Brand Valuation

[Brand Valuation-United Colors of Benetton]

PRODUCT AND BRAND MANAGEMENT

Mohit Almal Pankaj Agarwal Saurav Jalan Vineet Sekhani

[Brand Valuation-United Colors of Benetton] Executive Summary A brand is an intangible asset and future generator of cash flows. These days branding has become an important concept because as the market is getting more competitive it becomes important to differentiate yourself and provide something more to the consumer than the usual generic product or service. Brands have become increasingly important components of culture and the economy, now being described as "cultural accessories and personal philosophies". United Colors of Benetton by default belongs to a category where branding is very important. There are lot of apparel brands in the world but UCB has been able to create a unique personality for itself.UCB outfits have a subtle sophistication and young people are able to connect with the brand. The company has realised the strength of the brand and have gone for line extension and have entered various other categories like home furnishing, stationery products, travel gear etc. “Valuation is neither the science that some of its proponents do not make it out to be nor the objective search for true value that idealists would like it to become. The models that we use in valuation may be quantitative, but there is a great reliance on subjective inputs and judgments. “Thus the final value that is obtained from these models is colored by the bias that we bring into the process.” The Price Premia Model shows brand premium of UCB which is 72.48%. Thus, UCB has the ability to charge a premium of about 72% for the same product vis-à-vis unbranded or equivalents which shows that its marketing and branding strategy has reaped fruits. The valuation through Price Premia model has been arrived at 1542.28(million Euros). The Book to Market Model gives a valuation of UCB which is 557.59 million Euros. The model helps us to understand the strength of the company’s brand. Capital Market Oriented Brand Valuation Model gives a valuation of 134.88 million Euros. Since, it is a market determined model one may argue that market is the best place to arrive at a price rather than other models where the price is not arrived by market forces. The Historical Cost Approach model gives a valuation of 2020.71 million Euros to UCB. This model depicts the amount which would be required in order to create a brand like UCB in the present timeperiod. The ‘Royalty Relief’ method is based on the notion that a brand holding company owns the brand and licenses it to an operating company. The notional price paid by the operating company to the brand company is expressed as a royalty rate. The NPV of all forecast royalties represents the value of the brand to the business. The attraction of this method is that it is based on commercial practice in the real world. It involves estimating likely future sales, applying an appropriate royalty rate to them and then discounting estimated future, post-tax royalties, to arrive at a NPV.The brand value for UCB for the year 2008-09 was €106.4 million and when capitalised for the next 5 year it estimated to € 427.49 million.

[Brand Valuation-United Colors of Benetton] The Interbrand model is the most popular model to find the value of a brand. It is an extended and refined form of the DCF model. Their Brand Strength model is used to determine the value of a brand based on the assumption that a strong brand is more reliable for future earnings with lesser risk. The valuation which we got for UCB through interbrand model is 677.63 million Euros. What makes the difference between the most successful and less successful brands? It certainly is not what product features are offered. How, then, do consumers choose? The answer seems to be what the brand names mean to them. No single approach will give all the answers to a correct valuation. The starting point is to understand the purpose of the valuation and what benefits the brand delivers. Provided that information on the assumptions is made available to firms, they can make their own judgments on what the correct value should be.

“Suppliers and especially manufacturers have market power because they have information about a product or a service that the customer does not and cannot have, and does not need if he can trust the brand. This explains the profitability of brands.” Peter Drucker

[Brand Valuation-United Colors of Benetton]

Contents  Stage 3-Brand Valuation  Book to Market Model  Price Premia Model  Capital Market oriented Brand Valuation Model  Historical cost Approach  Royalty Relief Model  Interbrand Model  BiblioGraphy  Annexure

[Brand Valuation-United Colors of Benetton]

Brand Valuation Brand value is defined as the net present value of future earnings generated by the brand alone. Brands influence customer choice, but the influence varies depending on the market in which the brand operates. Intangible assets are crucial to business value and growth and it is important that they are identified alongside the tangible assets and valued as individual components. From a shareholder’s perspective, the value of a brand is equal to the financial returns that the brand will generate over its useful life. Any financial returns attributed to a brand must be discovered to account for market uncertainty and asset-specific risks. These two principles apply to the valuation of all assets, not just brands. Brand valuation is a powerful process that captures the present and future value of a brand. Brand valuation determines how the brand creates value and aligns with customer’s drive for purchases. Brand valuation becomes a means of communicating about brand and marketing strategy in shareholder value terms, both internally and externally.

Uses of Brand Valuation Mergers and acquisitions- Rarely will a corporation pay book value to acquire another business entity. The difference between book value and the acquisition price paid is called goodwill. Goodwill is often defined as the value of a business entity not directly attributable to its tangible assets and/or liabilities. Estimating the financial value of a brand helps determine the premium over book value that a buyer should pay. Licensing- One of the ways to cash in on the equity of a strong brand is by extending or licensing the brand. It is possible for both the licensor and the licensee to benefit economically from a licensing arrangement. The licensor benefits from a new source of revenue that requires little capital investment. The licensee benefits by having lower channel, advertising and customer acquisitions costs. Financing-While Corporations do not carry brands on their balance sheets as long-term assets; financial markets recognize the contribution brands have on shareholder value. Companies with strong brands regularly obtain better financial terms than companies with poor brands. The higher the value of the brand, better the terms.

