“Brand is a valuable asset of the corporation, and should be treated like any other asset. This means it must be invested in, put to work to generate value and held accountable for the results.”

-Joanna Seddon, Millward Brown

Brand Tracker

Phase III– Brand Value Measurement

A report submitted toProf. Srinivas Govindrajan

In partial fulfilment of the requirement of the course

Product and Brand Management

On 16th September 2012

By

Abinas Mishra (B11002)

Anubhuti Anup (B11008)

Piyush Das (B11031)

Sumedha Dutta (B110047)

Executive Summary

2 | P a g e

During the 1980’s when there were a series of merger and acquisition, a trend was observed that the acquiring companies were paying over and above the book value of the acquired companies. This created a ruffle in the accounting world and was resolved when experts came up with the idea that brands have an inherent value of their own. During this period the concept of Brand valuation was established. Brand valuation is the process in which the total financial value of the brand is estimated. There are several models that are used for Brand Valuation but Interbrand’s valuation model is the widely accepted one.

Interbrand’s method measures brand value under three pillars viz. financial performance of the organization, role of the brand in the purchase decision and strength of the brand to ensure expected future earnings. A variation of this model was used to calculate the value of Brand Colgate and one of its competitors (Dabur).

The annual report of the two companies was analysed to create a model that will give the estimated economic profits for the next five years as well as till perpetuity. The CAGR that was used to forecast future cash flow was taken by taking industry reports (18%).

To calculate the role of branding index and brand strength score a survey was undertaken with the help of questionnaire and with a sample size of 30. The above two parameters were measured across ten dimensions: Clarity, Commitment, Protection, Responsiveness, Authenticity, Relevance, Differentiation, Consistency, Presence and Understanding.

The brand value was calculated by multiplying the economic profit or the intangible earnings with role of brand index and subsequently discounting it with the discounting rate derived from the brand strength score. The value of Role of Branding Index for Colgate is 83.67 and that of Dabur is 68.27. Thus, for Colgate-Pamolive, 83.67% of its intangible earnings are generated from the brand Colgate. From our valuation, we derived that Colgate was valued at Rs 6088.29 Crores (For its Indian operation) while Dabur was valued at Rs 678.21 Crores (Oral Care business).

From this analysis we interpreted that Colgate should continue to follow its strategy of redefining the oral care segment and bring in more innovative products for the different identified segments. Dabur has been performing well but is not able to create a strong brand connect and hence should try to reposition itself and make it relevant to a wider mass.

3 | P a g e

Table of Contents

Executive Summary……....................................................................................... 3

Defining brand valuation.................................................................................... 5

Brand Value Measurement – Interbrand Model …………………………….6-9

Measurement of brand value………………………………………………………………10-15

Recommendation……………………………………………………………………………………..16

Annexure…………………………………………………………………………………………..17-20

References...............................................................................................................21

4 | P a g e

What is a brand?

A brand is a future generator of cash flows, known for its values and an intangible asset. For a common man it is just a name or a symbol through which he remembers or recalls a particular product or a set of products .A brand enables a consumer to differentiate amongst the available product. A brand is built by the consumer’s perception about the products.

Why is a brand valuable?

A brand is associated with tangible and emotional attributes that is intended to associate a good or a service of one seller in order to differentiate them from other competitors selling the same kind of goods or services. This makes a brand very valuable to the company that it belongs to.

Why value a brand?

The concept of brand valuation emerged in late 1970's when conglomerates were looking at low profile but sound, business houses for acquisition .At the time of negotiation the balance sheet of such target company needed to be spruced up by the intangible but yet very much real worth of the brands marketed by these businesses. Valuing brands therefore necessitate breaking up a company into its component brands and then valuing these brand by some applicable methods. The main argument against valuing a brand and pegging a financial figure to it is a subjectivity and resulting arbitrariness in and infrequency of transactions. The following are just some scenarios that might require a brand valuation

Transactional Mergers and Acquisition Joint Ventures Licensing Negotiation Regulatory and Accounting compliance

Litigation Damage/loss calculation Licensing and royalty rate issues

Marketing/Internal Brand Management strategy ROI/marketing investment allocation

5 | P a g e

Measuring Brand Value

Interbrand Model

Interbrand valuation methodology

Interbrand, one of the premier brand valuation firms, evaluated a number of different approaches in developing its brand valuation methodology. Its goal was to identify an approach that incorporated marketing, financial and legal aspects, followed by fundamental accounting concepts. Finally it decided to approach the problem of brand valuation by assuming that the value of a brand, like the value of any other economic asset, was the present worth of the benefits of future ownership. In other words, brand valuation is based on an assessment of what the value is today of the earnings or cash flow that the brand can be expected to generate in the future.

