Introduction

When we visit the KLCC Suria in Kuala Lumpur, Malaysia, a popular shopping mall, our eyes would be dazzled by illuminations of brands, from local brands to international brands. Lighted logos of brands are prominently placed at various points of their well-designed stores.

Brand owners should like my wife, Datin Azimah: toothpaste (Colgate), washing powder (Breeze), petrol (Shell), and fizzy drink (of course, Coke).

Brands help their owners to generate enduring revenue. These brands are valuable, and they are important intangible assets for corporations.

Methodologies to Value Brands     

According to Gabriela Salinas in The International Brand Valuation Manual, there are many methods used to value brands. Many methodologies are developed by brand consulting companies, and one of the most famous methodologies is the Interbrand method.

Valuation Using Interbrand Method

Interbrand is a brand consultancy firm, specializing in areas such as brand strategy, brand analytics, and brand valuation. Its Interbrand method determines the earnings from a brand and capitalizes them by making suitable adjustments. The firm bases its brand valuation on financial analysis, role of the brand and brand strength. In order to calculate brand value, Interbrand uses a five-stage process as follows:

1. Segmentation: This stage consists of determining the main homogeneous client groups on which the financial and demand analysis are based.
2. Financial analysis: Through this analysis, the model attempts to establish “economic earnings”, also referred to as “intangible earnings”.
3. Demand analysis: In this step Interbrand establishes the “Role of Brand Index (RBI)” or the percentage of intangible earnings attributable to earnings, referred to as brand earnings.
4. Brand strength analysis: Through competitive analysis, Interbrand analyses brand strength which is in turn related to discount rate.
5. Brand value calculation: In this stage, the discount rate is applied to “brand earnings.” The sum of the present value of brand earnings represents brand value.                                                                                                                                                                                                                                                                 Stage 1: Segmentation

According to Interbrand, as consumer attitudes and behaviours towards brands vary from sector to sector depending on product type, distribution and other market factors, brand value  can only be accurately be determined through separate evaluation of the individual segments that represent a group of homogeneous consumers.

Stage 2: Financial analysis-Estimation of “Economic Earnings”

To isolate earnings specifically attributable to the brand, Interbrand determines Economic Value Added, which indicates if a company is capable of generating returns that exceeds the cost of capital employed.

Stage 3: Demand analysis or role of brand index (RBI)

RBI is a measure of how a brand influences customer demand at the point of purchase.

RBI is determined via a three-step process:

1. Firstly, Interbrand identifies the demand drivers or the factors that motivate customers to purchase a particular brand.
2. Step 2 determines the relative importance of the specific attributes in step 1.
3. Lastly, InterBbrand determines the role that the brand plays in each of these drivers. The RBI is expressed as a percentage, such that if RBI is 30%, 30% is extracted from intangible earnings.

Stage 4: Brand strength analysis-Determination of brand risk and discount rate

Brand strength represents the brand’s relative capacity to “guarantee demand” and in this way sustains future earnings. This analysis yields the brand risk which is later expressed as a discount rate. The determined discount rate is then applied to earnings attributable to brand in order to arrive at the brand value.

Stage 4.1: Brand strength analysis

In this stage, the brand strength is compared with that of its competitors for each of the seven brand strength factors. Table 1 shows how Interbrand analyses these attributes as a function of other sub-attributes or sub-criteria. For example, the “market” factor is analysed based on “industry concentration” and “market growth” criteria.

 

Table 1: Brand Strength Specific Attributes

Factor	Evaluation Criteria	Maximum Score
Leadership	Market share, market position, market segment and brand awareness	25
Stability	History, current position, satisfaction, customer loyalty	15
Market	Competitive structure (concentration), market growth, volume, sales	10
International image	Presence in foreign market, export history	25
Trend	Consideration, attractiveness	10
Support	Quality, consistency is translated in term of advertising, identity	10
Protection	Date of registration, legal coverage and monitoring	5

Source: Interbrand

 

Stage 4.2: Determination of discount rate

A discount rate that adequately reflects the brand risk profile is used to calculate the present value of future brand earnings. The model assumes a relationship between brand strength and discount rate: the higher the brand strength score, the lower the discount rate. The brand strength index calculated in Stage 4.1 is translated into a discount rate using an S-curve. Thus, a brand with an average strength score will be discounted at the industry WACC, and a leading brand with a maximum brand score of 100 will be discounted at a risk-free rate. The relationship between brand strength index and discount rate in the Interbrand method is shown in Table 2.