[Brand Valuation-United Colors of Benetton]

BOOK TO MARKET MODEL

[Brand Valuation-United Colors of Benetton]

Book to Market Model Introduction Book to market model embraces the intangible asset that the company possesses as Brand Value, is calculated by deducting Market Value of company with the Book Value. United colors of Benetton valuation include the contribution of its brand –intangible asset. It embellishes in their financial statements and by Book to value method we can measure the performance and management of brands over last five years.

Rationale for choosing Book to Market Model For most of the century, tangible assets were regarded as the main source of business value. These included manufacturing assets, land and buildings or financial assets such as receivables and investments. They would be valued at cost or outstanding value as shown in the balance sheet. Categories of Intangible asset that support the superior market performance of business are: Knowledge Intangibles: For example patents, software, recipes, specific knowhow, including manufacturing and operating guides and manuals, product research etc. Business Process Intangibles: These include unique ways of organizing the business including business models, technology, R&D, patents, flexible manufacturing techniques etc. Brand and Relationship intangibles: These includes trade names, trademarks and trade symbols, domain name, design rights, logotypes, associated Goodwill general predisposition of individuals to do business with brands are included. Market position intangibles: For example, retail listings and contracts, distribution rights, licenses such as landing slots, production or import quotas, third generation telecom licenses, government permits and authorizations and raw materials sourcing contracts

[Brand Valuation-United Colors of Benetton]

Book to Market: Valuation Objective To measure the brand value of Nokia using Book to Market Model, Estimating the total financial value of the brand. The brand valuation is done on the yearly basis.

Methodology 2003 Total No. of Shares Share Price Market Cap Book Value(Equity + R&S) Market Value Brand Value(MVBV) Average 6 years value

2004

2005

2006

2007

2008

182675492 € 12.29 € 2,24,50,81,796.68

182679012 € 6.10 € 1,11,43,41,973.20

181558811 € 9.11 € 1,65,40,00,768.21

181558811 € 9.74 € 1,76,83,82,819.14

181558811 € 9.62 € 1,74,65,95,761.82

182675467 € 14.47 € 2,64,33,14,007.49

€ 1,17,38,61,000.00 € 1,65,40,00,768.21 € 48,01,39,768.21

€ 1,23,03,20,000.00 € 1,76,83,82,819.14 € 53,80,62,819.14

€ 1,27,49,60,000.00 € 1,74,65,95,761.82 € 47,16,35,761.82

€ € € 1,34,10,09,000.00 1,41,40,00,000.00 1,39,20,00,000.00 € € € 2,64,33,14,007.49 2,24,50,81,796.68 1,11,43,41,973.20 € € € 1,30,23,05,007.49 83,10,81,796.68 27,76,58,026.80

€ 55,75,94,521.09

[Brand Valuation-United Colors of Benetton]

PRICE PREMIA MODEL

[Brand Valuation-United Colors of Benetton]

Price Premia Model Introduction In the price premium method, the ability of a brand to charge a premium over an unbranded or generic equivalent can be tracked. The major advantage of this approach is that it is transparent and easy to understand. It is possible to determine the market share for a given product at a given price level. The relationship between brand equity and price is easily explained. For a brand, the model gives the percentage of premium it can charge its consumers over the generic substitutes. The brands can even compare their value of the brand vis-à-vis competition

Rationale for choosing Price Premia Model The premise of the price premium approach is that a branded product should sell for a premium over a generic product. The value of the brand is therefore the discounted future sales premium. The ability of a brand which is an intangible asset is tested. By taking out the brand value, the managers can actually track the performance over time and in case of insolvency, the brand could act as the most saleable asset. These days’ people are also pledging the brand value in order to raise debt. In Mergers and Acquisitions, we usually see a premium being paid over and above the market price. There is a certain amount of value which the buyer attaches to the company which he is acquiring and that value is not captured in the balance sheet. Hence, he pays a premium.

Limitations of Price Premia Model The disadvantages are where a branded product does not command a price premium; the benefit arises on the cost and market share dimensions. The model may bear little evidence to economic reality or serve other useful purpose. This method is flawed because there are generic equivalents to which the premium price of a branded product can be compared. The price difference between a brand and competing products can be an indicator of its strength, but it does not represent the only and most important value contribution a brand makes to the underlying business.

[Brand Valuation-United Colors of Benetton]

Price Premia: Valuation Objective To measure the brand value of United Colors of Benetton using Price Premia Model

Methodology A sample of 30 people was taken for the purpose of evaluation. The respondents were asked to state the price which they are willing to pay for an unbranded T-shirt, Shirt (Casual), Jeans and Accessory. Then they were asked to quote an amount which they were willing to spend for T-shirt, Jeans, Shirt (Casual) and accessory if a brand name is attached to it. The brands were Levis, UCB, Pepe, Reebok and Spykar. The difference between the amount which a consumer is willing to pay for a branded product and an unbranded product is the price premium which a brand commands.

