Brand Valuation - Cadbury Dairy Milk


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Brand Valuation - Cadbury Dairy Milk

  1. 1. PRAXIS BUSINESS SCHOOL Brand Valuation - ‘Cadbury Dairy Milk’Submitted To: Prof. Srinivas GovindrajanPresented By: Ankita Singh Arunachalam Ramanathan GauravTalwar Zeeshan Mohammad 1
  2. 2. EXECUTIVE SUMMARYIn Phase-2, equity of a brand was measured to determine the retention capacity of Cadbury DairyMilk in the market, under any circumstances. It also talked about the added value endowed onproducts and it determined the capability of generating future cash flows. In order to measureBrand Equity for Cadbury Dairy Milk, three models were used: Colombo Morrison Model Van Westendorp Price Sensitivity Meter Brand Leveragability ModelIn Phase-3, brand valuation was performed to determine the value of Cadbury Dairy Milk. Inorder to perform the valuation, Interbrand methodology was used.In 2010, Kraft Foods acquired Cadbury India and thus the balance sheet was available only till2009-10. With the following actual information and assumptions, the Interbrand model wasconstructed:Actual Information: 1. For the year 2012-2015, Cadbury‟s growth rate of 20% was determined from a recent published article. 2. Tax rate for chocolate category in 2010 and 2011 was 30% 3. Capital charge was determined from the Kraft Foods report on „Acquisition of Cadbury‟. It was considered to be the industry WACC (5.48%).Assumptions: 1. Brand‟s sales contribution percentage is the same till 2011 2. 22.35% and 10.45% are the respective brands‟ contribution towards the expenses and capital charge in Cadbury India. 3. Gross Margin %, Marketing, Overheads and Miscellaneous Expenses as a percentage of sales, Capital Employed as a percentage of sales are constant from 2009 – 2011. 4. Terminal Value is 2% 2
  3. 3. In order to calculate the Brand Strength Score, the seven parameters (Market, Stability,Leadership, Profit trend, Support, Geographic Spread and Protection) were considered. Tocalculate Role of Brand Index, the percentage of consumers who purchased the chocolate onlyfor the brand name was determined from the revised Colombo Morrison Model. Brands Brand Role of Strength Score Brand Index Cadbury Dairy Milk 100 45% Cadbury 5 Star 46 29%A 2*2 model was constructed between Role of Brand and Brand Strength Score. From the abovescores, it was found that Cadbury Dairy Milk falls under Quadrant B i.e low Role of Brand andHigh Brand Strength Score. As per this quadrant, it means that Cadbury Dairy Milk can beextended to different categories i.e it has high brand elasticity. From this model and from BrandLeveragability Model (conducted in Phase-2), it can be seen that Cadbury Dairy Milk has a highchance of success if launched in cookies and cakes category. 3
  4. 4. TABLE OF CONTENTSS.NO TITLE PAGE NO 1 Brand Valuation 5 2 Interbrand Model 7 3 Methodologies followed by 8 Interbrand Model 4 Determination of Role of 10 Brand Index 5 Determination of Brand 11 Strength Score 6 Relationship between Role of 15 Brand and Brand Strength 7 Analysis of Interbrand Model 17 8 Recommendations 18 9 References 18 4
  5. 5. BRAND VALUATIONBrands play an important role in generating and sustaining the financial performance ofbusinesses. With high levels of competition and excess capacity in virtually every industry,strong brands help companies differentiate themselves in the market and communicate why theirproducts and services are uniquely able to satisfy customer needs.The past 20 years have witnessed a dramatic shift in the sources of value creation from tangibleassets (such as property, plant, equipment and inventory) to intangible assets (such as skilledemployees, patents, business systems and brands). This is reflected in the growing divergencebetween the net asset value of companies and their market capitalization. There are a number ofrecognized methods for valuing trademarks or brands.Cost Based Approach: This approach takes into account all the costs involved in building thebrand. All these expenses are added to arrive at the value of the brand.Book to Market: This method is ideal for single brand companies. In this method the bookvalue of the company is deducted from its market capitalization, to arrive at the value of theintangible asset, i.e. the brand.Discounted Cash Flow Method: In this method, the cash flows are estimated and discounted tocome at the Present Value of the firm.Price Premia Model: This model helps to assess how much premium a particular brand cancharge from the consumers. This is more applicable to products, which are more likecommodities.Fifteen years ago, Interbrand conducted the first ever brand valuation for Rank Hovis McDougal.This exercise succeeded in putting the worth of the companys brands as a figure on the balancesheet. RHMs management wanted this information to fight a hostile takeover bid. With thebrand value information, the RHM board was able to go back to investors and argue that the bidwas too low, and eventually repel it. 5
