The battle between marketing and finance departments has been
raging for years, with each side struggling to understand and adapt to
each other’s very different ways of working. Gradually, finance
directors are resigning themselves to the necessity of marketing, but
only after great efforts by marketers to demonstrate the effectiveness
of their expenditure.
To make matters worse - or maybe better - this notoriously fractious
relationship is about to enter a critical new stage. From December the
Accountancy Standards Board’s (ASB) ’Financial Reporting Standards 10’
and ’11’ will begin to make a real difference to how brands are valued
by their parent companies. It marks the end of a long-running conflict
in the accountancy profession over how best to measure the value of
Now that the money men have gritted their teeth and agreed on the
standards, marketers can start turning the new rules to their
’FRS 10’ was published in December 1997 and is effective for accounting
periods ending on or after December 23 this year. Its objective was to
ensure that intangible assets - including brands - are charged to a
company’s profit and loss account.
Many companies have held back from implementing ’FRS 10’ until the ASB’s
latest and more detailed standard on brand valuation - ’FRS 11’ - was
published. This happened two weeks ago and there will now be six months
of intense activity in finance departments to meet the deadline.
Traditionally, accountants have simply written-off acquired ’goodwill’
and intangible assets and have refused to recognise brands as balance
sheet assets. One merchant banker dismisses the whole idea of brand
valuation by saying: ’You can make up any values you like and put them
on the balance sheet, but no one in the City is going to take the
resulting balance sheet seriously.’
The vast majority of UK companies have followed this approach. The
result has been undervalued balance sheets which flatter the performance
The treatment of intangible assets on balance sheets was either muddled
or simply ignored, so the hidden value of brands was not always
Some marketing champions have tried to persuade the wider business
community about the value of brands. One is former Unilever chairman Sir
Michael Perry, who says: ’The major assets of a consumer business,
overwhelmingly, are its brands. They are of incalculable value,
representing both its heritage and its future. To succeed as a consumer
products business there is no alternative but to invent, nurture and
invest in brands.’
It was RHM that really made people take notice of brand valuation in
1988, while under threat of takeover by Goodman Fielder Wattie. RHM took
the law into its own hands and simply revalued its brand portfolio,
putting them onto the balance sheet. Its defence said: ’RHM owns a
number of strong brands which are valuable in their own right, but which
the stock market tends to consistently undervalue. They are not included
in the balance sheet, but they have helped RHM build profits in the past
and provide a sound base for future growth.’ RHM beat off GFW, but was
later taken over by Tomkins at a much higher price.
Other events in the 80s - such as when Philip Morris paid dollars 12.9bn
(pounds 8bn) for Kraft at four times its book value and Nestle paid
dollars 4.5bn (pounds 2.8bn), five times the book value when it bought
Rowntree - have highlighted the value of brands, and now even the most
conservative accountants have to admit their worth.
When Orange floated in 1996, it made great play of the ability of its
brand to generate customer loyalty. One analyst put a value of pounds
200m on the brand alone despite its relative novelty.
Even the government has cottoned on. Recently culture minister Chris
Smith asked for a full brand valuation of the BBC before granting
permission for the licensing of the BBC brand to a new commercial
Those accountants that still doubt simply don’t believe brand values can
be reliably and consistently measured and they don’t know how long they
will remain valuable. They prefer to leave well alone.
This latest accounting development may seem of little relevance to
marketers but the reality is that the new accounting standards have
become a powerful catalyst for change on two fronts.
City analysts have woken up to the value of marketing generally and of
brands in particular. From now on they will be demanding much greater
disclosure from marketing people about their brands. In a recent City
report on brand financing, 80% of analysts asked for more information on
marketing and advertising investments by the companies they followed,
with 66% asking for more information on brand values.
Brand values played a big part in the takeover of Rolls-Royce. The
forecast value of the UK’s most famous car brand to either VW or BMW was
the driver of a bidding war for control of the company.
The areas where it seems clear that far more information will be
provided in future includes: segmentation of results by brand, region
and consumer group; qualitative and quantitative analysis of marketing
investment; revaluation of brands and long- as well as short-term
forecasts of performance.
ICI, for example, uses brand valuation to determine royalty rates for
licensing its brands both to group companies and to joint ventures
There is increasing pressure for companies to show five- or even
ten-year forecasts in their reports to analysts. Price Waterhouse has
led the charge for what it describes as ’Value Reporting’, which would
incorporate historic and prospective information of both a quantitative
and qualitative nature.
The quid pro quo of the move toward more rigorous brand valuation
techniques is much more intense accountability measures for marketers.
There will be much greater scrutiny of performance and this is likely to
act as a catalyst for change within companies. Many are already
significantly upgrading the way the marketing department manages itself
financially and reports internally. It is now the rule rather than the
exception for financial managers to be intimately involved in the
measurement and evaluation of marketing. The fact that there are already
over 5000 UK accountants who actually describe themselves as ’marketing
accountants’ speaks for itself.
This trend will rapidly accelerate.
Accountants tend to be data-driven, to be consistent in their analysis
and to track performance on a regular basis. On the one hand, this can
be intrusive and mechanistic for many traditional marketers. On the
other hand, it means they can expect to see much improved IT systems,
quantitative market research and analytical reports at their
Those who have been crying out for customer, channel and brand profit
and value measurement will suddenly find that they have them - courtesy
of a better-informed finance function. With such systems and analysis in
place, accountants will feel more comfortable about releasing budgets
for investment in brands - but only if the numbers can be shown to stack
Even in relatively sophisticated companies, marketing and finance
departments have historically communicated poorly, a fact which has
frequently led to brand managers carrying little financial
responsibility for their brands.
