INSIGHTS by HDTS

Before reading this article, we recommend downloading Brand Valuator, our open source Excel model for brand valuation. Download Brand Valuator

Over the past three months, our INSIGHTS research team has focused on communicating the importance of branding. In this report, we'll go one step further and uncover the components of brand value and show you our methods and best practices for measuring and monitoring the value of your brand.

Brands are powerful drivers for long-term value creation. Brands turn cold, emotionally void commodities, such as consumer products, into vibrant mediums for self expression. Brands attract consumers who share common values and adhere to certain lifestyles. So long as brands stay true to their base, consumers will be loyal and shower the brand owner with steady and predictable profits that dwarf the economies of their unbranded counterparts.

So what is a brand actually worth? Better yet, how do we measure brand value? Finally, what are the secrets to growing brand value?

At HDTS, we believe that a brand is worth the present value of expected future profits it will generate for the brand owner, based on historical profit performance, taking a variety of risk factors and uncertainties into careful consideration. Brand valuation is neither exact science, nor arbitrary assignment.

To put this concept into context, we’ll analyze the Coca-Cola brand. Recognized by Interbrand - a pioneer in brand valuation - as the world's most valuable brand, our Brand Valuator yields a brand valuation of $71 billion for the beverage juggernaut. Here's how we arrived at this number.

Total Present Value of NOPAT

First, we projected The Coca-Cola Company's Net Operating Profit After Taxes (NOPAT) for the next five years. To calculate NOPAT, we subtract operating expenses - costs related to ongoing operations - such as Cost of Goods Sold (COGS), Selling, General and Administrative (SG&A), and Research & Development (R&D), and operating taxes - taxes attributable to ongoing operations - from annual revenue. We projected NOPAT for the years 2013 through 2017, by applying historical averages to operating expenses and taxes as a percentage of revenue -- which is also growing based on conservative historical performance. We assigned a terminal growth rate of 2.5% after year 2017, which assumes the company will continue growing at the historical pace of inflation.

We used a Weighted Average Cost of Capital (WACC) of 8% - in line with the beverage industry - as the discount rate to arrive at our present value of NOPAT.

Earnings Contribution

Next, we multiplied the present value of NOPAT by the percent (30%) which the Coca-Cola brand contributes to the earnings (NOPAT) of The Coca-Cola Company which owns a portfolio of brands. We took the average historical contribution and expected future contribution into consideration to arrive at this value.

DecisionPower

Then, we determined the importance of brand in the consumer's purchasing decision. The underlying commodity of carbonated cola beverage is not uniquely controlled by Coca-Cola, and the consumer has many generic and branded choices. Therefore, we assigned a high DecisionPower correlation coefficient of 0.9. This means the brand itself is a powerful determinant of consumer selection.  

BrandPower

Finally, we conducted a thorough and objective assessment of Coca-Cola's stability. We looked at risk factors including the internationality of Coca-Cola's brand recognition and distribution, competitive threats, intellectual property threats, operational risk, and political risk which may prevent the Coca-Cola brand from achieving the performance of our projections. To perform this portion of the brand valuation, we scrutinized the company's most recent annual report and studied the global beverage industry.

Coca-Cola is an exceptional brand. Based on our Brand Power rating of Coca-Cola, we see that the brand has a perfect correlation coefficient of 1 plus a bonus of 0.1, or 10%, for Ubiquity. Below we will provide an overview of each of our BrandPower rankings.

Leadership - this measurement is a combination of market share and consumer awareness or brand recognition relative to industry peers.

Internationality - how global is this brand? Is the brand operational and recognized globally, or is it confined to certain regions?

Endurance - Warren Buffett talks about investing in companies that have “moats.” Does this brand have a durable competitive advantage that will allow it to maintain and even grow its relevance and leadership over time? Simply put, how certain are you that this brand will thrive 100 years from now? Certain industries such as technology, are prone to disruption. This rating helps us discount for such threats to brand durability.

Momentum - is the brand growing in real terms (ie: NOPAT)? Is the brand owner reinvesting earnings to fuel growth? Does the brand have products that are performing exceptionally well relative to competing offerings?

Defense - is the brand able to protect itself? Beyond intellectual property, is the brand owner able to enforce measures that protect its brand. Some methods include the ability to lobby and work closely with government officials, and the ability and willingness to invest in world-class legal counsel, and public relations support including but not limited to reputation management, and crisis management.

Ubiquity - Is the brand synonymous with the commodity being sold? For example, when ordering a beverage at a restaurant, many people will say “I’ll have a Coke, please.” Notice, they did not say “I’ll have a cola,” instead, they referred to the product by the brand name. This, in a nutshell, is Ubiquity.

The goal for BrandPower criteria is to be simple, objective, and repeatable. We welcome any and all feedback to help improve our rating system.

Brand Valuation = TPV NOPAT × Earnings Contribution × Decision Power × Brand Power

                            = $254.4 billion × 0.3 × 0.85 × 1.1

                            = $71.4 billion (USD)

Understanding brand value will help companies, large and small, gain a clearer picture of the importance of branding in terms of the value it can create. We hope brand owners will incorporate brand valuation as a key metric which should be regularly monitored and actively managed. Our next INSIGHTS report will be about managing and growing brand value. Sign up now if you’re not already a member of our mailing list.

About HDTS

When it comes to durable goods, the consumer has many choices. Positioning your brand effectively is the key to brand recognition and long term value creation. At HD Trade Services (HDTS), we believe in the power of brands and the role eCommerce will play in their proliferation. We combine local market expertise and distribution technology to empower leading consumer product companies to profitably and quickly gain brand recognition and market share in foreign markets by targeting relevant consumers and sales channels. Our core focus is helping industry leading Chinese brands with United States market development.

Interested in valuing your brand? Contact [email protected] | Download Brand Valuator