Data Collection Out of 30 respondents, 9 were females and 21 were males. The respondents were in the age group of 21-26 years and were the users of T-shirts, Jeans, Casual Shirts and accessories.

Gender Female 30% Male 70%

26 years 21 years 25 years 10% 3% 3%

Male Female

Age 21 years

24 years 13%

22 years 37% 23 years 34%

22 years 23 years 24 years 25 years

26 years

[Brand Valuation-United Colors of Benetton]

Findings T-shirt

Unbranded

Levis

UCB

Average Price

173.3

677.5

769.3

565.7

612.5

516.7

Premium (%)

2.9

3.4

2.3

2.5

2.0

No. of Buyers

5.0

14.0

3.0

2.0

6.0

Shirt(Casual) Unbranded

Levis

UCB

Average Price

838.3

964.2

775.8

755.0

714.2

Premium (%)

2.2

2.7

2.0

1.9

1.7

No. of Buyers

12.0

8.0

5.0

1.0

4.0

260.2

Pepe Jeans Reebok Spykar

Pepe Jeans Reebok Spykar

Jeans

Unbranded

Levis

UCB

Pepe Jeans Reebok Spykar

Average Price

500.8

1,736.7

1,675.0

1,526.7

1,346.7

1,448.3

Premium (%)

2.5

2.3

2.0

1.7

1.9

No. of Buyers

18.0

0.0

3.0

0.0

9.0

[Brand Valuation-United Colors of Benetton]

Belt

Unbranded

Levis

UCB

Pepe Jeans

Reebok Spykar

Average Price

125.5

370.8

414.2

333.0

383.3

334.0

Premium (%)

2.0

2.3

1.7

2.1

1.7

No. of Buyers

7.0

7.0

4.0

4.0

6.0

Data Analysis & Interpretation

T-Shirts UCB is a strong player in this segment of the apparel business. Out of the 30 respondents, 14 wanted to buy UCB. Spykar came a distant second with 6 respondents. The average price which the respondents were willing to pay for an unbranded t-shirt was Rs. 173.33. The highest number of preemie was commanded by UCB which was 343.85% more than the unbranded price. Although, a greater number of people were willing to buy Spykar as compared to Levis but they were willing to spend more money for a Levis t-shirt than a Spykar one. This shows that the consumers attach more esteem to Levis than Spykar.

Shirts (Casual) The average price which the consumer is willing to spend for an unbranded casual shirt is Rs. 206.16. This is more than the average price for an unbranded T-shirt. In this category the largest numbers of consumers want to buy Levis i.e. 12/30. UCB came second with 8/20 respondents who wanted to buy UCB. In terms of premium, UCB was the leader with a 270% premium which the consumers were willing to pay. Levis came second with 222% premium over the unbranded one. The respondents consider UCB as a premium brand and therefore they are willing to shelve out more money for it.

Jeans Levis is a strong player in the denim segment as its USP is denim only. This was evident in our survey as Levis was the clear leader. Out of 30 respondents, 18 chose to buy Levis denim. Spykar came a distant second with 9 respondents. People were willing to pay a 247% premium for Levis which was the highest in this segment. Although, nobody chose to buy UCB yet it commanded a second highest premium of 234%. The reason for such a result might be the low awareness and exposure of the denim business of UCB among the respondents. The high premium can be because of the overall brand image of UCB not denim per

[Brand Valuation-United Colors of Benetton] Belt Since, all are present in the accessories segment also so we chose belt as a representative of the accessory segment. The average price which a consumer is willing to spend for an unbranded belt is Rs. 125. UCB accessories are known for their funkiness factor so it relates more to the youth. The premium which the consumer is willing to give for a UCB belt is around 230%. Reebok came a close second with 205%. Both, Levis and UCB came first as far as number of buyers is concerned with 7 respondents each.

Calculation of Brand Value of United Colors of Benetton Weighted Avg. premium

Weighted Avg. Price

T-shirts

30%

Average Price(Unbranded) 173.33

Shirts(Casual)

30%

260.166

78.0498

964.16

289.248

211.1982

Jeans

30%

500.83

150.249

1675

502.5

352.251

Belt

10%

125.5

12.55

414.16

41.416

28.866

1063.963

771.1152

Weightage

UCB

Premium

51.999

Average Price(UCB) 769.33

230.799

178.8

Unbranded

Million Euros Revenue Brand Value (Revenue * Premium %age)

2128 1542.284032

Premium %

72.48%

[Brand Valuation-United Colors of Benetton]

CAPITAL MARKET ORIENTED BRAND VALUATION MODEL

[Brand Valuation-United Colors of Benetton] Capital Market-Oriented Brand Valuation Model This model is defined as the present value of all future earnings attributable solely to branding. Thus, from a financial markets perspective, brand value can be calculated from a company’s stock market capitalization or market value. But, this valuation method can be useful only for stock exchange-listed companies as the model is based on the idea that the stock price of a company will perform to reflect the future potential, its brands provide. In the case of a single-brand company, brand value will therefore consist the company’s capitalized or realized market value. Brand value of a company can be calculated by using simple formula: Brand Value = (stock price x number of shares) – (tangible assets + all remaining intangible assets)

