Hello, I'm here at the Brand Exchange, which is the home of Brand Finance, with David Haigh, the CEO of Brand Finance. And we're going to talk about brand valuation and also understanding, once we've valued the brand, to think about how do we grow the brand. And David, brand valuation is still an emerging concept despite its being around for ten years or so. What's your take on brand valuation? What's your philosophy? >> Well, as you say, it's been around for about 20 years, but it's rapidly accelerating in the professionalization of it. So the Marketing Accounting Standards Board of America and the ISO are rapidly trying to create standards that will stick with worldwide management. >> And how do you actually value a brand? I mean, it's this amorphous difficult to value thing. How do you go about it? It's an intangible asset. >> Well, first of all one has to decide what one means by the term brand. And really, there are two key concepts that people mean when they say brand. One is a branded organization, or we call it a branded business. And some people like Unilever, for example, when they're talking about their brands, mean branded businesses like Persil or Flora or whatever. The second definition of brand is the narrower definition, which is trademarks and associated intellectual property. So, one is a subset of the other. Now, when we do brand valuations, the first thing we always do, is we value the branded business, which means we have to understand all the value drivers in that business, and how do the trademarks and associated IP drive value into that branded business? So there's these two aspects of brand, the trademark and the branded business. Practically speaking, how can you put a value on this? What are the different approaches, and which one do you subscribe to? >> Well, if we're talking about the branded business, the widely accepted methodology is discounted cash flow, and we, like equity analysts and other business valuers, value the branded business on the basis of the expected cash flows. The real difference, I suppose, where you have somebody like us, is we go into a lot more segmental detail. We try and understand a lot more about what is actually driving that business value. So a conventional valuer really just has a spreadsheet, and to a large extent, mechanically churns out a number. But we really try and understand how is the brand actually driving the value drivers that determine the value of that business. >> So are you then asking how the brand drives your price premium, if that's part of your strategy versus volume? >> What we do first of all is we look at who the stakeholders to that business are. And the most obvious ones are customers and consumers, staff, distributors, and retailers and financiers. And we look at each one of those, and we try and identify them with a particular value driver. And what we're then looking for is to see whether particular behavior or response from those stakeholder groups is likely to favorably increase the performance of a particular value driver. So in the case of customers, it would be volume of sales, frequency of sales, and price of sales, so you might get a price premium. But with each of the other stakeholder groups, there are also effects that favorably affect the profit, and therefore value, of the branded business. >> So you mentioned staff being one of them. How is brand a value driver on that side of the business? >> Well, where it comes to staff, they are a consumer of the business, just like end consumers are consumers of the products. So if somebody was thinking of working for Goldman Sachs, or Sachs, or PWC, they would get a great deal of satisfaction from doing that. It would be good for their CV, it would be good for their experience, they would feel good about it. So employer brands are extremely important in motivating staff to join, to stay, and to moderate their demands in terms of finance. So you can actually see very clear benefits from employees, which I know that you've researched, and it's true that there are clear benefits to strongly branded employers that improve the performance of the branded business. >> Why would I value a business or the brand, for that matter? They're different objectives, and I know you've talked about, in the past, how you might have different valuations depending on the objectives. Could you give an example of two different objectives, which you might value a brand for different reasons, where you might have a different valuation. >> I think where it comes to the different reasons for valuing brands, you can really break them into two broad groups. One is technical valuations, which are largely for financial purposes. And the other one is commercial valuations, which are for strategy and decision making. The technical valuations tend to focus on the value of the trademarks and IP as a separable piece of property. And that would tend to be used to putting it into balance sheets following an acquisition, to transfer the brand abroad, perhaps to a brand CO to get into a litigation action or something of that kind. So those technical evaluations tend to be point in time, very technical, and generally speaking, they use a methodology called royalty relief, where you're saying well, what would a third party pay for the use of that trademark and associated IP? The other side, the commercial side, tends to focus on the value of the branded business as a whole, broken into segments, and using that with scenario analysis and various other techniques to try and decide how will the value of the brand be optimized within the business. So, it's a very much a strategy or business decision-making tool. >> So it's not as much as a marketing decision tool, though it can be, it's really across these functional silos. So, it could be the financial silo within the organization, it could be strategy, marketing. Do they tend to work together to maximize the value of brands or to maximize the value of business in your experience? >> Well I think, generally speaking, silos don't work together very well. Whether they work together well depends largely on the CEO, and I think there are an increasing number of inspired CEOs who are actually making the silos work together. And I think more and more CEOs are beginning to understand how brands and marketing IP can bring them together and enhance the value of the business. So, I don't know, someone like Paul Polman at Unilever, someone like Paul Walsh at Diageo, someone like Antonio Horta Osorio at Lloyds, they all really understand the value of brands and how they can maximize the portfolio value of the business. And then they crack a whip and everyone jumps to it, but until the CEO is really leading the charge, I think you tend to get slightly dysfunctional behavior. >> Now those are very different businesses, one is financial services, the other is consumer packaged goods. Have you worked on industrial companies, business to business? Does a brand play as much a role, or does it differ across sectors in your experience? >> Well, I think over the last 20 years, we've worked on just about every business under the sun, from water companies through to steel companies. And the fact is brands are there to influence people's behavior and simplify choice and to reinforce loyalty, and so on. So brands work in any category, and increasingly over the 20 years I've been working in the business, business to business companies and industrial companies are waking up to the notion that brands actually do work to improve their business. So if you look at companies like Arcelormittal, Holcim in the cement category, Kier in the construction sector, they are all very acutely aware that their brand will influence behaviour. >> Now many of these face hard nosed procurement, people on the other side of the negotiation table. How does brand influence the behavior of the buyer in that setting, rather than, let's say, a purchaser of a luxury good? >> Yeah, well I think one of the issues is the procurement are usually the policemen of the process, but they're not necessarily the people who make the ultimate decision, it's usually a committee decision where the procurement guy is really just making sure it's done correctly. And you cannot eliminate the emotional and psychological effects of other parts of the committee. So, for example, if you had five players, who all gave identical bits and there were very small differences in price, I think you can be pretty sure that they would go for the one that had the strongest brand on a broader level. And occasionally, we've been involved with pictures, and I think we've heard of pictures where the price from one player is slightly higher than the rest. But for all sorts of qualitative and brand reasons, they go with the higher-priced player, and so it still works even in a situation where you've got business to business and even in a situation where you've got competitive pricing. >> Do you think the value of brands is growing in this highly competitive global environment? >> One of the primary reasons that interest in brands and certainly the value of brands is growing is because China has finally caught onto the notion of intellectual property and in particular brands. They are building and defending all forms of intellectual property, but in particular brands. And that stems from Xi Jinping, their leader, who has basically said, he no longer wants China to produce things quickly, but with high quality. Not to be made in China, but to be created in China. And for them to be branded products, not just products. And he has created a whole culture in China, where there is now active interest in how brands work, how they add value in order to capture more value lower down the value chain in China, so that China will go from being a manufacturing economy to being a high added value economy like the West. They have spotted the fact that Western companies are the ones that get all the margin, and they want to capture some of that for China. And the instrument for doing that is branding. So I think it's fair to say brands are rising in value, and the interest in brands is growing dramatically. >> Both across geographies and sectors. >> Yes, absolutely. >> Thank you, David. >> Thanks. >> [MUSIC]