According to Interbrand, to estimate brand value, it is necessary to identify projected future earnings for the brand and the discount rate to adjust these earnings for inflation and risk. Based on all these criteria, Interbrand developed two step method of calculating brand value:

I. Identifying the true earnings and cash flowII. Capitalizing the earnings by applying a multiple to historic earnings as a discount rate

to future cash flow

The three key aspects that contribute to the assessment are: the financial performance of the branded products or services, the role of brand in the purchase decision process, and the strength of the brand.

7 | P a g e

FINANCIAL PERFORMANCE

ROLE OF THE BRAND

BRAND STRENGTH

BRAND VALUATION

Operating Profit –

Taxes =

NOPAT - WACC =

Economic Profit

X Role of Brand =

Branded Earnings

X Brand Strength Discount Rate = $

FINANCIAL PERFORMANCE

Financial performance measures an organization’s raw financial return to the investors. For this reason, it is analyzed as economic profit, a concept akin to Economic Value Added (EVA).

To determine economic profit, we remove taxes from net operating profit to get to net operating profit after tax (NOPAT). From NOPAT, a capital charge is subtracted to account for the capital used to generate the brand’s revenues; this provides the economic profit for each analyzed year.

For purposes of the rankings, the capital charge rate is set by the industry weighted average cost of capital (WACC). The financial performance is analyzed for a five-year forecast and for a terminal value.

ROLE OF BRAND

Role of brand measures the portion of the decision to purchase that is attributable to brand. The role of brand determinations for this study derives, depending on the brand, from one of three methods: primary research, a review of historical roles of brand for companies in that industry, or expert panel assessment.

BRAND STRENGTH

Brand strength measures the ability of the brand to secure the delivery of expected future earnings. Brand strength is reported on a 0 to 100 scale, where 100 is perfect, based on an evaluation across 10 dimensions of brand activation.The ten dimensions are divided into internal and external factors.

INTERNAL FACTORS

CLARITYClarity internally about what the brand stands for in terms of its values, positioning and proposition

COMMITMENTIt deals with internal commitment to the brand, and a belief internally in the importance of brand. It gives the extent to which the brand receives support in terms of time, influence, and investment

PROTECTIONProtection deals with how secure the brand is across a number of dimensions: legal protection, propriety ingredients or design, scale or geographical spread

RESPONSIVENESS

8 | P a g e

It measures the ability to respond to market changes, challenges and opportunities. The brand should have a sense of leadership internally and a desire and ability to constantly evolve and renew itself

EXTERNAL FACTORS

AUTHENTICITYIt measures the brand’s internal truth and capability, well defined heritage, well grounded value set and delivery of high expectations that customers have of it

RELEVANCERelevance measures how well does the brand fit with customer/consumer needs, desires, and decision criteria across all relevant demographics and geographics

DIFFERENTIATIONThis is the degree to which customers perceive the brand to have a positioning that is distinct from the competition

CONSISTENCYThis measures the degree to which a brand is experienced without fail across all touch-points or formats

PRESENCEPresence is the degree to which a brand feels omnipresent and is talked about positively by consumers, customers and opinion formers in both traditional and social media

UNDERSTANDINGThe brand is not only recognized by customers, but there is also an in-depth knowledge and understanding of its distinctive qualities and characteristics

9 | P a g e

Measurement of brand value

(for detailed workings please check the excel sheets attached)

• A variation of the Interbrand brand valuation model was used to calculate the brand value of Colgate and its competitors Dabur.

• For the purpose of the research a questionnaire was designed and 30 respondents were surveyed. This was done to find out the role of branding index and the brand strength score.(See annexure for the questionnaire).

FINANCIAL ANALYSIS

The annual reports of the parent companies of the 2 brands were analyzed to develop the Discounted Cash Flow model. For the financial years ending 2009, 2010 and 2011 the figures were directly picked up from the audited financial statements and for the year ending 2012, data was extrapolated from the unaudited quarterly reports published. The financial statement of Colgate is given a weightage of 96% and that of Dabur is given 18%, since that is the contribution of Oral care in the overall respectively.The overall growth of the industry was taken from a industry report and keeping that as the base the assumed YoY growth rate for the next 5 years was arrived at. This growth rate was kept same for the 2 brands for the ease of comparison. All expenses have been treated as a percentage of revenue while revenue, assets and current liabilities were treated as a function of the growth rate. For extrapolating the expenses for the next 5 years the average value of the last 3 years have been taken into consideration. One WACC and cost of equity is taken care of as Colgate is not having any debt.The industry WACC was taken as the capital charge to arrive at the intangible earnings. Total assets – Current Liabilities = Net Plant Property and equipments (Net Plant Property and Equipments * Capital Charge) – NOPAT = Intangible earnings

10 | P a g e

Branding Index

• The Branding index is the parameter which leads to purchase of a particular brand apart from price and feature.