Capital Market Oriented Brand Valuation Model(All Data is as On 31.12.2008) No of shares CMP Market Cap(A) Intangibles as on 31.12.2008 Industrial patents Concessions, licenses, trademarks and similar rights Other Total Intangibles(B) Tangible assets as on 31.12.2008 Land and Buildings Plant, Machinery and equipment Furniture fittings and Electronic devices Vehicles and aircraft Assets Under construction and advances Leased assets Leasehold improvements Total Tangibles Asset(D) Brand Value{A-(B+D)}

€ €

182679012 6.81 1,24,40,44,071.72

€ €

26,02,000.00 1,71,89,000.00

€ €

4,03,51,000.00 6,01,42,000.00

€ € € € € € € € €

73,83,10,000.00 9,38,57,000.00 6,73,82,000.00 2,37,24,000.00 7,14,00,000.00 48,52,000.00 4,94,97,000.00 1,04,90,22,000.00 13,48,80,072

[Brand Valuation-United Colors of Benetton]

HISTORICAL COST APPROACH

[Brand Valuation-United Colors of Benetton] Historicalal Cost Approach In the Historicalal cost approach, we adopt a solution rooted in conventional accrual accounting to value a brand name. We begin by making an assumption about what expenses that a firm incurs are most likely to impact its brand name. It stands to reason, for instance, that a portion of every firm’s advertising expenses is spent to build or augment the company’s brand name.

Process 1. We determined an amortizable life for the brand name expenditures based on how long we think the benefits from the expenditure will accrue. In our case this value is 16 years. This period is chosen based on the financial data availability. 2. We collected the data on brand name expenditures each year going back Historicalally, for the amortizable life of the brand name. We collected brand name expenditures for the last 16 years.

3. Using a straight line amortization schedule, we write off a portion (In our case 6.25% over the period of 16 years) of the brand name expenditures from each year’s expenditures in the subsequent years. As a result, we were able to estimate the total amortization of brand name expenditures in the current year (to be treated like depreciation) and the unamortized portion of the previous year’s expenditures, which will be now treated as asset (brand name value).

Assumptions 1. We begin by making an assumption about what expenses that a firm incurs are most likely to impact its brand name 2. We assumed that 50% of the selling and advertising expenses each year are associated with building up brand name, with the balance used to generate revenues in that year.

[Brand Valuation-United Colors of Benetton] Historical Cost Approach: Valuation Historicalal Cost Approach for Brand Valuation

Year

Selling , General and Advertising Expense(Euro)

Brand Name Related Expense

Amortization this year

Unamortized Expense

1993

€

38,83,75,588.12

€

19,41,87,794.06

€

1,21,36,737.13

€

-

1994

€

39,25,07,243.31

€

19,62,53,621.65

€

1,22,65,851.35

€

1,22,65,851.35

1995

€

39,97,37,639.90

€

19,98,68,819.95

€

1,24,91,801.25

€

2,49,83,602.49

1996

€

38,88,92,045.01

€

19,44,46,022.51

€

1,21,52,876.41

€

3,64,58,629.22

1997

€

41,83,30,088.26

€

20,91,65,044.13

€

1,30,72,815.26

€

5,22,91,261.03

1998

€

57,94,43,982.50

€

28,97,21,991.25

€

1,81,07,624.45

€

9,05,38,122.27

1999

€

55,75,30,716.27

€

27,87,65,358.14

€

1,74,22,834.88

€

10,45,37,009.30

2000

€

57,05,56,000.00

€

28,52,78,000.00

€

1,78,29,875.00

€

12,48,09,125.00

2001

€

62,35,06,000.00

€

31,17,53,000.00

€

1,94,84,562.50

€

15,58,76,500.00

2002

€

62,47,35,000.00

€

31,23,67,500.00

€

1,95,22,968.75

€

17,57,06,718.75

2003

€

57,82,06,000.00

€

28,91,03,000.00

€

1,80,68,937.50

€

18,06,89,375.00

2004

€

53,97,97,000.00

€

26,98,98,500.00

€

1,68,68,656.25

€

18,55,55,218.75

2005

€

48,60,00,000.00

€

24,30,00,000.00

€

1,51,87,500.00

€

18,22,50,000.00

2006

€

48,90,00,000.00

€

24,45,00,000.00

€

1,52,81,250.00

€

19,86,56,250.00

2007

€

52,00,00,000.00

€

26,00,00,000.00

€

1,62,50,000.00

€

22,75,00,000.00

2008

€

57,30,00,000.00

€

28,65,00,000.00

€

1,79,06,250.00

€

26,85,93,750.00

€

25,40,50,540.73

€

2,02,07,11,413.17

The cumulated value of the last column i.e. € 2,02,07,11,413.17 is the brand value of United Colors of Benetton computed by Historical cost approach.

