The City long ago realised that brands have value. It knows that
when the economic going gets tough, a brand’s equity and strength can
help maintain consumer confidence and support its share price.
But many in advertising and marketing feel that the red braces brigade
in the City think about brands in the same way as their next
They like what they see, but don’t always appreciate what’s under the
bonnet. So whereas the brand has a clear value for them, the marketing
and advertising which drives it does not.
Industry bodies such as the Institute of Practitioners in Advertising,
along with individually listed companies, are busily trying to change
this perception of marketing as a cost, rather than an investment.
They have their work cut out. Financial Times chairman David Bell,
speaking at the IPA’s Effectiveness Awards earlier this month, said
there was still strong evidence that the value of marketing and
advertising went unrecognised by City institutions.
’Nothing highlights this better than the different approaches of the
City to pharmaceutical companies and branded goods companies,’ he
’A review of this year’s company results reveals a strong focus on
patents, new product trials and overall spend on R&D in the comment
about pharmaceutical companies. And the City tends to mark these
companies down if they reduce spend in these areas.’
He adds: ’By comparison, the comment about branded goods companies
highlights almost none of this information. The focus is much more on
the short-term performance and cost-cutting initiatives.’
Bell went on to point out that successful brands can have ’amazing
longevity and profit streams’, citing Coke as an example. ’Coke first
appeared in 1886 ... it goes without saying that (its) market value is
many thousand times its tangible assets.’
But Bell was preaching to the converted. The members of the IPA and the
clients at the Effectiveness Awards know good marketing and advertising
can make its mark on a company’s bottom line. The challenge, as Bell
made clear, is to convince the City, which is still resistant to the
charms and claims of brand marketing.
’The value of brands as shareholder assets has been widely recognised,
but the crucial role of marketing and advertising in building this brand
equity, and so enhancing these assets now on the balance sheet, is still
not fully recognised. We will have to change this. We will need to
continue to develop the vocabulary and widely accepted measures of brand
equity if this situation is to change.’
Some in the marketing industry argue that a forthcoming change in
accountancy law could help the development of a vocabulary that the City
Next month, two new innocuous-sounding rules, Financial Reporting
Standards (FRS) 10 and 11, will come into force. One senior marketer
calls it ’the most significant event in branding in the last
The reason for this enthusiasm is that, for the first time in the UK,
acquired brands (termed ’purchased goodwill and intangible assets’) will
have to appear on a company’s annual accounts.
In the past, intangibles, such as brands, goodwill and patents, were
simply written off, but as intangibles have become more valuable, large
companies found they were having to write off increasingly huge sums
with unpleasant and misleading consequences on the balance sheet.
The new accounting measures bring Britain into line with what’s been
happening in the US for years, and what most brand-heavy companies
started doing in the 1980s, which is to put a value on the brand and
include it in the annual accounts.
More importantly, however, many in the industry hope this official
recognition will ensure the City recognises the value of building
brands, and thus the contribution of marketing, to the share price
These minor changes in accounting rules could have a very significant
effect on marketers around the country.
What FRS 10 says is that items in the intangibles category must be
written off over a maximum of 20 years (compared with 40 years in the
US) unless that presumption can be rebutted. A company with a strong,
newly acquired brand, for instance, may claim its useful life is forever
(for example BMW acquiring the Rolls-Royce brand) in which case it will
have to do a discount cash flow valuation annually to support its
David Haigh, managing director of Brand Finance, is an accountant whose
company is at the forefront of a rapidly developing business in
evaluation accountancy. Haigh is excited about FRS 10 and 11 because, he
says, the rules will be a catalyst for a dramatic change in the way
accountants view and invest in the marketing function.
Haigh claims that annual discount cashflow analysis on the brand will
mean finance departments will have to think in terms of long-term
investment in marketing. ’Marketing and financial management will have
to dovetail, and the accountants will have to be far more mindful of
brand investment,’ he says.
According to Ray Perry, marketing director at the Chartered Institute of
Marketing, this process will, if nothing else, give marketing
departments an annual indicator of their effectiveness. And, although
the rules only relate to bought-in brands, Haigh claims it makes no
sense to limit the process. Once companies have set up a template for
valuing acquired brands, they will use it for their entire brand
Of course, FRS 10 and 11 don’t give companies that template; they have
to determine their own method of evaluation and be able to justify its
formula. Haigh says it is important to be clear about what assumptions
are being made and that they are fully disclosed. Just as pension fund
managers must disclose that their forecasts are based on a certain yield
and growth in salaries, so brand valuation will have to be equally
transparent, revealing profit margins, market share and other key
Shell’s global head of brand and communication, Raoul Pinnel, welcomes
the FRS 10 change. He argues that not only will it encourage the board
to take care of the brand, but it will open a dialogue about investing
in its value. ’Marketing people won’t just be preaching on the basis of
belief, but on the basis of hard facts and quantitative research and
that will speak much more loudly to the board,’ he says.
