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PRAXIS BUSINESS SCHOOL

        Brand Valuation - ‘Cadbury Dairy Milk’




Submitted To:     Prof. Srinivas Govindrajan



Presented By:     Ankita Singh

                  Arunachalam Ramanathan

                  GauravTalwar

                  Zeeshan Mohammad

                                 1
EXECUTIVE SUMMARY
In Phase-2, equity of a brand was measured to determine the retention capacity of Cadbury Dairy
Milk in the market, under any circumstances. It also talked about the added value endowed on
products and it determined the capability of generating future cash flows. In order to measure
Brand Equity for Cadbury Dairy Milk, three models were used:

                  Colombo Morrison Model
                  Van Westendorp Price Sensitivity Meter
                  Brand Leveragability Model

In Phase-3, brand valuation was performed to determine the value of Cadbury Dairy Milk. In
order to perform the valuation, Interbrand methodology was used.

In 2010, Kraft Foods acquired Cadbury India and thus the balance sheet was available only till
2009-10. With the following actual information and assumptions, the Interbrand model was
constructed:

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
In order to calculate the Brand Strength Score, the seven parameters (Market, Stability,
Leadership, Profit trend, Support, Geographic Spread and Protection) were considered. To
calculate Role of Brand Index, the percentage of consumers who purchased the chocolate only
for 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 above
scores, it was found that Cadbury Dairy Milk falls under Quadrant B i.e low Role of Brand and
High Brand Strength Score. As per this quadrant, it means that Cadbury Dairy Milk can be
extended to different categories i.e it has high brand elasticity. From this model and from Brand
Leveragability Model (conducted in Phase-2), it can be seen that Cadbury Dairy Milk has a high
chance of success if launched in cookies and cakes category.




                                               3
TABLE OF CONTENTS

S.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
BRAND VALUATION

Brands play an important role in generating and sustaining the financial performance of
businesses. With high levels of competition and excess capacity in virtually every industry,
strong brands help companies differentiate themselves in the market and communicate why their
products 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 tangible
assets (such as property, plant, equipment and inventory) to intangible assets (such as skilled
employees, patents, business systems and brands). This is reflected in the growing divergence
between the net asset value of companies and their market capitalization. There are a number of
recognized methods for valuing trademarks or brands.

Cost Based Approach: This approach takes into account all the costs involved in building the
brand. 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 book
value of the company is deducted from its market capitalization, to arrive at the value of the
intangible asset, i.e. the brand.

Discounted Cash Flow Method: In this method, the cash flows are estimated and discounted to
come at the Present Value of the firm.

Price Premia Model: This model helps to assess how much premium a particular brand can
charge from the consumers. This is more applicable to products, which are more like
commodities.

Fifteen years ago, Interbrand conducted the first ever brand valuation for Rank Hovis McDougal.
This exercise succeeded in putting the worth of the company's brands as a figure on the balance
sheet. RHM's management wanted this information to fight a hostile takeover bid. With the
brand value information, the RHM board was able to go back to investors and argue that the bid
was too low, and eventually repel it.




                                                 5
It was the wave of brand acquisitions in the late 1980's that exposed the hidden value in highly
branded companies and brought brand valuation to the fore. Some of these acquisitions included
Nestlé buying Rowntree, United Biscuits buying and later selling Keebler, Grand Metropolitan
buying Pillsbury and DANONE buying Nabisco's European businesses. All these acquisitions
were at high multiple price tags. The amount being paid for the acquisition of a strongly branded
company was increasingly higher than the value of the company's net tangible assets. This
resulted in huge levels of 'goodwill' arising on acquisition. This 'goodwill' actually disguised a
mix 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 in
1981 net tangible assets represented 82% (on average) of the amount bid for companies, by1988
this had fallen to just 56%. It became clear that companies were being acquired less for their
tangible 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 brand
management and strategy. Companies are increasingly recognizing the importance of brand
guardianship and management as key to the successful running of any business. The values
associated 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 and
familiarity. In return businesses enjoy a secured earning by loyalty of customers who have
'bought 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
THE INTERBRAND METHODOLOGY

The Interbrand methodology is the most recognized of all methodologies. Interbrand method
takes into account the ongoing investment and management of the brand as a business asset. The
brand value obtained can be used to guide strategic brand management so that the business can
make 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 separately
identifiable, 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
METHODOLOGIES FOLLOWED BY INTERBRAND




1. Market Segmentation: Brands influence customer choice; however, their influence differs
depending 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 as
product or service, distribution channels, consumption patterns, purchase sophistication,
geography, or existing and new customers. The brand is valued for each segment, and the sum
of the segment valuations constitutes the total value of the brand.