[Brand Valuation-United Colors of Benetton]

ROYALTY RELIEF MODEL

[Brand Valuation-United Colors of Benetton] Royalty Relief Model The ‘Royalty Relief’ method is based on the notion that a brand holding company owns the brand and licenses it to an operating company. The notional price paid by the operating company to the brand company is expressed as a royalty rate. The NPV of all forecast royalties represents the value of the brand to the business. The attraction of this method is that it is based on commercial practice in the real world. It involves estimating likely future sales, applying an appropriate royalty rate to them and then discounting estimated future, post-tax royalties, to arrive at a NPV.

Steps in the Royalty Relief brand valuation process: 1. Obtain brand specific financial and revenue data. 2. Estimated five-year financial forecast (2009-2013), based on Historical growth trends for the brand & Expert analyst’s forecasts. 3. Establish the notional royalty rate. Steps in determining the notional Royalty Rate: a. Establish a Royalty Range b. Compare royalty rates with operating margins in the industrial sector Fundamental profitability in each industrial sector influences the determination of royalty rate ranges. This must be taken into account when determining the royalty rate ranges. A ‘Rule of Thumb’ exists within the licensing industry (‘Rule of 25’), which states that, on average, a licensee should expect to pay between 25% and 40% of its expected profits for access to the licensed intellectual property. For example, if profit margin is 20%, an appropriate royalty rate should fall between 25% x 20% = 5% and 40% x 20% = 8%. The rule is based on heuristic evidence of a relationship between market royalty rates and margins earned in licensee businesses. Royalty rates may be higher or lower than 25% of profits, depending upon a variety of quantitative and qualitative factors that can and do affect commercial negotiations. When determining royalty rate ranges, the ‘25% rule’ is a useful indicator of what an appropriate royalty rate range might be in each industrial sector. In case of UCB, operating margins are approximately 16% for FY 08-09. Therefore as per rule of thumb the royalty range should fall between 4% and 6.4%. But to be on a safer side and have an extended range we will take the range from 1% to 7%. c. The next stage is to assess how a brand can be positioned in such a range. There are many ways in which this can be done but a simple and practical approach can be to use a Brand Strength Analysis. This takes a number of key value drivers for a brand, based on market research, and scores the brand against those drivers relative to the competitive set. This then gives a score against a minimum and a maximum possible and is used to position the brand in the royalty rate range. Note: The source of data taken below for Royalty rate calculation is from the previous studies for this brand.

[Brand Valuation-United Colors of Benetton] Brand Strength Analysis Market Factors Economic Growth Substitution Strength of Competition

UCB 1 3 3

Brand Factors Brand Perception Loyalty History, Heritage & Longevity Price Premium Share of Market Potential for Line Extension Promotional Expenditure

4 3 3 4 4 4 4

Total Score

33

Profitability

Scoring: Each Factor is scored on a scale of 0-5, with 5 being the highest. Score are relative to the defined competitive set

Royalty Range (in %) 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0

Score 0

Derived Royalty Rate

33

Royalties are a way of showing value brought to a business by a brand, and 50 determining compensation to the brand owner. Such value will often be based on the profitability of the business, together with other factors such as the strength of the brand. An analysis of this profitability can be done on a see through basis through some or all of the supply chain. The resulting see through profit can be attributed to various business functions, but one will be the brand. In the long term royalties relating to this part of the supply chain will be a proportion only of the see through profit. For commercial arrangements to be successful on a long term basis the value brought by the brand will need to be shared by all concerned in bringing it to market.

Costs through Supply chain 84% Retail Price 100% Profit for non brand owners in supply chain 11%

See through Profit 16% Brand owner (UCB) Royalty 5%

[Brand Valuation-United Colors of Benetton] Significance Royalty rates are typically small percentages, but they are applied to sales figures, meaning that royalty values are often significant. They drive brand values which are in it often highly significant (the Malibu spirit brand was bought by Allied Domecq in May 2002 for £560 million –this transaction was mostly attributed to brand value). Given this significance they warrant in depth analysis –so that significant decisions are made on an informed basis. The royalty rate analysis illustrated for UCB above is 5%. When applied to the forecast sales this gives significant annual forecast income of €106.4 million in 2008-09, and when capitalised as a brand value using a relief from royalty methodology it can amount to € 427.49 million: Significant by any standards. In million € Revenues Royalty Income Discounting factor Discounted Cash Flow (DCF) Total DCF

2008 2128.00 106.40

2009 (E) 2042.88 102.14 1.09 93.71 427.49

2010 (E) 2124.60 106.23 1.19 89.41

2011 (E) 2012 (E) 2013 (E) 2209.58 2297.96 2389.88 110.48 114.90 119.49 1.30 1.41 1.54 85.31 81.40 77.66

The growth estimates and discounting factor are similar to that take in for InterBrand Model.

