“If I have to split the business, I will give you all the real estate, I will only take the brand and trademark, I will definitely make more profit than you” - John Stuart, Chairman of Quaker (ca. 1900 ), The last 25 years of the 1920s witnessed an extremely impressive change in people's understanding of the factors that create shareholder value.
Previously, tangible assets were still considered the main factor creating corporate value. These factors include machinery and equipment, land, buildings or other financial assets such as receivables and investment capital.
These assets are valued based on cost and residual value as shown on the balance sheet. In fact, the market is also aware of the presence of intangible assets, but its specific value is unclear and unquantifiable. Even today, in the process of determining the profit and business performance of an enterprise, the calculation is only based on indicators such as investment return rate, assets, and equity, not at all. indicators related to intangible assets. For example, the P/B index (Price-to-book ratio), the value of intangible assets has been excluded from the book value (B).
This does not mean that management is wrong in not realizing the importance of intangible assets. Brands, technology, patents, and human resources are vital factors for business success but are rarely valued in detail, they are only included in the total asset value. relative way. Some big brands such as Coca-Cola, Procter & Gamble, Unilever, and Nestlé are always aware of the importance of brands, as evidenced by the fact that these companies have created the title of Brand Director. However, in the stock market, investors only focus on pricing based on the ability to exploit tangible assets of the enterprise.
1. Evidence of brand value
Interest in the value of intangible assets is increasing as the gap between market value and company book value widens, most specifically shown in mergers and acquisitions. the last years of the 1980s.
Today, it is safe to say that the majority of corporate value lies in intangible assets. Management interest in this asset class has increased significantly.
Brand is a special intangible asset that in many businesses is considered the most important asset. This is because of the economic impact that branding can bring. Brands influence the choices of consumers, employees, investors and public agencies. In a world of choice, this influence is vital for commercial success and shareholder value creation. Even non-governmental organizations consider branding as a key factor in finding funding sources, donations as well as finding volunteer candidates.
Some brands have also proven to be surprisingly durable. Coca-Cola is considered the most valuable brand with 118 years of age; Most of the remaining brands are also about 60 years old or more while the average life cycle of a business according to statistics is about 25 years old. Many studies have tried to estimate the contribution of brands to corporate value. A study by Interbrand in conjunction with JP Morgan concluded that brands contribute about one-third of shareholder value. The research also revealed that brands create a significant value for consumers, businesses or both.
Research by Harvard University, the University of South Carolina and Interbrand on companies included in the "Best Global Brands" ranking shows that these companies are capable of operating much more effectively than other companies. other businesses in all aspects. The work also shows that owning a portfolio of these brands is much more valuable than investing in brands included in Morgan Stanley's global MSCI and S&P 500 indexes.
Today, leading companies focus their management efforts on intangible assets. Typically, Ford Motor has significantly reduced its investment structure from tangible assets to intangible assets. In recent years, Ford has invested more than $12 billion to increase the reputation of brands such as Jaguar, Aston Martin, Volvo and Land Rover. Sam sung Electronics Group also invests heavily in intangible assets, willing to spend 7.5% of annual revenue to invest in Research and Development and 5% for the media sector. In the field of consumer goods, many companies are willing to spend up to 10% of annual revenue on Marketing. That's what John Akasie wrote in an article from Forbes magazine:
“In short, it's about branding, branding and customer relationships. Companies that own famous brands can gain large profits from investments and grow faster, these companies also do not have to deal much with factory management as well as a large volume workers through what the stock market has rewarded them with high P/E ratios.
2. Recognition of brand value on the balance sheet
The wave of brand acquisitions in the late 1980s was the result of the failure of most existing accounting systems to recognize the economic value of brands. Transactions that sparked controversy around this recognition include Nestlé's acquisition of Rowntree, Grand Metropolitan's acquisition of Pillsbury, and Danone's acquisition of Nabisco's European.
When these companies acquire other companies, the current accounting regime does not have any items for so-called brands (note that brands are part of "Goodwill" (goodwill). ) includes brands, technology, patents, human resources). As a result, these companies are “penalized” for what they believe are value additions from acquisitions. They had to endure huge deductions directly from their income accounts or reserve funds. In many cases, the result of the sale causes the business's assets to decrease even lower than before the purchase.
In some countries such as the UK, France, Australia and New Zealand, recording the value of brands as intangible assets on the balance sheets of some acquired brands has been done for a long time. This helps partly solve the problems that arise as described above. However, this recognition still has many limitations, at least in the UK and France. Companies in these two countries are discouraged, but at the same time not prohibited, from recording brand value on their balance sheets. In the mid-1980s, Reckitt & Colman, a company operating in the UK, recognized the value of the Airwick brand when making an acquisition; Grand Metropolitan does the same with the Smirnoff brand. At the same time, a few newspaper companies also recorded the value of their newspaper names on their balance sheets.