2. Financial analysis: In the financial analysis, forecast current and future earnings specifically
attributable to the branded products and then subtract operating costs from revenue to calculate
branded operating profit. Then, apply a charge to the branded profit for capital employed, giving
us the brand‟s economic earnings

Financial performance measures an organization‟s financial return to its investors. For this
reason, it is analyzed as economic profit, a concept akin to EVA (Economic Value Added). To
determine economic profit, taxes are removed from net operating profit to get to net operating
profit after tax (NOPAT). From NOPAT, a capital charge is subtracted to account for the capital
used to generate the demand revenues: this provides the economic profit for each analyzed year.
Financial performance is studied across each individual segment.




                                                 8
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. Intangible
earnings are defined as branded revenues minus operating costs, applicable taxes, and a charge
for 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 for
products and services in the markets in which it operates to determine what proportion of
intangible earnings are attributable to the brand measured by an indicator referred to as the “Role
of Branding Index,” which is calculated by first identifying the various drivers of demand for the
branded business, then determining the degree to which each driver is directly influenced by the
brand. The role of branding represents the percentage of intangible earnings generated by the
brand. Brand earnings are derived by multiplying the role of branding by intangible earnings.

5. Competitive Benchmarking: Determine the competitive strengths and weaknesses of the
brand to derive the specific brand discount rate that reflects the risk profile of its expected future
earnings, as measured by an indicator referred to as the “Brand Strength Score,” which
comprises extensive competitive benchmarking and a structured evaluation of the brand‟s
market, stability, leadership position, growth trend, support, geographic footprint, and legal
protect ability.

6. Brand Value Calculation: Brand value is the net present value (NPV) of the forecast brand
earnings, discounted by the brand discount rate. The NPV calculation includes both the forecast
period and the period beyond, reflecting the ability of brands to continue generating future
earnings.




                                                  9
DETERMINATION OF ROLE OF BRAND INDEX

The Role of Brand Index is a measure of how much of the customer demand was dependent on
the brand at the point of purchase and is applied to the economic earnings to arrive at Branded
Earnings. 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 from
Interbrand‟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 industry
benchmarks.

The Role of Brand Index (RBI) measures how much of the decision to purchase is attributable to
the Brand Power, regardless of other aspects, like product price or features. RBI is defined
through an in-depth analysis based on primary research data. Because the Brand‟s role in driving
demand differs depending on geography, type of channel, this analysis is carried out for each
individual segment. RBI is combined with the economic profit of the branded products to
determine 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 customer
demand was dependent on the brand at the point of purchase. From revised Colombo Morrison
Model, the actual brand loyalty was determined. Actual brand loyalty was those customers who
were 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 Model
Cadbury Dairy Milk              9                          20                        45%
Cadbury 5 Star                  2                           7                        29%




                                                10
DETERMINATION OF BRAND STRENGTH SCORE

The Interbrand model of brand strength – part of the valuation methodology – is a useful
framework to consider the performance of a brand.

Brand Strength Score (BSS) measures the ability of the brand to secure the delivery of future
expected earnings. Brand strength is reported on a 0-100 scale, based on an evaluation across 7
dimensions of brand activation. Performance in these dimensions is judged relative to other
brands in the industry. BSS inversely determines, through a proprietary algorithm, a discount
rate. That rate is used to discount branded earnings back to a present value based on how likely
the 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
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 for
older brands and so may not give adequate recognition to the value of newer brands such as
Amazon 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
Analysis

Brand 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
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-free
rate). 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 was
7.87%. The discount rate for Cadbury 5 Star was calculated based on the following formula that
was 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
RELATIONSHIP BETWEEN ROLE OF BRAND & BRAND STRENGTH

The Role of Brand defines the degree to which demand is dependent on the brand, while Brand
Strength 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 relationship
between Role of Brand and Brand Strength.




                                        D                          A



                                        C                         B



In Quadrant A:

High Role of brand & High brand Strength is the perfect spot for the brands and at the same time
most challenging place.In turn, customers‟ attitudes and economic circumstances have changed
in responses to the shifts and thus, they continue to maintain their Brand Strength and Role of
Brand, 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 decision
and focus on price and other verifiable or “tangible” drivers




                                                15
In Quadrant B:

The brands found in Quadrant B have high Brand Strength and low Role of Brand, meaning the
brand 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 a
lower 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 new
segments. High brand Strength shows that thecustomers are loyal and thus has an edge over the
other 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 stretching
your brand out.