[Brand Valuation-United Colors of Benetton]

INTERBRAND MODEL

[Brand Valuation-United Colors of Benetton] Introduction Interbrand’s approach is based on the three economic functions of a brand: 1. To create cost synergies 2. To generate demand for the products and services 3. To secure future demand and thus reduce operative and financial risks

Segmentation Consumer’s purchasing behaviour and attitudes towards brands differ from one market sector to another, depending largely on product, market, and distribution related factors. For this reason, the value of a brand can only be determined precisely through the separate assessment of individual segments that represent a homogeneous customer group. Apart from this, brand management can only obtain the insights it needs to increase the brand’s value systematically if the brand has been evaluated in all its segments.

Financial Analysis Interbrand’s brand valuation begins with an assessment of the company’s value and then determines the value contributed by the brand. The first step towards isolating brand earnings from other forms of income is to determine the Economic value added(EVA) which tells whether a company is able to generate returns that exceed the costs of Capital Employed. As both value creation and its counterpart, risk, lie in the future, the analysis is based on a five-year forecast of future revenues generated in the brand segment being assessed.

[Brand Valuation-United Colors of Benetton] Demand Analysis In this step, Interbrand analyzes the brand’s value chain and identifies the position of the brand in the minds of customers. To determine the brand’s share of EVA, Interbrand examines what factors influence demand and motivate customer to purchase. These factors are weighted in terms of their bearing on demand and for each; the contributions of the specific associations with the brand are statistically calculated. The sum of these brand contributions on the demand drivers is expressed as the Role of Brand Index (RBI) which, multiplies with the EVA, yields the brand earnings.

Brand Strength Analysis The stronger a brand, the lower is its risk, and thus the more certain are future brand earnings. Interbrand assesses this risk by analyzing the strength of a brand compared with its competitors on the basis of seven factors (i.e. market, stability, brand leadership, trend, brand support, diversification and protection).In fact, a broad range of measured attributes explains the seven factors and facilities an all-round diagnosis of a brand’s competitive position. This step results in the Brand Strength Score (BSS).

Net Present Value Calculation The economic value of future brand earnings is inversely correlated with the brand’s estimated risk and this risk is directly linked to brand strength. The strongest brands are discounted with the industry WACC. Discounting the forecast period and the calculation of an annuity (Terminal value) results in the total value of the brand.

[Brand Valuation-United Colors of Benetton] Calculation of WACC

Index

Value

Rationale

Beta Risk Free Rate

0.94 4.04%

Market Premium

5.52%

Bloomberg Treasury Rate in Italy BorsaItaliana Bank Statements

Cost of Equity

9.23%

Value(Euro Millions) Equity Debt

1392 689

Interest

48.23

Cost Of debt debt/Equity 1-debt/Equity WACC

7.00% 0.494971264 0.505028736 8.13%

Calculation for RBI (Role of Branding Index) There were two questions asked to consumers. The questions were: 1) How much do you think the following factors affect your buying behaviour for apparels & Accessories? (1 being the lowest, 10 being the highest) 2) In case of UCB, how would you rate the following factors?

The factors were quality, innovation, design, value for money, reliability, leadership, contemporary. The findings for the same are shown below:

Demand Drivers (as a %)

Quality Innovation Design Value for Money Reliability Leadership Contemporary Total

16.42% 13.52% 15.20% 16.16% 14.62% 9.79% 14.29% 100.00%

[Brand Valuation-United Colors of Benetton] Weighted Percentage

Quality Innovation Design Value for Money Reliability Leadership Contemporary Total

15.90% 13.20% 14.36% 13.20% 14.42% 9.47% 13.14% 93.69%

Weighted % as a percentage of Demand Drivers

96.86% 97.62% 94.49% 81.67% 98.68% 96.71% 91.89%

Hence this RBI comes to 93.69%

[Brand Valuation-United Colors of Benetton] Calculation for Brand Strength Score All the Factors in the Brand Strength score were asked to be rated out of 10, 10 being the best. The results for the same are:

Market

Market Growth

6

Industry Concentration

5

Satisfaction

7

Consumer Loyalty

6

Market Share

7

Awareness

8

Consideration

8

Attractiveness

8

Share of Advertising

8

Identity

6

Geographic

5

Offer Related Diversification

7

Date of Registration

5

Legal Coverage & Monitoring

4

Stability

Leadership

Trend

Support

Diversification

Protection

Factors Market Stability Leadership Trend Support Diversification Protection Total

11

13

15

16

14

12

9

Weightage

Score out of 20 10% 1.1

15% 25% 10% 10% 25% 5% 100%

1.95 3.75 1.6 1.4 3 0.45 13.25

[Brand Valuation-United Colors of Benetton]

S-Curve

[Brand Valuation-United Colors of Benetton] Assumptions in InterBrand for Calculating Brand Earnings Estimates Short term growth dip due to recession Long term Growth Cost of sales estimates Cost of sales as % of revenues in 2006 Cost of sales as % of revenues in 2007 Cost of sales as % of revenues in 2008 Average Distribution and Transportation Cost Estimates Cost as % of sales in 2006 Cost as % of sales in 2007 Cost as % of sales in 2008 Average Sales Commission % in 2006(Sales) % in 2007(Sales) % in 2008(Sales) Average Total Operating cost % in 2006(Sales) % in 2007(Sales) % in 2008(Sales) Average Hedging Activities % in 2006(Sales) % in 2007(Sales) % in 2008(Sales) Average Tax Rate Working Capital % in 2006(Sales) % in 2007(Sales) % in 2008(Sales) Average Capital Employed % in 2006(Sales) % in 2007(Sales) % in 2008(Sales) Average Other Income Average

