“If this business were split up, I
would give you the land
and bricks and mortar, and I would
take the brands andtrade marks, and I would fare better than you.”
— John Stuart, Chairman of Quaker (ca. 1900)
The quote above opens the article “Brand Valuation” by Jan
Lindemann. The comments of Mr. Stuart
are probably even more relevant in today’s world, if that’s even possible. Brands are everywhere. They are no longer just about products or the
companies that make products. These days
cities, states, and even countries (watch Bloomberg for the ads about investing
in Kazakhstan, Mongolia, and Belize) are aware of their brand. Athletes, singers, movie stars, and
politicians probably pay closer attention to their brands than many companies. Today,
even types of meat have brands (beef “It’s what’s for dinner” and pork “The
other white meat”).
While their influence on consumers is undeniable, I don’t
think brands belong on the balance sheet as an asset. A brand is an intangible asset. By definition something that’s intangible can’t
really be measured. Lindemann tries to
make the case that through financial and other analysis one can put a price on
the value of a brand. His process calls
for a lot of forecasting and subjective calculations. As it turns out, forecasting is incredibly
difficult. Study any forecasts made at
the beginning of each year about the economy, sports, or world politics and you’ll
find a dismal record, even by the so-called experts.
The subjective part of the recommended analysis may be even
more flawed. Coach, for example, is a
luxury brand whose stock has fallen a bit over the last couple of years because
of competition but also because consumers have come to view it as a little less
aspirational. The company still sports
some of the highest margins around throws off a lot of cash, but does
management actually consider the brand worth less? I can’t answer that for sure, but the
evidence certainly points to the consumer as being less enthused about the
brand. Consider the ratings agencies of S&P,
Moody, and Fitch. They were simply
trying to rank the safety of securitized mortgages, a proposition that requires
far less accuracy than specifying a particular value. Whether by incompetence or misconduct, they
failed miserably.
Finally, the accounting scandals in recent years of Enron, WorldCom,
and Tyco are example of how companies were able to fudge real and measurable
numbers. Allowing companies to value their
brand for placement on the accounting statements would be asking for fraud.
Today’s accounting standards allow a company to record as
goodwill the amount of purchase over book value of another company. The purchasing company is then supposed to
test for impairment each year. I asked
my accounting instructor how to test for impairment in a recent lecture. His response was, “I don’t know and I’m not
even sure it’s possible.”
In the end, a brand is just a symbol of the reputation of a
company or product. Just as with a
reputation, it may take several years to build up a brand, but only a moment
for it to be tarnished. For several
years my family and I would always stay with Hyatt when we travelled. Building up a large number of points I tried
to redeem them for a free night in Paris last summer. When they told me I would need to book a
second room because there were three of us, I wrote to the president of the
European operations. I got a nice letter
back from the manager of the Paris property apologizing, but basically telling
me rules are rules. I am now a member of
the Marriott rewards program.
I think the value of the brand is reflected in the income
statement and the return on capital by the firm. It is the value of the brand that leads to
high sales and large margins. I recently
wrote about the world’s most ubiquitous brand, Coca-Cola. The Coke brand is invaluable, which is part of
the reason why investors are always willing to pay a higher multiple to own the
stock.
P.S.
The article, written in 2004, uses Ford as an example of a company focusing on intangible assets and investing $12 billion in brands such as Jaguar, Volvo, Aston Martin, and Land Rover. See how that turned out: Just How Much Did Ford Lose on Jaguar and Land Rover
P.S.
The article, written in 2004, uses Ford as an example of a company focusing on intangible assets and investing $12 billion in brands such as Jaguar, Volvo, Aston Martin, and Land Rover. See how that turned out: Just How Much Did Ford Lose on Jaguar and Land Rover
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