            Brands                     Role of Brand Index              Brand Strength Score
    Cadbury Dairy Milk                          45%                                100
       Cadbury 5 Star                           29%                                56



In Quadrant C:

In Quadrant C, brands with high Role of Brand and low Brand Strength score are found. This is a
critical spot on the matrix. In this scenario, the brand has an important influence on purchase
decisions but fails to drive ongoing demand. This means the brand is important but risky, and the
competitors tend to win the battle. Brand building is required, and fast, as the category structures
will punish weak brands.

In Quadrant D:

In Quadrant D, brands with high Role of Brand and low Brand Strength are found. The brand has
full of opportunities. However, if competitive pressure increases, the brand becomes a needed
point of difference. Increasing the Role of Brand or increasing the Brand Strength (or ideally
doing both) is the key to competitive advantage.




                                                 16
ANALYSIS OF INTERBRAND MODEL

Since Cadbury India was acquired by Kraft Foods in 2010, the balance sheet was not available
for 2010-2011 & 2011-2012.

Thus, Cadbury India‟s 2009-2010 annual report was used to determine the contribution of
Cadbury Dairy Milk and Cadbury 5 Star to the overall sales of Cadbury India. From the
calculations, it was found that 22.35% and 10.45% of the overall sales come from Cadbury Dairy
Milk 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.2630
crores and Cadbury 5 Star has a brand value of Rs. 465 crores




                                               17
RECOMMENDATION

Cadbury Dairy Milk has a brand value of Rs.2630 crores and it falls under Quadrant B as per the
2*2 model constructed between Role of Brand and Brand Strength Score. From the above two
statements, it can be found that Cadbury Dairy Milk has high brand elasticity. Thus, as an
additional support to Brand Leveragability Model (conducted in Phase-2), Cadbury Dairy Milk
has a high chance of success if extended to cookies and cakes category.




                                         REFERENCES

       http://www.webpronews.com/brand-valuation-the-seven-components-of-brand-strength-
       2003-06
       http://www.livemint.com/Companies/5NnJK87FxsWn7MZUvTq2HI/Cadbury-India-
       hopes-to-sustain-20-growth.html
       http://www.interbrand.com/




                                               18

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Brand Valuation - Cadbury Dairy Milk