  6. 6. It was the wave of brand acquisitions in the late 1980s that exposed the hidden value in highlybranded companies and brought brand valuation to the fore. Some of these acquisitions includedNestlé buying Rowntree, United Biscuits buying and later selling Keebler, Grand Metropolitanbuying Pillsbury and DANONE buying Nabiscos European businesses. All these acquisitionswere at high multiple price tags. The amount being paid for the acquisition of a strongly brandedcompany was increasingly higher than the value of the companys net tangible assets. Thisresulted in huge levels of goodwill arising on acquisition. This goodwill actually disguised amix of intangible assets - brands, copyrights, patents, customer loyalty, distribution contracts,staff knowledge, etc. An Inter brand study of acquisitions in the 1980s showed that, whereas in1981 net tangible assets represented 82% (on average) of the amount bid for companies, by1988this had fallen to just 56%. It became clear that companies were being acquired less for theirtangible assets and more for their intangible assets.Why Are brands valued?Although public perceptions of brand valuation are often focused on balance sheet valuations,the reality is that the majority of valuations are now actually carried out to assist with brandmanagement and strategy. Companies are increasingly recognizing the importance of brandguardianship and management as key to the successful running of any business. The valuesassociated with the product or service is communicated through the brand to the consumer.Consumers no longer want just a service or product but a relationship based on trust andfamiliarity. In return businesses enjoy a secured earning by loyalty of customers who havebought into the brand.Uses of Brand Valuation In mergers and acquisition: By more accurately assessing the value of the various parties Decisions on business investments and performance by making brand asset comparable to other company assets Decisions on brand investments within a brand portfolio, market segmentation or distribution channel Decision on the cost of licensing the brand to subsidiaries or third parties Raising of funds by allowing brands to be used as collateral 6
  7. 7. THE INTERBRAND METHODOLOGYThe Interbrand methodology is the most recognized of all methodologies. Interbrand methodtakes into account the ongoing investment and management of the brand as a business asset. Thebrand value obtained can be used to guide strategic brand management so that the business canmake better and more informed decisions.The concept of brand valuation was developed to recognise brand value on a balance sheet.However, not every brand meets with the criteria that allow clear valuation: should be separatelyidentifiable, able to be protected legally, should be transferable and enduring in nature. The relationship between the brand strength and brand value follows a normal distribution represented by the “S” curve. As the brand evolves from a weak brand to a strong one the curve shifts to the right. The multiple on the y-axis is determined by making use of all brands in that particular segment/industry. The brand strength variables are then correlated to a multiple such as price ratio to gauge the level of confidence of the brand in the future. The brand multiple must then be added to brand profit to derive the true value of brand equity. 7
  8. 8. METHODOLOGIES FOLLOWED BY INTERBRAND1. Market Segmentation: Brands influence customer choice; however, their influence differsdepending on the market in which they operate. The brand‟s markets are split into non-overlapping and homogenous groups of consumers according to applicable criteria such asproduct or service, distribution channels, consumption patterns, purchase sophistication,geography, or existing and new customers. The brand is valued for each segment, and the sumof the segment valuations constitutes the total value of the brand.2. Financial analysis: In the financial analysis, forecast current and future earnings specificallyattributable to the branded products and then subtract operating costs from revenue to calculatebranded operating profit. Then, apply a charge to the branded profit for capital employed, givingus the brand‟s economic earningsFinancial performance measures an organization‟s financial return to its investors. For thisreason, it is analyzed as economic profit, a concept akin to EVA (Economic Value Added). Todetermine economic profit, taxes are removed from net operating profit to get to net operatingprofit after tax (NOPAT). From NOPAT, a capital charge is subtracted to account for the capitalused to generate the demand revenues: this provides the economic profit for each analyzed year.Financial performance is studied across each individual segment. 8