 

 

Table 2: Relationship between Brand Strength and Discount Rates

 

Brand Strength Index	Discount Rate
100	5.0%
75	7.1%
50	10%
0	34.1%

 

Stage 5: Calculation of Brand Value

The present value of brand earning is inversely related to brand risk. To calculate brand value for a particular segment, future brand earnings are discounted at present value and an annuity or perpetuity is calculated as a terminal value. The sum of the value of the individual segments yields the total value of the brand.

The Interbrand method’s various components and their inter-relations can be summarised as follows:

• The financial analysis stage is used to determine intangible earnings;
• The RBI module is used to determine the ratio of brand earnings to total intangible earnings; and
• The brand strength analysis module is used to determine the discount rate required for re-expressing future brand’s earnings at present value.

 

Example of Brand Valuation Using Interbrand Method 

When using Interbrand method, brand value is the net present value of the forecast brand earnings, discounted by the brand discount rate. The net present value calculation comprises both the forecast period and the period beyond, reflecting the ability of brands to continue generating future earnings. An illustration of brand valuation using Interbrand model is shown in Table 3.

Table 3: Valuation Using Interbrand Method

Year ended December 31st,		Year 1	Year 2	Year 3	Year 4	Year 5
FINANCIAL ANALYSIS
Market (units)		150,000	153,000	156,366	161,057	167,499
Market growth rate			2%	2%	2%	2%
Market share (volume)		15%	17%	19%	21%	23%
Volume		22,500	26,010	29,710	33,822	38,525
Price		10.00	10.00	10.25	10.50	10.75
Price change			3.00%	2.50%	2.00%	2.00%
Branded revenue		225,000	267,903	312,136	362,233	422,425
Cost of sales	40%	90,000	107,161	124,854	144,893	168,970
Gross margin		135,000	160,742	187,282	217,340	253,455
Marketing costs	18%	40,500	48,223	56,184	65,202	76,036
Depreciation	0.75%	1,688	2,009	2.341	2,717	3,168
Other overheads	5.1%	11, 475	13,663	15,919	18,474	21,544
Central cost allocation	1.2%	2,700	3,215	3,746	4,347	5,069
EBITA (Earnings before interest, tax and amortization)		78,638	93,632	109,091	126,601	147,637
Applicable tax	35%	27,523	32,771	38,182	44,310	51,673
NOPAT (Net operating profit after tax)		51,114	60,861	70,909	82,290	95,964
Capital employed		78,525	93,498	108,935	126,419	147,426
Working capital		67,532	80,408	93,684	108,721	126,687
Net PPE		10,994	13,090	15,251	17,699	20,640
Capital charge as % of capital employed	8%	6,282	7,480	8,715	10,114	11,794
Intangible earnings		44,832	53,381	62.195	72,177	84,170
DEMAND ANALYSIS		\
Role of branding Index	70%
Brand earnings		31,383	37,367	43,536	50,524	58,919
COMPETITIVE BENCHMARKING
Brand strength score	66
Brand discount rate	7.40%	0.931	0.867	0.807	0.751	0.699
Discounted brand earnings		29,217	32,397	35,141	37,944	41,184
BRAND VALUE
NPV (Net present value of discounted brand earnings from Year 1 to Year 5)		175,883
NPV of discounted brand earnings beyond Year 5 at 2.5% growth rate		938,089
Brand Value		1,113,972

 

The Interbrand method assumes that in order to arrive at earning attributable to intangible assets, a capital charge must be deducted from NOPAT.

 

Conclusion

Brands are valuable intangibles as they can generate continuing income for their owners. Brands can be licensed or sold to other corporations. Interbrand method is a useful tool used to calculate the value of a brand.

About the author:

We wish to inform that we have just accepted a position of Adjunct Professor at the Asia e University based in Subang Jaya, Malaysia. Asia e University is a private university approved by the Malaysian Higher Education Ministry, which offers both on-campus learning and on-line learning.