  • 1. PRAXIS BUSINESS SCHOOL Brand Valuation - ‘Cadbury Dairy Milk’ Submitted To: Prof. Srinivas Govindrajan Presented By: Ankita Singh Arunachalam Ramanathan GauravTalwar Zeeshan Mohammad 1
  • 2. EXECUTIVE SUMMARY In Phase-2, equity of a brand was measured to determine the retention capacity of Cadbury Dairy Milk in the market, under any circumstances. It also talked about the added value endowed on products and it determined the capability of generating future cash flows. In order to measure Brand Equity for Cadbury Dairy Milk, three models were used: Colombo Morrison Model Van Westendorp Price Sensitivity Meter Brand Leveragability Model In Phase-3, brand valuation was performed to determine the value of Cadbury Dairy Milk. In order to perform the valuation, Interbrand methodology was used. In 2010, Kraft Foods acquired Cadbury India and thus the balance sheet was available only till 2009-10. With the following actual information and assumptions, the Interbrand model was constructed: 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. In order to calculate the Brand Strength Score, the seven parameters (Market, Stability, Leadership, Profit trend, Support, Geographic Spread and Protection) were considered. To calculate Role of Brand Index, the percentage of consumers who purchased the chocolate only for 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 above scores, it was found that Cadbury Dairy Milk falls under Quadrant B i.e low Role of Brand and High Brand Strength Score. As per this quadrant, it means that Cadbury Dairy Milk can be extended to different categories i.e it has high brand elasticity. From this model and from Brand Leveragability Model (conducted in Phase-2), it can be seen that Cadbury Dairy Milk has a high chance of success if launched in cookies and cakes category. 3
  • 4. TABLE OF CONTENTS S.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. BRAND VALUATION Brands play an important role in generating and sustaining the financial performance of businesses. With high levels of competition and excess capacity in virtually every industry, strong brands help companies differentiate themselves in the market and communicate why their products 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 tangible assets (such as property, plant, equipment and inventory) to intangible assets (such as skilled employees, patents, business systems and brands). This is reflected in the growing divergence between the net asset value of companies and their market capitalization. There are a number of recognized methods for valuing trademarks or brands. Cost Based Approach: This approach takes into account all the costs involved in building the brand. 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 book value of the company is deducted from its market capitalization, to arrive at the value of the intangible asset, i.e. the brand. Discounted Cash Flow Method: In this method, the cash flows are estimated and discounted to come at the Present Value of the firm. Price Premia Model: This model helps to assess how much premium a particular brand can charge from the consumers. This is more applicable to products, which are more like commodities. Fifteen years ago, Interbrand conducted the first ever brand valuation for Rank Hovis McDougal. This exercise succeeded in putting the worth of the company's brands as a figure on the balance sheet. RHM's management wanted this information to fight a hostile takeover bid. With the brand value information, the RHM board was able to go back to investors and argue that the bid was too low, and eventually repel it. 5
  • 6. It was the wave of brand acquisitions in the late 1980's that exposed the hidden value in highly branded companies and brought brand valuation to the fore. Some of these acquisitions included Nestlé buying Rowntree, United Biscuits buying and later selling Keebler, Grand Metropolitan buying Pillsbury and DANONE buying Nabisco's European businesses. All these acquisitions were at high multiple price tags. The amount being paid for the acquisition of a strongly branded company was increasingly higher than the value of the company's net tangible assets. This resulted in huge levels of 'goodwill' arising on acquisition. This 'goodwill' actually disguised a mix 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 in 1981 net tangible assets represented 82% (on average) of the amount bid for companies, by1988 this had fallen to just 56%. It became clear that companies were being acquired less for their tangible 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 brand management and strategy. Companies are increasingly recognizing the importance of brand guardianship and management as key to the successful running of any business. The values associated 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 and familiarity. In return businesses enjoy a secured earning by loyalty of customers who have 'bought 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. THE INTERBRAND METHODOLOGY The Interbrand methodology is the most recognized of all methodologies. Interbrand method takes into account the ongoing investment and management of the brand as a business asset. The brand value obtained can be used to guide strategic brand management so that the business can make 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 separately identifiable, 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. METHODOLOGIES FOLLOWED BY INTERBRAND 1. Market Segmentation: Brands influence customer choice; however, their influence differs depending 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 as product or service, distribution channels, consumption patterns, purchase sophistication, geography, or existing and new customers. The brand is valued for each segment, and the sum of the segment valuations constitutes the total value of the brand. 2. Financial analysis: In the financial analysis, forecast current and future earnings specifically attributable to the branded products and then subtract operating costs from revenue to calculate branded operating profit. Then, apply a charge to the branded profit for capital employed, giving us the brand‟s economic earnings Financial performance measures an organization‟s financial return to its investors. For this reason, it is analyzed as economic profit, a concept akin to EVA (Economic Value Added). To determine economic profit, taxes are removed from net operating profit to get to net operating profit after tax (NOPAT). From NOPAT, a capital charge is subtracted to account for the capital used to generate the demand revenues: this provides the economic profit for each analyzed year. Financial performance is studied across each individual segment. 8