  9. 9. 3. Role of Branding (RBI) Analysis: Identify and forecast revenues and “Intangible Earnings”generated by the brand for each of the distinct segments determined in step 1. Intangibleearnings are defined as branded revenues minus operating costs, applicable taxes, and a chargefor the capital employed. The concept is similar to the notion of economic profit.4. Brand Strength Analysis (BSS): Assess the role that the brand plays in driving demand forproducts and services in the markets in which it operates to determine what proportion ofintangible earnings are attributable to the brand measured by an indicator referred to as the “Roleof Branding Index,” which is calculated by first identifying the various drivers of demand for thebranded business, then determining the degree to which each driver is directly influenced by thebrand. The role of branding represents the percentage of intangible earnings generated by thebrand. Brand earnings are derived by multiplying the role of branding by intangible earnings.5. Competitive Benchmarking: Determine the competitive strengths and weaknesses of thebrand to derive the specific brand discount rate that reflects the risk profile of its expected futureearnings, as measured by an indicator referred to as the “Brand Strength Score,” whichcomprises extensive competitive benchmarking and a structured evaluation of the brand‟smarket, stability, leadership position, growth trend, support, geographic footprint, and legalprotect ability.6. Brand Value Calculation: Brand value is the net present value (NPV) of the forecast brandearnings, discounted by the brand discount rate. The NPV calculation includes both the forecastperiod and the period beyond, reflecting the ability of brands to continue generating futureearnings. 9
  10. 10. DETERMINATION OF ROLE OF BRAND INDEXThe Role of Brand Index is a measure of how much of the customer demand was dependent onthe brand at the point of purchase and is applied to the economic earnings to arrive at BrandedEarnings. By this assessment, the brand‟s contribution to the earnings of the business is isolated.For this study, industry benchmark analysis for the Role of Brand Index is derived fromInterbrand‟s database of more than 5,000 prior valuations conducted over the course of 20 years.In-house market research is used to establish individual brand scores against our industrybenchmarks.The Role of Brand Index (RBI) measures how much of the decision to purchase is attributable tothe Brand Power, regardless of other aspects, like product price or features. RBI is definedthrough an in-depth analysis based on primary research data. Because the Brand‟s role in drivingdemand differs depending on geography, type of channel, this analysis is carried out for eachindividual segment. RBI is combined with the economic profit of the branded products todetermine the amount of branded earnings that contribute to the total value.Analysis:As per Interbrand model, Role of Brand Index is a measure of how much of the customerdemand was dependent on the brand at the point of purchase. From revised Colombo MorrisonModel, the actual brand loyalty was determined. Actual brand loyalty was those customers whowere insensitive to price, taste and availability of Cadbury Dairy Milk and Cadbury 5 Star. Brands Actual Brand No.of Brand Loyal Role of Brand Loyal Customers Customers as per Colombo Index Morrison ModelCadbury Dairy Milk 9 20 45%Cadbury 5 Star 2 7 29% 10
