did not own it. It involves estimating the\nfuture revenue attributable to a brand and calculating a royalty rate\nthat would be charged for the use of the brand.
Mishra points\nout that Interbrand’s valuation model has three core components — an\nanalysis of the financial performance of the branded products or\nservices, the role the brand plays in the purchase decision, and the\ncompetitive strength of the brand. “These are preceded by a decision on\nsegmentation and, at the end of the process, are brought together to\nenable the calculation of a brand’s financial value,” he says.
But what happens when a company that mortgaged its trademarks with financial institutions to raise funds goes bust?
“This\n(Kingfisher case) is a unique situation… When a trademark is used as an\nasset for lending, one of the disciplines which global financial\ninstitutions follow is a rigorous tracking of the profit-and-loss\naccount and cash flows of the company. If the business faces a setback,\nthe value of the trademark falls drastically,” says Francis.
It\nappears then that due care was not taken in the Kingfisher case.\nWhether banks will ever recover the money from Mallya is not known. But\nwhat is certain is that financial institutions will now be more careful\nin setting much store by mere brand power.
After all, like any other power, this is liable to fluctuate too.
\n<\/span><\/p>\n