  • 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. Intangible earnings are defined as branded revenues minus operating costs, applicable taxes, and a charge for 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 for products and services in the markets in which it operates to determine what proportion of intangible earnings are attributable to the brand measured by an indicator referred to as the “Role of Branding Index,” which is calculated by first identifying the various drivers of demand for the branded business, then determining the degree to which each driver is directly influenced by the brand. The role of branding represents the percentage of intangible earnings generated by the brand. Brand earnings are derived by multiplying the role of branding by intangible earnings. 5. Competitive Benchmarking: Determine the competitive strengths and weaknesses of the brand to derive the specific brand discount rate that reflects the risk profile of its expected future earnings, as measured by an indicator referred to as the “Brand Strength Score,” which comprises extensive competitive benchmarking and a structured evaluation of the brand‟s market, stability, leadership position, growth trend, support, geographic footprint, and legal protect ability. 6. Brand Value Calculation: Brand value is the net present value (NPV) of the forecast brand earnings, discounted by the brand discount rate. The NPV calculation includes both the forecast period and the period beyond, reflecting the ability of brands to continue generating future earnings. 9
  • 10. DETERMINATION OF ROLE OF BRAND INDEX The Role of Brand Index is a measure of how much of the customer demand was dependent on the brand at the point of purchase and is applied to the economic earnings to arrive at Branded Earnings. 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 from Interbrand‟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 industry benchmarks. The Role of Brand Index (RBI) measures how much of the decision to purchase is attributable to the Brand Power, regardless of other aspects, like product price or features. RBI is defined through an in-depth analysis based on primary research data. Because the Brand‟s role in driving demand differs depending on geography, type of channel, this analysis is carried out for each individual segment. RBI is combined with the economic profit of the branded products to determine 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 customer demand was dependent on the brand at the point of purchase. From revised Colombo Morrison Model, the actual brand loyalty was determined. Actual brand loyalty was those customers who were 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 Model Cadbury Dairy Milk 9 20 45% Cadbury 5 Star 2 7 29% 10
  • 11. DETERMINATION OF BRAND STRENGTH SCORE The Interbrand model of brand strength – part of the valuation methodology – is a useful framework to consider the performance of a brand. Brand Strength Score (BSS) measures the ability of the brand to secure the delivery of future expected earnings. Brand strength is reported on a 0-100 scale, based on an evaluation across 7 dimensions of brand activation. Performance in these dimensions is judged relative to other brands in the industry. BSS inversely determines, through a proprietary algorithm, a discount rate. That rate is used to discount branded earnings back to a present value based on how likely the 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. 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 for older brands and so may not give adequate recognition to the value of newer brands such as Amazon 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. Analysis Brand 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. 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-free rate). 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 was 7.87%. The discount rate for Cadbury 5 Star was calculated based on the following formula that was 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. RELATIONSHIP BETWEEN ROLE OF BRAND & BRAND STRENGTH The Role of Brand defines the degree to which demand is dependent on the brand, while Brand Strength 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 relationship between Role of Brand and Brand Strength. D A C B In Quadrant A: High Role of brand & High brand Strength is the perfect spot for the brands and at the same time most challenging place.In turn, customers‟ attitudes and economic circumstances have changed in responses to the shifts and thus, they continue to maintain their Brand Strength and Role of Brand, 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 decision and focus on price and other verifiable or “tangible” drivers 15
  • 16. In Quadrant B: The brands found in Quadrant B have high Brand Strength and low Role of Brand, meaning the brand 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 a lower 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 new segments. High brand Strength shows that thecustomers are loyal and thus has an edge over the other 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 stretching your brand out. Brands Role of Brand Index Brand Strength Score Cadbury Dairy Milk 45% 100 Cadbury 5 Star 29% 56 In Quadrant C: In Quadrant C, brands with high Role of Brand and low Brand Strength score are found. This is a critical spot on the matrix. In this scenario, the brand has an important influence on purchase decisions but fails to drive ongoing demand. This means the brand is important but risky, and the competitors tend to win the battle. Brand building is required, and fast, as the category structures will punish weak brands. In Quadrant D: In Quadrant D, brands with high Role of Brand and low Brand Strength are found. The brand has full of opportunities. However, if competitive pressure increases, the brand becomes a needed point of difference. Increasing the Role of Brand or increasing the Brand Strength (or ideally doing both) is the key to competitive advantage. 16
  • 17. ANALYSIS OF INTERBRAND MODEL Since Cadbury India was acquired by Kraft Foods in 2010, the balance sheet was not available for 2010-2011 & 2011-2012. Thus, Cadbury India‟s 2009-2010 annual report was used to determine the contribution of Cadbury Dairy Milk and Cadbury 5 Star to the overall sales of Cadbury India. From the calculations, it was found that 22.35% and 10.45% of the overall sales come from Cadbury Dairy Milk 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.2630 crores and Cadbury 5 Star has a brand value of Rs. 465 crores 17
  • 18. RECOMMENDATION Cadbury Dairy Milk has a brand value of Rs.2630 crores and it falls under Quadrant B as per the 2*2 model constructed between Role of Brand and Brand Strength Score. From the above two statements, it can be found that Cadbury Dairy Milk has high brand elasticity. Thus, as an additional support to Brand Leveragability Model (conducted in Phase-2), Cadbury Dairy Milk has a high chance of success if extended to cookies and cakes category. REFERENCES http://www.webpronews.com/brand-valuation-the-seven-components-of-brand-strength- 2003-06 http://www.livemint.com/Companies/5NnJK87FxsWn7MZUvTq2HI/Cadbury-India- hopes-to-sustain-20-growth.html http://www.interbrand.com/ 18