It is a view backed by Leslie Butterfield, chairman of Partners BDDH,
who wrote in the IPA’s Understanding The Financial Value of Brands:
’This sort of research process is good news for the marketing community,
and for advertising agencies, too. The rigour that it implies will force
a positive revaluation by the board and by the financial community of
the role and value of brands, and of the marketing and advertising
support for those brands. As a result, the better clients and their
agencies will prosper and may one day even see their remuneration and
fees linked to changes in the brand values.’
Frazer Thompson, Heineken’s international marketing manager, also thinks
the changes are good news and will help change the mindset of finance
and marketing departments. ’Brand managers are increasingly aware of the
intangible asset value of the brand and what they can do to increase
that value. The implications of FRS 10 and 11 are that non-marketing
managers will appreciate that too.’
But some in the industry think the impact of the new rules has been
overestimated. One sceptic is Tim Ambler, senior fellow at the London
Business School. ’There’s a huge amount of baloney about this which is
profoundly misleading,’ he says. Ambler claims that nothing will appear
on balance sheets that wasn’t there before. ’It isn’t a template, it
doesn’t tell you how do it, it’s simply clarifying the rules for
companies who have for many years put acquired brands on the balance
sheet. From that point of view, it’s most welcome, but for marketers or
company structure, there’ll be no spin-off at all.’
Ambler was at Grand Met in 1988 when it was among the first to include
new brands - worth pounds 608m - in its accounts. At the time this was
seen as a radical move, but Ambler says it had ’no impact on the use of
brand equity internally’.
While many welcome the changes in accountancy rules, they argue that
this is not the real battleground. The issue is about convincing the
City of the value of advertising and marketing, using language that both
the City and marketers can share.
One recent notable effort was a paper by Orange and its advertising
agency, WCRS, which won the IPA Charles Channon Award for the best
contribution to new learning this month. It set out not only to prove
the effectiveness of advertising on sales, but to show how it added
value to shareholders in terms of share price. WCRS worked with Lehman
Brothers on developing a spreadsheet methodology that sought a
quantitative comparison of advertising with stock value.
The paper reports: ’Lehman Brothers’ sophisticated spreadsheet
methodology puts the current implied value per share of Orange at 528p
(compared with the current market value of 443p). We then asked them to
re-work their valuation on the assumption that advertising’s effects on
net subscriber growth, customer revenue, and churn had not applied. The
implied value per share plummets to 279p.’
The paper concludes: ’With the help of Lehman Brothers we have been able
to calculate advertising’s capacity to increase Orange plc’s implied
value per share by pounds 2.49. This is equivalent to an increased
market capitalisation of pounds 3bn.’
There are few marketers who today would accept the old Lord Leverhulme
complaint that half of their advertising was working, they just don’t
know which half. Metrics for measuring advertising and media
effectiveness are being refined and improved all the time. But the
industry must ensure that its claims about measurability and
accountability are made in a language the City can understand and agree
HOW IS BRAND EQUITY WORKED OUT?
New accountancy rules should theoretically make it easier to put a
figure on the value of acquired brands on the balance sheet. But Steve
Waring, partner at specialist marketing accountants Willott Kingston
Smith, says the process is fraught with problems. As yet, there is no
consistent framework for working out the value, he says, or apportioning
how much of total value is assigned to a company’s brands.
’Comparative allocation is the difficult bit and will differ from year
to year,’ says Waring. ’It’s hard to say, for example, if a brand has
suffered reversible losses.’ Evaluation will therefore be a matter of
analysing how the brand was acquired, together with its sales, and
discussion with company directors.
According to David Aaker’s Building Strong Brands, this analysis should
embrace the following areas of evaluation: price premium,
satisfaction/loyalty, perceived quality, leadership/popularity,
perceived value, brand personality, organisational associations, brand
awareness, market share, market price, and distribution coverage.
Brand Finance managing director David Haigh is so confident that he’s
found a way to do this he has registered his brand valuation formula as
a trademark : Brand Value Added (BVA). It involves traditional research,
questionnaires and face-to-face interviews and includes the following
Economic Value Added (EVA) A brand’s background and revenues, costs and
capital are calculated to produce a five- to ten-year cashflow forecast.
The EVA is the fully absorbed earnings of the brand after the allocation
of central overhead costs.
Elimination of private label production
The earnings in the discounted cash flow calculation must relate only to
the brand being valued, not to other unbranded goods which may be
produced alongside the brand, but aren’t sold under its name.
Remuneration of capital employed
To avoid over-valuing the brand, a fair charge must be made for the
value of the business’s tangible assets, such as the distribution
system, manufacturing plant and stock. The brand is only adding value to
the business once a fair return has been made on the fixed assets and
The discount rate is applied to post-tax earnings, giving an assessment
of the historic and prospective Economic Value Added attributable to the
intangible assets of the branded business.
Different businesses rely in varying degrees on branding to stimulate
demand and support price. By identifying what it is that drives demand
in the specific market, Haigh argues it is possible to estimate the
contribution made by the brand.
Assessing brand risk: Brand value reflects its income-generating
potential - an appropriate discount rate takes into account economic,
market and brand risks.