Percentage -4% 4% 57.82% 55.66% 53.85% 55.78% 3.30% 2.93% 3.10% 3.11% 3.87% 4.20% 4.18% 4.08% 25.59% 25.34% 26.93% 25.95% -0.16% -0.05% -0.09% -0.10% 25% 32.60% 31.84% 33.60% 32.68% 89.48% 92.24% 97.79% 93.17% 40 million

[Brand Valuation-United Colors of Benetton] InterBrand Model All figures are in Million Euro Branded Revenues Cost Of Sales Gross Margin Distribution and Transportation Cost Sales Commission Contribution Margin Total Operating Cost Hedging activities Other income Income before tax Applicable taxes NOPAT Capital Employed

2006 € 1,911.00 € 1,105.00 € 806.00 € 63.00 € 74.00 € 669.00 € 489.00 € 3.00 € 38.00 € 215.00 € 31.00 € 184.00 € 1,710.00

2007 € 2,048.00 € 1,140.00 € 908.00 € 60.00 € 86.00 € 762.00 € 519.00 € 1.00 € 41.00 € 242.00 € 53.00 € 189.00 € 1,889.00

2008 € 2,128.00 € 1,146.00 € 982.00 € 66.00 € 89.00 € 827.00 € 573.00 € 2.00 € 43.00 € 252.00 € 56.00 € 196.00 € 2,081.00

2009

2010

2011

2012

2013

€ 2,042.88

€ 2,124.60

€ 2,209.58

€ 2,297.96

€ 2,389.88

€ 1,139.52

€ 1,185.10

€ 1,232.51

€ 1,281.81

€ 1,333.08

€

903.36

€

939.49

€

977.07

€ 1,016.15

€ 1,056.80

€

63.52

€

66.06

€

68.70

€

71.45

€

74.31

€

83.44

€

86.78

€

90.25

€

93.86

€

97.62

€

756.39

€

786.65

€

818.12

€

850.84

€

884.87

€

530.18

€

551.38

€

573.44

€

596.38

€

620.23

€

-2.04

€

-2.12

€

-2.21

€

-2.30

€

-2.39

€

40.00

€

40.00

€

40.00

€

40.00

€

40.00

€

224.18

€

233.14

€

242.47

€

252.17

€

262.25

€

56.04

€

58.29

€

60.62

€

63.04

€

65.56

€

168.13

€

174.86

€

181.85

€

189.13

€

196.69

€ 1,903.35

€ 1,872.71

€ 1,873.65

€ 1,874.58

€ 1,875.51

[Brand Valuation-United Colors of Benetton] Working Capital Capital Charge Intangible Earnings Brand Earnings Brand Score Discount Rate@ 7% Discount Factor Discounted Brand Earnings NPV for 5 years

€ 623.00 € 138.95 € 45.05 € 43.67 66.25%

€ 652.00 € 153.49 € 35.51 € 34.42 66.25%

€ 715.00 € 169.09 € 26.91 € 26.08 66.25%

€

667.59

€

694.29

€

722.06

€

750.95

€

780.98

€

154.66

€

152.17

€

152.25

€

152.32

€

152.40

€

13.47

€

22.69

€

29.61

€

36.81

€

44.29

€

13.06

€

21.99

€

28.70

€

35.68

€

42.93

66.25%

66.25%

66.25%

Brand Value

66.25%

0.93457944 0.87343873 0.81629788 0.76289521 0.71298618 € 12.59 € 19.82 € 24.17 € 28.08 € 31.58 € 116.24

Long term Growth rate @ 2.5% NPV of terminal Value

66.25%

€ 561.39 € 677.63

The Brand value Calculated by this model comes up to 677.63 million Euro

[Brand Valuation-United Colors of Benetton] Net Take Away Brand Valuation of United Colors of Benetton under different models Model

Source

Brand Value(Million)