• A research was conducted where the respondents were asked to rate, on a scale of 1 to 5 where 1 is the lowest and 5 is the highest, Colgate, Dabur and Pepsodent on the 10 parameters on the Interbrand Valuation model mentioned above.

• The mean scores for each parameter and for each brand have been taken and multiplied with weights.

• 10% weight age have been assigned to each attribute. The weighted average total and subsequently the brand index have been prepared for each brand.

• The above picture shows the position of each brand in the branding index.

• The closer the value to 100 the more sales is coming due to the brand. The closer to 100 the more sales coming due to the feature of parent company i.e. supply chain etc. Colgate had highest score among all 3 brands i.e. of 83.67.

Brand earnings = Intangible Earnings * Role of Brand Index

11 | P a g e

Branding Index

Brand Strength

• For calculating the brand strength, the sum total of all the rates for the brands have been taken.

• Since brand strength is a relative measure the total of each attribute have been taken and accordingly, by calculating the average of the sum, weights have been assigned to each attribute.

• The scores of each brand for each attribute have been calculated by multiplying the weights with the average values.

• The sum total of all the attributes gives the brand strength score for the respective brands.

• The discount rate is used to calculate the risk associated with the cash flows of the brand.

• The industry WACC that has been calculated taking average of WACC and cost of equity of 2 brands.

• Interbrand uses a proprietary algorithm which calculates the brand discounting factor from the brand strength score.

• Here in our research, we have assumed that a brand strength score of 100 would entitle a discounting rate which is equivalent to the industry WACC.

• The brand earnings were discounted with the brand discount rate (arrived from brand strength score) to arrive at the present value of the future cash flows with year 0 being 2012.

12 | P a g e

Brand Strength Score

Particulars Brand Strength Score WACC

Industry 100 10.81%

Pepsodent 77.79 13.90%

Colgate 83.71 12.92%

Dabur 68.34 15.82%

13 | P a g e

Brand Valuation

All the present values of the future cash flows including the terminal cash flows were added to arrive at the value of the brand in the year 2011

Brands Value (as of 2012 )(in millions)

Colgate 6088.29

Dabur 678.21

Dabur

2012 2013 2014 2015 2016Total Net Revenues 778.1813 894.9085 1020.196 1163.023 1314.216

Cost of Sales 645.1618 741.9361 845.8071 964.2201 1089.569Cost of Sales as a % of

Revenue 82.91% Gross Margin 133.0195 152.9724 174.3886 198.803 224.6474

Depreciation 8.526573 9.805559 11.17834 12.7433 14.39993

Depreciation as a % of Revenue 1.10%

Overheads 645.1618 741.9361 845.8071 964.2201 1089.569Overheads as a % of revenue 82.91%

EBITA 124.4929 143.1669 163.2102 186.0597 210.2474Applicable Taxes 26.14352 30.06505 34.27415 39.07253 44.15196

NOPAT 98.34942 113.1018 128.9361 146.9871 166.0955

Total Assets 462.2248 531.5585 605.9767 690.8134 780.6192 Current Liabilities 266.6367 306.6322 349.5607 398.4992 450.3041

NET PPE 195.5881 224.9263 256.416 292.3142 330.3151Capital Charge 21.15285 24.32578 27.73139 31.61378 35.72358

Intangible Earnings 77.19657 88.77606 101.2047 115.3734 130.3719

Role of Branding Index Brand Earnings 52.69953 60.60446 69.08908 78.76155 89.00055

Brand Strength Score Brand Discount Rate

Discounted Brand Earnings 45.50123 45.17909 44.46914 43.77035 42.70462

14 | P a g e

Terminal Growth Rate 414.42

Brand value 678.21

Colgate

2012 2013 2014 2015 2016

Total Net Revenues 3091.2 3554.88 4052.563 4619.922 5220.512Cost of Sales 2444.402 2811.062 3204.611 3653.256 4128.179