  11. 11. DETERMINATION OF BRAND STRENGTH SCOREThe Interbrand model of brand strength – part of the valuation methodology – is a usefulframework to consider the performance of a brand.Brand Strength Score (BSS) measures the ability of the brand to secure the delivery of futureexpected earnings. Brand strength is reported on a 0-100 scale, based on an evaluation across 7dimensions of brand activation. Performance in these dimensions is judged relative to otherbrands in the industry. BSS inversely determines, through a proprietary algorithm, a discountrate. That rate is used to discount branded earnings back to a present value based on how likelythe Brand is to withstand challenges and deliver the expected earnings.The seven components of brand strength in the Interbrand valuation model are: 1. Market: 10% of brand strength. Brands in markets where consumer preferences are more enduring would score higher. So for example, a food brand or detergent brand would score higher than a perfume or clothing brand, because these latter categories are more susceptible to the swings of consumer preference. 2. Stability: 15% of brand strength. Long established brands in any market would normally score higher, because of the depth of loyalty they command. So for example: Rolls Royce would score higher than Lexus. 3. Leadership: 25% of brand strength. A market leader is more valuable: being a dominant force and having strong market share matters. So for example on this score it is likely that the Coca-Cola brand would out-perform Pepsi on a global basis. 4. Profit trend: 10% of brand strength. The long-term profit trend of the brand is an important measure of its ability to remain contemporary and relevant to consumers, according to Interbrand. 5. Support: 10% of brand strength. Brands which receive consistent investment and focused support usually have a much stronger franchise, but the quality of this support is as important as the quantity. 6. Geographic spread: 25% of brand strength. Brands that have proven international acceptance and appeal are inherently stronger than regional brands or national brands, as they are less susceptible to competitive attack and therefore are more stable assets. 11
  12. 12. 7. Protection: 5% of brand strength. Securing full protection for the brand under international trademark and copyright law is the final component of brand strength in the Interbrand model.This model is not perfect, for example several of the components have a built in preference forolder brands and so may not give adequate recognition to the value of newer brands such asAmazon or Starbucks. However, it is certainly useful to reflect on the seven components. Strength Maximum Value Leadership 25 Stability 15 Market 10 Geographic Spread 25 Trend 10 Support 10 Protection 5 Total: 100 12
  13. 13. AnalysisBrand Strength score can be determined only based on comparison with the other brands. Hence,Cadbury 5 Star was considered. Market – Since it is a chocolate category (impulse purchase category), consumer preferences are more than any other categories and hence was given the maximum marks for both the brands Stability – It was measured based on the age of the brand. The relative percentages were found and thus the respective scores were calculated. Stability Age of Brand Relative Score (years) Percentage out of 15 Cadbury Dairy Milk 64 100% 15 Cadbury 5 Star 43 67% 10 Leadership – Based on the market share in India, the relative percentages were found Leadership Market Share Relative Score in India Percentage out of (By Volume) 25 Cadbury Dairy Milk 30% 100% 25 Cadbury 5 Star 14% 47% 12 Profit Trend – The accumulated NOPAT of 2010 and 2011 was calculated and the relative percentages were found Profit Trend Profit Relative Score (in Rs. Cr) Percentage out of 10 Cadbury Dairy Milk 176 100% 10 Cadbury 5 Star 82 47% 4.7 13
  14. 14. Support – Kraft Foods gives its full support to Cadbury Dairy Milk and Cadbury 5 Star. Hence, both the brands receive maximum score for this parameter Geographic Spread – In the international market, the market shares of Cadbury Dairy Milk and Cadbury 5 Star was determined and the relative percentages were calculated Geographic Spread Market Share Relative Score Worldwide Percentage out of (By Volume) 25 Cadbury Dairy Milk 10% 100% 25 Cadbury 5 Star 2% 20% 5 Protection – Both the brands receive full protection for the brand under international trademark. Hence, both the brands receive maximum scores.Based on the seven parameters, the brand strength scores were calculated.If the brand strength score is 100, then the discount rate is equal to industry WACC (risk-freerate). As the brand strength score decreases, the discount rate increases as the risk increases.Thus, Cadbury Dairy Milk‟s discount rate was 5.48% and Cadbury 5 Star‟s discount rate was7.87%. The discount rate for Cadbury 5 Star was calculated based on the following formula thatwas devised:Discount Rate = Industry WACC + {[(100 – Brand‟s Strength Score)/100]*Industry WACC} Brands Brand Strength Discount Score Rate Cadbury Dairy Milk 100 5.48% Cadbury 5 Star 56 7.87% 14
