Hovis and The Valuation of Brands

Today we turn to a history lesson on brand valuation. Rank Hovis McDougall, a big U.K. food manufacturer in the 1980s decided to record the value of its brands on its balance sheet including internally generated brands. This “… created a storm of controversy” (Murphy et al., 1989, page 9). (This eventually led to accounting rules designed to prevent similar actions from occurring.)

Faced with this controversy Interbrand — led by John Murphy — responded. A short article in the British Food Journal neatly lays out the problem with not capitalizing spending on brand assets. Many of these comments remain relevant today, for example that recording assets on the balance sheet reduces the need for Goodwill upon acquisitions. (Goodwill is the portion of the purchase price of a company that is largely inexplicable). Furthermore, Murphy makes the (hard to argue with point) that: “We see no reason why acquired brands should be treated differently from “home grown” brands, since both can be equally valuable assets of the company” (Murphy et al., 1989, page 10).

Unfortunately the solution is a little harder to arrive at. Murphy outlines problems in a number of alternative brand valuation methodologies: spending on brand building can be a weak proxy for brand value and reward frivolous spending, increased margins may not capture all the value from a brand, brands are not traded (causing problems finding market value), some survey methodologies (e.g., measuring awareness) can’t easily be translated into dollar values, and predicting future cash flows and growth is fraught with difficulty. All these problems seem a largely fair.

The solution proposed is interesting — and has helped create a massive business for Interbrand and other consultants. The problem is that it also seems a little arbitrary. Brand strength helps determine the multiple of profits assigned to brand value using an S curve methodology. Sadly, the seven aspects of brand strength while all likely important seem not fully justified or even fully explained. These are stated to be: Leadership, Stability, Market, Internationality, Trend, Support, and Protection.

Like many papers Murphy’s is better outlining problems than solutions but it is very useful in helping us better understand the history of brand valuation.

Read: J. Murphy et al. (Interbrand Ltd., Windsor) (1989) The Valuation of Brands, British Food Journal, 91, 2, pages 9-11

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