Today we turn to a history lesson on brand valuation. The story is of Hovis and the valuation of brands.
Hovis And The Valuation of Brands
Rank Hovis McDougall, a big U.K. food manufacturer in the 1980s decided to record the value of its brands on its balance sheet. This included its internally generated brands. (These are brands whose value is as a result of the firm’s actions, e.g., advertising, rather than being purchased through an acquisition etc…)
This decision “… created a storm of controversy” (Murphy et al., 1989, page 9). (This eventually led to accounting rules designed to prevent similar actions from occurring.)
Interbrand Responded
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 a point that is hard to argue with. (At least if you think a firm’s balance sheet should be informative about the firm’s assets.
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
No Solution Found
Unfortunately, the solution is a little harder to arrive at. Murphy outlines problems in a number of alternative brand valuation methodologies. For example, 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. While predicting future cash flows and growth is fraught with difficulty. All these problems seem largely fair points.
The solution proposed is interesting. It 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 at outlining problems than solutions. Still, it is very useful in helping us better understand the history of brand valuation.
For more on brand valuation see here, here, and here.
Read: J. Murphy et al. (Interbrand Ltd., Windsor) (1989) The Valuation of Brands, British Food Journal, 91, 2, pages 9-11