  15. 15. RELATIONSHIP BETWEEN ROLE OF BRAND & BRAND STRENGTHThe Role of Brand defines the degree to which demand is dependent on the brand, while BrandStrength is the ability of the brand to generate and sustain the demand.The following two-by-two Matrix provides a useful framework to consider the relationshipbetween Role of Brand and Brand Strength. D A C BIn Quadrant A:High Role of brand & High brand Strength is the perfect spot for the brands and at the same timemost challenging place.In turn, customers‟ attitudes and economic circumstances have changedin responses to the shifts and thus, they continue to maintain their Brand Strength and Role ofBrand, when the dynamics and competitive game of the market are in flux.If a brand is in quadrant A, customers will look for tangible returns on their purchase decisionand focus on price and other verifiable or “tangible” drivers 15
  16. 16. In Quadrant B:The brands found in Quadrant B have high Brand Strength and low Role of Brand, meaning thebrand is well positioned in a market where the brand‟s contribution to demand is rather small.Advantage of this quadrant is the freedom to experiment with new ways to grow the business.Strong brands have a strong foundation, and a lower Role of Brand in your category means alower risk of exposure or lower risk of stretching your brand out.Cadbury Dairy Milk lies in this quadrant and hence has a freedom to experiment in the newsegments. High brand Strength shows that thecustomers are loyal and thus has an edge over theother brands with an increasing profit trend. It will give more stability to the brand in the market.On the other hand low role of brand means a lower risk of exposure or lower risk of stretchingyour brand out. Brands Role of Brand Index Brand Strength Score Cadbury Dairy Milk 45% 100 Cadbury 5 Star 29% 56In Quadrant C:In Quadrant C, brands with high Role of Brand and low Brand Strength score are found. This is acritical spot on the matrix. In this scenario, the brand has an important influence on purchasedecisions but fails to drive ongoing demand. This means the brand is important but risky, and thecompetitors tend to win the battle. Brand building is required, and fast, as the category structureswill punish weak brands.In Quadrant D:In Quadrant D, brands with high Role of Brand and low Brand Strength are found. The brand hasfull of opportunities. However, if competitive pressure increases, the brand becomes a neededpoint of difference. Increasing the Role of Brand or increasing the Brand Strength (or ideallydoing both) is the key to competitive advantage. 16
  17. 17. ANALYSIS OF INTERBRAND MODELSince Cadbury India was acquired by Kraft Foods in 2010, the balance sheet was not availablefor 2010-2011 & 2011-2012.Thus, Cadbury India‟s 2009-2010 annual report was used to determine the contribution ofCadbury Dairy Milk and Cadbury 5 Star to the overall sales of Cadbury India. From thecalculations, it was found that 22.35% and 10.45% of the overall sales come from Cadbury DairyMilk and Cadbury 5 Star respectively.Actual Information: 1. Cadbury‟s growth rate (20%) was determined from a recent published article 2. Tax rate for chocolate category in 2010 and 2011 was 30% 3. Capital charge was determined from the Kraft Foods report on „Acquisition of Cadbury‟. Hence, it was considered to be the industry WACC (5.48%)Hence, the following assumptions were taken into consideration for calculating the brand value: 1. Brand‟s sales contribution percentage is the same till 2011 2. 22.35% and 10.45% are the respective brands‟ contribution towards the expenses and capital charge in Cadbury India. 3. Gross Margin %, Marketing, Overheads and Miscellaneous Expenses as a percentage of sales, Capital Employed as a percentage of sales are constant from 2009 – 2011 4. Terminal Value is 2%Brand Valuation:At the end of the valuation, it was found that Cadbury Dairy Milk has a brand value of Rs.2630crores and Cadbury 5 Star has a brand value of Rs. 465 crores 17
  18. 18. RECOMMENDATIONCadbury Dairy Milk has a brand value of Rs.2630 crores and it falls under Quadrant B as per the2*2 model constructed between Role of Brand and Brand Strength Score. From the above twostatements, it can be found that Cadbury Dairy Milk has high brand elasticity. Thus, as anadditional support to Brand Leveragability Model (conducted in Phase-2), Cadbury Dairy Milkhas a high chance of success if extended to cookies and cakes category. REFERENCES 2003-06 hopes-to-sustain-20-growth.html 18