In the late 1980s, the recognition of the value of acquired brands suggested the recognition of the self-accumulated value of the brand as a valuable financial asset of the company. In 1988, Rank Hovis McDougall (RHM), a conglomerate operating mainly in the food industry, successfully defended the true value of its brand when it was defeated by rival Goodman Fielder Wattie (GFW). ) intending to take over. This is considered a pioneer company in valuing its own brand, proving that brands are not only valued when acquired but can also be valued within the company. After this success, in 1988, RHM recorded its brand value in two forms: Acquired brands and internally generated brands under the category of assets. intangible assets on the balance sheet.
In 1989, the London Stock Exchange issued a decision to recognize the brand valuation used by RHM by allowing the recognition of intangible assets in the valuation process for approval. of shareholders. This has created a strong wave when companies with good brands decide to record their brand value as intangible assets on their balance sheets. In the UK, some of these companies include Cadbury Schweppes, Grand Metropolitan (when it acquired Pillsbury for $5 billion), Guinness, Ladbrokes (when it acquired Hilton) and United Biscuits (including the Smith brand).
Today, many companies including L'Oréal, Gucci, Prada, and PPR recognize the value of their acquired brands on their balance sheets. Other companies use brand value as an indicator of financial performance and a support tool in investment activities.
In terms of accounting standards, countries such as the UK, Australia, and New Zealand are considered pioneers in allowing brands to appear on the balance sheet. Provide details on how to record the brand in the Goodwill account. In 1999, the UK Accounting Standards Board introduced FRS 10 and 11 providing detailed guidance on recording Goodwill accounts on the balance sheet. The International Accounting Standards Board followed with IAS 38. In the spring of 2002, the US Accounting Standards Board introduced FASB 141 and 142, repealing several previously inconsistent regulations and providing cost guidance. details about recording the Goodwill account in the balance sheet.
There are some signs that most accounting standards, including international and UK, will eventually migrate to US standards. This is because most international companies that want to raise capital or operate in the US must meet the standards set by the US (US Generally Accepted Accounting Principles).
The general provisions of all accounting standards show that Goodwill should be recorded as an increase or decrease based on its life cycle. However, intangible assets such as brands have an indefinite life cycle, so they cannot be written down as depreciation. Instead, companies will revalue the brand every year and record the value of the brand on the balance sheet based on the valuation results. Two recommended methods are the Discounted Cash Flow (DCF) method and the market value approaches. Valuation must be done on each object (business unit, subsidiary...) with revenue and profit.
Accounting standards relating to the recognition of goodwill in corporate acquisitions are an important step forward in improving the way the value of brands is recorded in financial statements. However, this method of recording is still ineffective because only the acquired value is recorded and the details are recorded as notes in the account. This leads to the distortion that the value of a brand such as McDonald's is actually not recorded on the company's balance sheet, even though the value of the brand accounts for 70% of the company's market value. ty.
There are also some issues related to the quality of brand valuation. Some companies use a typical approach to brand valuation, but many use less sophisticated techniques and often produce very unreliable results. The debate over how to bring a company's true long-term value closer to its book value will continue. However, if there is a better approach and the company's financial reports improve in terms of brand value, the company's asset value will become more "intangible".
3. Social value of the brand
The economic value of a brand to its owner is widely accepted today, but the social value of a brand is still somewhat unclear. Does the brand create value for anyone other than the owner? And does the value created by brands come largely at the expense of society? A direct link has been found between brands and labor exploitation in many developing countries and cultural assimilation. In addition, the brand was found guilty of hindering competition and tarnishing the integrity of the financial system by promoting monopoly and limiting customer choice. On the contrary, many people believe that brands create significant value for their owners as well as for society by increasing competition, improving product quality and increasing pressure on owners. Owners must behave more responsibly towards society.
Competing on the basis of performance and price is the essence of brand competition, which will promote product innovation and development. Companies that invest heavily in brand development often have a larger portfolio of new products than other companies. A study conducted by PIMS Europe for the European Brands Association shows that businesses with poor brands launch fewer new products, invest less in research and development and products have less competitive advantage than businesses in the same industry with better brands. Statistics show that nearly half of companies with poor brands invest almost nothing in research and development compared to less than a quarter of companies with good brands. And while 26% poorly branded manufacturers almost never introduce new products, the number is much lower for better branded 7% manufacturers.
Brand owners must be responsible for the quality of their products and services as well as their behavior towards society. If you connect the relationship between brand and sales and stock value, the potential costs of behaving unethically are many times higher than the benefits received from behaving unethically. Some famous brands have also been accused of unethical behavior but fortunately, today these brands are considered as pioneers in introducing ethical standards and monitoring systems. internal supervision. This does not mean that these brands have succeeded in eliminating unethical practices, but at least they have shown that they are willing to confront these issues.
The more honest companies are in accepting the gap they have to overcome in terms of ethical behavior, the more trust they will gain from customers. Nike, a company that has been criticized for exploiting labor in developing countries by its suppliers, today provided an external audit report and interviews with factory workers. on website: www.nikebiz.com. The concern of multinational companies is understandable, in that a decrease of about 5% in revenue can mean a loss of brand value of over $1 billion. Thus, it is clear that behaving according to ethical standards is correlated with the economic benefits of these companies.
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