Cost of Sales as a % of Revenue 79.08%

Gross Margin 646.7983 743.818 847.9525 966.6659 1092.332

Depreciation 48.16897 55.39432 63.14952 71.99045 81.34921Depreciation as a % of

Revenue 1.56% Overheads 2431.957 2796.751 3188.296 3634.658 4107.163

Overheads as a % of revenue 78.67% EBITA 598.6293 688.4237 784.803 894.6754 1010.983

Applicable Taxes 144.2697 165.9101 189.1375 215.6168 243.647NOPAT 454.3596 522.5136 595.6655 679.0587 767.3363

Total Assets 1165.077 1339.838 1527.415 1741.253 1967.616

Current Liabilities 798.3415 918.0927 1046.626 1193.153 1348.263NET PPE 366.735 421.7453 480.7896 548.1001 619.3531

Capital Charge 39.66239 45.61175 51.99739 59.27703 66.98304Intangible Earnings 414.6973 476.9018 543.6681 619.7816 700.3532

Role of Branding Index

Brand Earnings 346.9634 399.0079 454.869 518.5506 585.9622Brand Strength Score Brand Discount Rate

Discounted Brand Earnings 307.2648 312.9246 315.9175 318.939 319.165

Terminal Growth Rate 4231.354

Brand value 6088.293

15 | P a g e

Inferences and recommendation

Colgate

Colgate with a wide range of products is the strongest brand in the country with a

brand strength of 83.72

Colgate leads with the brand value of almost $1.08 billion which shows that Colgate's

evolution from dental hygiene to oral care has been successful

In the course of evolution ,Colgate has been successful in creating needs for the

consumers

Colgate must continue introducing new variants in its products for satisfying the

evolving need-set of the consumers

Dabur

Dabur has a brand strength of 68.35

Dabur toothpastes are known for its herbal composition, hence a major portion of its

revenue comes from Babool , Meswak & Red

Dabur must introduce new variants other than herbal toothpaste to compete with

major brands like Colgate, Pepsodent which have a wide range of products.

Dabur must transform from toothpaste/toothpowder to a complete oral care brand to

increase its share in the oral care division of personal care

16 | P a g e

17 | P a g e

Annexure

Questionnaire

Please select "only" one option per brand * Required

1. Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "commitment" *Commitment - the extent to which the brand receives support in terms of time, influence and investment *

1 2 3 4 5

Pepsodent

Colgate

Dabur

2. Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "protection" *Protection - examines how secure a brand is across a number of dimensions (legal protection, proprietary ingredient, design, scale or geographic spread) *

1 2 3 4 5

Pepsodent

Colgate

Dabur

3. Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "clarity" *Clarity - measures the degree to which the brand is truly dedicated to understanding and defining their customer *

1 2 3 4 5

Pepsodent

Colgate

Dabur

19 | P a g e

4. Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "responsiveness" *Responsiveness - the brand's ability to adapt to market changes, challenges and opportunity *

1 2 3 4 5

Pepsodent

Colgate

Dabur

5. Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "authenticity" *Authenticity - if a brand has a defined heritage and a well grounded value set as well as if it can deliver against customer's expectations *

1 2 3 4 5

Pepsodent

Colgate

Dabur

6. Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "relevance" *Relevance - how well a brand fits with the customer's needs, decision and decision criteria across all appreciate demographics and geographies *

1 2 3 4 5

Pepsodent

Colgate

Dabur

7. Rate the following companies on a score of 1-10 (1 being the lowest and 10 being the highest) for "presence" *Presence - the degree of how positively consumers, customers and opinion formers discuss it in both traditional and social media *

20 | P a g e

1 2 3 4 5

Pepsodent

Colgate

Dabur

8. Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "understanding"*Understanding - in-depth understanding of the brand distinctive quality and characteristics *

1 2 3 4 5

Pepsodent

Colgate

Dabur

9.Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "consistency" *Consistency - the degree to which a brand is experienced without fail across all touch-points and formats *

1 2 3 4 5

Pepsodent

Colgate

Dabur

10.Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for "differentiation"*Differentiation - the degree to which customers perceive the brand to a positioning that is distinct to its competition *

1 2 3 4 5

Pepsodent

Colgate

Dabur

21 | P a g e

22 | P a g e

Submit

References

Prof. Srinivas Govindrajan’s PPTs

Strategic Brand Management by Kevin Lane Keller

http://www.interbrand.com

Marketing Management : Philip Kotler- 13th Edition

Wikipedia.org

http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/101.html

http://www.acrwebsite.org/volumes/display.asp?id=7644

http://lta.hse.fi/1999/1/lta_1999_01_a4.pdf