Case study 84 brand valuation

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itself. Unfortunately, the accounting methods used have varied from one firm to another, which has led to problems when a firm wishes to sell a brand or when the company is being valued for tax purposes or for shareholders' reports.

During 1999 a new accounting standard was introduced in the UK for the valuation of brands. For many years, standards have existed for the valuation of such intangibles as goodwill and patents, but until now no agreed method has been in place for measuring the value of a brand.

For many companies, this is a major breakthrough in asset valuation; it has been estimated that brands and intellectual property make up 96% of the total value of the Coca-Cola Corporation, 95% of the value of Microsoft, and even for heavy industrial corporations such as BP the figure may be as much as 74%.

Shell Oil realises the importance of the brands. Simon Saville, global brand manager for Shell International, says: 'For some years Shell has tracked the health of its brand through market research surveys in key countries. We are extending this to include a tracking of brand value on an annual basis. In order to estimate the Shell brand value, we must first understand how that value is derived: why customers buy our products and services, what they prefer about Shell, and how important this is to them in their purchase decisions.'

Brand value is an important part of franchising and licensing negotiations, and most firms recognise that they are managing an asset which has value. Investment in promoting the brand will increase its value, and having an accounting standard for valuing brands means that marketing managers are better able to argue their case for more investment in the brand, even with the most traditional of finance managers.

For finance managers, the main purpose of brand valuation is to establish a more accurate balance sheet; brands as assets can be included and the finance managers know that other firms are using the same valuation methods. From a marketing management viewpoint, the main purpose of brand valuation is to see the trend over time, rather than to establish an absolute valuation figure. This allows the manager to control what is happening to the brand, perhaps by increasing investment in it or (if the brand's value is low) reducing investment. In the absence of agreed methods for valuing, firms have been operating with a degree of uncertainty, according to many managers.

On the other hand, Alex Batchelor (brand valuation director of consultants Interbrand Newell & Sorrell) says: 'Brand valuation is very much like business valuation with a couple of tweaks. Sure, there are judgements in it but there are judgements in everything. The accounting profession has done a wool-pulling act where people think it's a perfect science when it is not.'

The new accounting standard draws a distinction between intangible assets that have a limited life (for example most patents) and those that have an indefinite life (which would be true of many brands). The standard defines limited life as being less than 20 years. In practice, market research has a major role to play in the valuation of brands, because the consumer's view of the brand will determine not only whether the brand will be purchased during the next few years, but whether the brand is robust enough to survive in the very long term.

Whichever methods marketers use to determine the brand value, it seems that the new accounting standard will not only add more rigour to the estimates, but will also help to focus the minds of managers more keenly on brand management issues.

(Case contributed by Jim Blythe)

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