The following is an excerpt from Best Canadian Brands 2006: A Ranking by Brand Value. The report was published by Interbrand, in conjunction with Report on Business.
Brand value is the Net Present Value (NPV) or today's value of the earnings the brand is expected to generate in the future. This valuation approach is a derivative of the way businesses and financial assets are valued. It fits with current corporate finance theory and practice.
There are three key elements and they are detailed below:
Interbrand identifies the revenues from products or services that are generated with the brand. From these Branded Revenues we deduct operating costs, applicable taxes and a charge for the capital employed to derive Intangible Earnings. Intangible Earnings are the earnings that are generated by all of the business' intangibles including brands, patents, R&D, management expertise, etc. This is a prudent and conservative approach as it only rewards the intangible assets after the tangible assets have received their required return. The concept of Intangible Earnings is therefore similar to value based management concepts such as economic profit or EVA (Economic Value Added is Stern Stuart's branded concept). Based on reports from financial analysts we prepare a forecast of Intangible Earnings for 6 years.
Role of Branding
Since Intangible Earnings include the returns for all intangibles employed in the business, we need to identify the earnings that are specifically attributable to the brand. Through our proprietary analytical framework called Role of Branding we can calculate the percentage of Intangible Earnings that are entirely generated by the brand. In some businesses, e.g. fragrances or packaged goods, the Role of Branding is very high - as the brand is the predominant driver of the customer purchase decision.
However, in other businesses (in particular b2b) the brand is only one purchase driver amongst many and the Role of Branding is therefore lower. In the case of Shoppers Mart people buy not only because of the brand but also because of the location of the stores. We have for each of the brands (and categories) assessed the Role of Branding. In situations where the brand is used across a variety of businesses, the Role of Branding figure was assessed for each core business segment.
The Role of Branding is a per cent - thus if it is 50 per cent, we take 50 per cent of the intangible earnings as Brand Earnings. If it is 10 per cent, we take only 10 per cent of the earnings.
For deriving the NPV of the forecast Brand Earnings, Interbrand uses a discount rate that represents the risk profile of these earnings. There are two factors at play: Firstly, the time value of money (i.e. $100 today is more valuable than $100 in 5 years as I can earn interest on the money in the meantime), secondly the risk of the forecast earnings actually materializing. The discount rate represents these factors as it provides an asset specific risk rate. The higher the risk of the future earnings stream the higher will be the discount rate. To derive today's value of a future expected earnings stream it needs to be 'discounted' by a rate that reflects the risk of the earnings actually materializing and the time for which it is expected. For example, $100 from the RBC brand in 5 years commands a lower discount rate than $100 from the National Bank of Canada brand in 5 years, as the RBC brand is stronger and therefore more likely to deliver the expected earnings.
The assessment of Brand Strength is a structured way of assessing the specific risk of the brand. We compare the brand against a notional ideal and score it against common factors of Brand Strength such as awareness, market position, customer satisfaction, loyalty and advertising & marketing support. The ideal brand is virtually 'risk free' and would be discounted at a rate almost as low as government bonds or similar risk free investment. The lower the Brand Strength the further it is from the risk-free investment and so the higher the discount rate (and therefore the lower the net present value).
The basis of the financial assessments
Using the 2005 edition of Report on Business' Top 1000 list of the largest publicly traded Canadian corporations, Interbrand formed an initial consideration set of brands owned and operating in the country. Published annual reports and analyst reports from multiple investment banks were used to examine the revenues, earnings and balance sheets of the brand-owning companies.
The basis for the marketing assessments Interbrand's experience in creating and managing brands over 30 plus years has created brand metrics that consider: (a) the level of differentiation the brand has achieved; (b) the success of the current position; (3) the ability to control that position and (4) the ability to maintain differentiation from competitors. Our expertise was supplemented with press articles, analysts comment and syndicated market research.