Book to Market Model

Primary

€

557.59

Price Premia Model

Primary

€

1,542.28

Capital Market Oriented Brand Valuation Model

Primary

€

134.88

Historical Cost Approach

Primary

€

2,020.71

Royalty Relief Model

Primary

€

427.49

Interbrand Model

Primary

€

677.63

No single approach will give all the answers to a correct valuation. The starting point is to understand the purpose of the valuation and what benefits the brand delivers. Provided that information on the assumptions is made available to firms, they can make their own judgments on what the correct value should be. The group tested six models of valuation. The book to market model shows that United Colors of Benetton has a brand value of 557.59 million Euros. This approach has numerous advantages in that it recognizes that it is based on empirical evidence. The shortcomings are that it assumes a very strong state of the efficient market hypothesis (EMH), and that all information is included in the share price, number of shareholders, total equity of the company. The Price Premia Model reflects a valuation of 1542.28 million Euros .The disadvantages of this model are where a branded product does not command a price premium, the benefit arises on cost and market share dimensions. Capital Market Oriented Valuation model shows the brand value of United Colors of Benetton to be 134.88 million Euros. The Historical cost approach throws up brand value to be 427.49 million Euros. This model is based on assumption that all operating expenses that a company makes goes into making a brand value. The ‘Royalty Relief’ method is based on the notion that a brand holding company owns the brand and licenses it to an operating company. The NPV of all forecast royalties represents the value of the brand to the business. The value from this model comes Upto 427.49 million Euros. In Interbrand model the value comes Upto 677.63 million Euros. The appropriate discount rate is very difficult to determine as parts of the risks usually included in the discount rate have been factored into the Brand Index score. Even the appropriate rate for the capital charge is difficult to ascertain.

[Brand Valuation-United Colors of Benetton] Bibliography Price Premia Model: The interviews were carried out among the students of Praxis Business School, Kolkata Calculation of BSS and RBI in Interbrand model: The survey was conducted among the students of Praxis Business School, Kolkata

www.interbrand.com www.benetton.com www.borsaitaliana.it www.buildingbrands.com/.../11_brand_valuation.php www.intangiblebusiness.com/Brand.../Brand-valuation-why--how~467.html www.unit-conversion.info/currency.html

[Brand Valuation-United Colors of Benetton] Annexure How much do you think the following factors affect your buying behaviour for apparels & Accessories? (1 being the lowest , 10 being the highest) Respondents

Quality

Innovation

Design

Nabendu Kar Twinkle Jaithalia Apoorva Kaushambi Gunjan Dugar Sourabh Dhariwal Uma Tarun Shweta Baidya Ritu Shriram Bal Durga Anuj Nabila Parikshit Ananthmani Ritesh sreyans Piyush Manoj Hardik Mishra Santu Govind Sahu Mirza Geet Suri Meenakshi Rinki Sumant Sumit Tiwari Atul

5

8

8

Value for Money 5

9

8

8

10 10 9

9 7 10

8 8 9 8 7 7 8 8 10 10 10 10 6 9 8 9 10 8 10 8 9 7 7 8 10

Reliability Leadership Contemporary 4

3

9

9

9

6

9

10 9 9

10 10 8

10 9 8

8 3 8

8 7 10

5

7

8

9

4

1

6 6 7 8 6 8 7 7 6 9 8 3 10 6 6 6 8 8 6 10 6 6 7 3

8 10 8 8 6 8 7 9 6 8 8 5 8 8 10 6 8 8 8 9 8 8 7 6

9 8 9 8 8 6 9 7 8 10 8 7 10 9 8 8 6 10 9 8 8 9 9 10

4 6 6 7 9 7 8 8 8 9 9 6 9 9 6 8 8 9 4 8 7 7 8 8

3 4 6 6 5 6 6 6 2 5 8 4 5 5 4 2 4 5 6 8 4 4 6 6

5 7 5 8 7 9 9 6 7 10 8 7 8 7 8 7 7 10 8 10 7 7 7 4

[Brand Valuation-United Colors of Benetton] Annexure In case of UCB, how would you rate the following factors? Respondents

Quality Innovation

Design

Value for Money

Reliability Leadership

Contemporary

Nabendu Kar Twinkle Jaithalia Apoorva Kaushambi Gunjan Dugar Sourabh Dhariwal Uma Tarun Shweta Baidya Ritu Shriram Bal Durga Anuj Nabila Parikshit Ananthmani Ritesh Sreyans Piyush Manoj Hardik Mishra Santu Govind Sahu Mirza Geet Suri Meenakshi Rinki Sumant Sumit Tiwari Atul

5 8 10 10 10 9

7 7 9 9 10 5

9 7 10 10 10 9

5 7 10 10 8 8

4 8 10 9 8 8

2 5 5 5 6 5

6 6 8 7 7 2

9 9 9 8 8 9 8 8 7 8 8 7 6 8 8 7 8 8 9 10 8 8 7 10

8 9 7 7 7 7 6 6 6 7 8 5 8 6 5 6 5 7 7 10 7 5 6 3

6 9 7 8 6 7 6 6 5 8 9 6 8 7 9 5 6 8 7 10 8 6 5 6

8 8 8 7 8 7 8 2 3 7 8 4 6 6 8 3 7 7 7 8 7 7 3 10

7 8 9 7 7 7 8 7 8 6 9 7 7 6 9 8 8 6 7 8 7 6 8 7

2 4 4 5 6 6 6 6 3 4 8 4 6 6 6 5 6 4 6 6 5 6 4 1

7 9 6 7 8 6 6 6 5 8 8 7 6 6 8 9 8 6 6 9 7 7 9 4

Total % of the demand driver

247 96.86%

205 97.62%

223 94.49%

205 81.67%

224 98.68%

147 96.71%

204 91.89%

Weighted Percentage

15.90%

13.20%

14.36%

13.20%

14.42%

9.47%

13.14%