When Bridgestone asked, ‘What’s in a name?’ at the beginning of its 2000 annual report, it wasn’t just a rhetorical question. The company was coping with the fallout from the Firestone tire recall – perhaps the most traumatic product recall ever – which presented it with a real dilemma: should it eliminate the Firestone brand or even opt to rebrand the entire company?
Bridgestone did neither. Instead, its new president pledged to restore confidence in Firestone and dedicated the entire annual report to ‘building brand value’.
In a shrewd repositioning, the company lauded its own multi-brand strategy, characterizing Firestone as a ‘workhorse brand for our subsidiaries’ and extolling the ‘highly polished identity’ of the home brand.
It worked. Despite earnings plunging 80 percent in 2000, Bridgestone has long since recovered. The theme of ‘building brand value’ provided the rationale for the recovery.
Reporting on brand value or equity is a great paradox. Brand Finance, a management consultancy, finds that 73 percent of analysts and 72 percent of corporate managers want more information about intangibles. Yet research shows that brand value accounting among the UK’s FTSE 350 companies has decreased in the last few years. Brand Finance’s CEO, David Haigh, says this gap between expectations and performance is ‘making a mockery of financial accounting.’
The challenge is finding a consistent way to value brands and get them on the books. ‘Brands are intangible assets, so they’re difficult to touch and feel and hold,’ remarks Adrian Davis from the valuation and strategy group at PricewaterhouseCoopers. ‘There’s a lot of scepticism about valuing brands, particularly in the marketing community. But we use the same methods that we use for any other asset. For us there’s no mystery.’
Davis explains that starting next year, international accounting standards will be in line with current US standards which require companies to value acquired brands and put them on the balance sheet. ‘That is a seismic shift,’ he declares. ‘It shows that brands are being treated less like intangible assets and more like tangible ones.’
The Chartered Institute of Marketing in the UK defines brands as ‘the capitalized value of the trust between a consumer and the company.’ And that can be big money. Brand accounts for an estimated 30 percent of the market cap of the top 50 brands in Interbrand’s annual ranking.
Brand value is indeed a prime factor in M&A. Why else would Philip Morris (now Altria) buy Kraft for $12.9 bn, more than four times its book value, or Nestlé acquire Rowntree for $4.5 bn, five times the value of its tangible assets?
Brand champions?
So how does the world’s top brand communicate its value? In a nutshell, poorly. Coca-Cola, long number one on Interbrand’s league table, brags about ‘unparalleled brand appeal and distribution’ in its 2002 annual report. Yet it gives scant evidence.
By contrast, PepsiCo is a paragon of reporting excellence with consistent brand metrics. It’s not afraid, for example, to show Coke Classic ahead in terms of supermarket sales while at the same time showing that Pepsi Cola is the number one contributor to the sales and profit growth of its retailers.
Unfortunately most US corporations are closer to Coca-Cola’s poor brand reporting standards. In contrast, Japanese companies excel in presenting brand equity.
Fuji Heavy Industries, for example, made ‘focusing on our new brand equity’ the motto of its latest annual. Strategies to create premium brands are the focal point of the president’s interview, and Fuji even includes a statement from its chief designer on ways to consolidate brand image.
In the first sentence of his message to shareholders, Kao’s president, Takuya Goto, addresses the issue of ‘maintaining and expanding brand equity’ for the cosmetics firm’s core brands. Kao reports in great detail on its brands, though it doesn’t provide concrete figures or percentages of market share.
Finally, food company Ajinomoto takes an organizational approach to the process with a ‘brand committee’. It’s ranked as one of Japan’s top ten brands by Nikkei.
Looking beyond Japan, Indian software company Infosys calculates and reports on its brand value every year. It draws up an annual score sheet of other intangibles like intellectual property and internal resources. And at the annual meeting in June, V Balakrishnan, VP of finance and company secretary, presented shareholders with a chart showing the ‘strength of the invisibles’.
Infosys has won both national and international prizes for the quality of its reporting. Another example of pan-Asian excellence is Singapore’s Asia Pacific Breweries. Its annual tells of awards, expansion policies and marketing activities, all rounded off with a judicious mixture of hard facts and figures.
After all that, it’s almost comforting to find an Asian brand champion that still has a long way to go in its brand reporting. Samsung is one of Interbrand’s rising stars with brand value up a staggering 30 percent in the 2002 league table – after a 22 percent rise the year before. The South Korean company’s vice president for marketing, Eric Kim, has been quoted as saying, ‘We consider our global brand as one of our most important corporate assets.’ So why do Samsung’s annual reports expound endlessly on technology while ignoring brand issues?
European middle ground
European companies take the middle ground, divulging more than most counterparts in the US and less than those in Asia. BAT has a focused approach, concentrating on the quarterly results of its four top cigarette brands. Ralph Edmondson, head of IR, says, ‘Market share and volume are important but brand performance in key segments is also relevant.’
Then there’s Nestlé. In 2001 its brand accounted for a staggering 81 percent of its market, according to Interbrand. But Roddy Child-Villiers, the company’s IR chief, says brands don’t play a significant role in financial communication. Still, he points out, ‘Without brand quality and value you’ll never be able to have a loyal customer base over time. We own the trademarks and the technology, but the consumer owns the brands.’
Le mal occidental of brand value reporting is the inherent conflict of marketing and financial cultures in western business. Most US and European finance officers evidently don’t take logos seriously, and many appear confused about the issue.