This will change. Marketers will need to raise their game, in terms of
analysis, accountability and results. If they are not already doing so,
they are simply going to have to embrace the valuation and measurement
techniques espoused by the City and their finance directors.
The changes need not make marketers worry that accountants will be
seizing power at their expense. Accountants will find their work more
stimulating and productive. Marketers will be able to focus better and
with more support on the things which they do best. Chief executives
will have a more integrated team, producing better results which will
keep the City happy. That could lead to a virtuous circle.
The presiding aim of both finance director and marketing director should
be the need for more effective financial understanding of and interest
in marketing issues. As Voltaire suggested, victory will go to the best
shots rather than the heavy battalions. But to be the best shots,
marketers need to be able to see the targets with sights on which they
can rely. It is the financial function which will help define the
targets and calibrate the sights.
Who knows, marketers may even start to compliment the foresight of the
finance function, while finance people may start to understand and
respect the contribution of marketing to their company’s success. Maybe
that’s too much to ask, but there’s always hope.
David Haigh is managing director of Brand Finance, which publishes an
information booklet on FRS10 and 11. For a copy call Tracey McCulloch on
0181 943 0060.
FOUR WAYS BRAND VALUATION CAN HELP YOUR COMPANY
1 Budget allocation
By connecting future business performance with current marketing
thinking, brand valuation provides a bridge between marketing and
finance people, allowing them to talk rationally about budget
allocations and predict where the greatest returns are likely to be.
It can also be useful in managing portfolios of brands, and in
allocating advertising budgets between brands, new launches, setting
discount policies or overseas extensions. This technique is employed by
Fazer, one of Scandinavia’s largest confectionery companies, with a
domestic and international portfolio.
2 New-product development Brand valuation techniques can be used to
model alternative new-business strategies. Which is the best market,
brand extension, consumer segment or npd strategy to maximise long-term
For example, the marketing director of a UK financial services company
whose corporate name is also a significant consumer brand, used the
results of a brand valuation exercise to identify the potential increase
or decrease in brand value that would result from stretching the brand
into various new product areas.
3 Internal marketing management
A number of large, blue-chip companies now calculate brand earning
streams and brand valuations as a reference point for use by all
concerned in brand management (see Diageo case study).
Brand valuation reporting gives the marketing director an opportunity to
assess the success of brand strategies. It also provides an opportunity
to look at the success of particular management teams. For example, one
international cigarette company has introduced brand valuation manuals
for its brand managers worldwide to monitor values internally, and to
monitor the growth or decline of brand values in regular reports.
Cadbury uses brand valuation in its balance sheet and for the internal
management of its brand portfolio
4 Assessing agency performance Just as a number of marketing directors
believe that part of their rewards should be linked to long-term brand
values, some clients believe that agencies should be rewarded according
to the value they add to the brands they serve, rather than on the
number of awards they win or the amounts they spend in the media.
For those who view the raison d’etre of advertising to be the creation
of brands for clients, there exists a desire for this contribution to be
DIAGEO CASE STUDY
Until its recent merger with Guinness to form Diageo, Grand Met had a
portfolio of brands including names as prominent as Smirnoff, Baileys,
Haagen-Dazs, Green Giant and Burger King.
In 1988 Grand Met shocked the financial world by including its acquired
brands as intangible assets on its balance sheet. Being so rich in name
brands, it was little surprise that senior management appreciated their
importance to the long-term health of the organisation and wished to
reflect this in the company accounts. The 1988 balance sheet included
brands with a cost of pounds 608m.
To the board of Grand Met the fact that a series of expensive and
high-profile acquisitions might not have been included in the accounts
seemed an absurd contradiction and would have left the company
An anomaly remained. Only acquired brands were included on the balance
sheet despite the obvious value to Grand Met of their internally
Similarly, early valuations were based on historical earnings multiples,
a method not currently seen as accurately reflecting the true worth of a
Grand Met’s response to this problem - and evidence of a real bridge
being built between marketing and finance functions - was the
introduction of its ’brand equity monitor’.
The purpose of this was not to place a historical value on a brand, but
to give management an idea of the performance of brands. The factors
measured could not be calculated in purely profit and loss terms and the
monitor included both economic, consumer and perceptual measures of
performance, which together formed a subtle and responsive mechanism for
tracking both brand health, and if necessary, financial brand value.
The process has been extended from its early beginnings and Diageo now
monitors a number of key financial and marketing indicators to establish
the level of brand equity.
These indicators focus management’s attention on gaining customer
awareness, loyalty, market share and the brand’s ability to charge a
price premium. It is this premium which communicates the value of a
brand to the company’s stakeholders.
There are a number of checks used by Diageo staff to assess the trends
in brand equity. A sample of these measures includes awareness,
advertising spend, market penetration and share of display.
Management is able to gauge the relative health of brands from a flow of
consistent and reliable data.
The fact that the vast majority of this data will never be included in
the company accounts is irrelevant; its purpose is to provide a degree
of strategic and operational control over the group’s most valuable
However, the catalyst for these developments was the need to adequately
reflect, purely from a financial reporting perspective, the value of