They can’t really be blamed. Even Interbrand’s scoring seems rather arbitrary, for instance evaluating product and corporate brands in pretty much the same way. This can lead to misleading assessments: sales of Coke might be more than Pepsi, but what about the rest of each company’s brand portfolios? Isn’t PepsiCo far ahead of Coca-Cola as a company?
A rival brand consultancy, CoreBrand, has another methodology which leads to decidedly different results. CoreBrand links brand equity value to stock performance, and its predictive model is useful when looking at incremental spending. Asked why brand measurement is still in such a formative phase, CoreBrand CEO James Gregory is diplomatic: ‘Senior level executives have been confused about the value of the corporate brand and how to leverage that value.’
Conventional accounting logic postulates that brands can be numerically assessed only when they are sold or acquired. That view was reinforced by a 1989 London Business School report which concluded that brand valuation wasn’t sufficiently reliable to be entered on the balance sheet. No wonder brands languish in the financial background. If they can’t be traded, they won’t be counted. In fact, ever since Naomi Klein published her diatribe No Logo: Taking aim at the brand bullies, animosity against brands seems a lot clearer than their actual worth.
Long way to go
Experts with a broader view of financial reporting like Brand Finance’s Haigh and PricewaterhouseCoopers’ David Phillips, the firm’s European value reporting leader, have called for a more enlightened approach to disclosure. Phillips doesn’t think brand valuation techniques are useful in all cases: ‘Putting a precise value on brands can be misleading. Often data that allow the reader to evaluate brand awareness and extensibility are more relevant.’
Even the best companies have a long way to go. In a recent study, ‘Market metrics: What should we tell the shareholders?’, the London Business School criticizes the fact that only 16 percent of 125 FTSE 350 companies it studied actually heed the ASB advisory guidelines calling for concrete information on brand issues in operating and financial reviews, the UK’s equivalent of the MD&A.
‘What’s in a name? That which we call a rose by any other name would smell as sweet,’ says Juliet. Sorry Shakespeare, but as with Bridgestone, fortunes in the business community are inextricably linked to good names. So we prefer to follow the words of your contemporary, Galileo: ‘Measure what is measurable, and make measurable what is not so.’
Cost vs value
Adrienne Baker on intellectual property disclosure
Did you know our accounting system is based on a 15th century Franciscan friar’s treatise on double-entry bookkeeping? In 1494 Luca Pacioli came up with the idea of debits and credits, which became the basis for balance sheets and income statements. The trouble is Pacioli’s theory was based on historical costs, not current or future asset value. This is a real problem when it comes to valuing intangibles such as intellectual property.
Intellectual property – including technology, patents and trademarks – can be both costs and assets, so it’s often difficult to figure out how a company gets IP onto the books. Accounting rules let companies either expense or capitalize intangibles so long as they use the same method year after year. Regardless of whether they’re expensing or capitalizing IP, only about ‘half do a good job of disclosing it’, estimates Darrell Dorrell of Oregon-based Financial Forensics.
In the US, the Financial Accounting Standards Board (FASB) is planning to issue reporting guidelines for reporting intangible assets, though it has currently shelved the project in favor of more pressing concerns, namely revenue recognition.
There’s a big debate over how to disclose intangible assets like IP. Accountants are still focused on the cost of IP while bankers and corporate types are thinking about its future value. IROs in the technology, biotech and pharmaceuticals sectors, where IP is central to business, are likely aware of the tension. They may not, however, recognize that they are in the best position to bridge the gap between the accountants’ cost-based valuation and corporate finance’s future-oriented vision.
‘The best information the IR people have available is the accounting data,’ notes Dorrell. ‘But by virtue of the accounting requirements, that data is very skinny in terms of the value of IP.’
For example, companies that contract their IP over a long period of time only book that revenue as incurred; so every quarter a bit will show up but the full value of the contract is nowhere to be seen. It would benefit companies, from an IR point of view, to be more upfront in disclosing information about the full value of such agreements to the Street.
IBM is a leader in IP disclosure. The company has been licensing its IP (including technology, patents and trademarks) for over 50 years as a way of enhancing its return on investment in technology. It issues an IP income statement in quarterly and annual reports.
‘In 2002 we recorded $1.1 bn of IP income,’ says Jerry Rosenthal, vice president of intellectual property at IBM. ‘What we record is the income the IP generates. We talk about R&D expense – what it costs to do the R&D – but from an IP value statement, the only thing we record is the income.’
Putting a number on IP is not the most important part of conveying its value to investors, notes Rosenthal. There are three things to communicate, he says: one, how the company is producing leading-edge products; two, how R&D money is being wisely spent; and finally, the amount of time it takes for a product to develop from a patent.
It’s also important for IR professionals to recognize that analysts and fund managers don’t rely on the balance sheet to measure intangibles; they look at the cash flow statement. ‘They will project out what they believe the overall cash flows of the entity as a whole could be and they will compare that to the current stock price and give a recommendation,’ says Neil Beaton, national director of accounting advisory firm Grant Thornton. He says IROs should tell investors to ‘look at the cash flows’ to get an accurate picture of the value of intangibles.
That picture is far from complete – even though it’s been over 500 years since Father Luca converted the world to the cult of valuation. Asked where IP value is recorded, here’s how one 21st century IRO responds: ‘It’s just really complicated.’
Adrienne Baker, North American editor of IR magazine, will be giving a presentation on this subject at Thomson Financial’s conference, ‘IntangiblesIQ: Innovation & shareholder value’, September 17, San Francisco. For information, e-mail [email protected]
