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The Licensing Journal, October 2018: Preventing brand value from going up in flames

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The Licensing Journal, October 2018: Preventing brand value from going up in flames

  1. 1. SEPTEMBER 2018 T h e L i c e n s i n g J o u r n a l A Licensing OCTOBER 2018 DEVOTED TO LEADERS IN THE INTELLECTUAL PROPERTY AND ENTERTAINMENT COMMUNITY V O L U M E 3 8 N U M B E R 9 Edited by Gregory J. Battersby and Charles W. Grimes THE Journal
  2. 2. OCTOBER 2018 T h e L i c e n s i n g J o u r n a l 1 copyrights by employing staff to search for instances where such use does not comply with their standards in an effort to inter- vene and avoid any lasting dam- age to the brand. Aside from these traditional efforts, some companies take brand protection to the next level. According to a recent BBC article (www.bbc.com/news/busi- ness-44885983), luxury fashion retailer Burberry literally burned £28.6 million worth of clothes, accessories, and perfumes last year. In an effort to protect the Burberry brand from dilution via unwanted discount sales or theft, the company incinerates its excess stock in a specially designed fur- nace that captures the energy from the process for re-use (which does little to please the environmental proponents who oppose this pro- cess). Over the past five years, it is estimated that more that £90 million worth of Burberry goods have suffered the fate of the fur- nace—which gives us a pretty good understanding of just how highly the company values its brand. For further context, we can examine Burberry’s most recent Annual Report, dated June 6, 2018. The company reports roughly £19 mil- lion and £40 million in “Additions” to its “Intangible assets in the course of construction” over the last 2 years. From this we gather that Burberry incinerates tangible goods for the sake of protecting its brand that are valued at amounts nearly equal to, if not greater than, the amount it spends on develop- ing new intangible assets. It is important to note that Burberry is not alone in the prac- tice of destroying its unsold goods for the purpose of protecting its brand. Constant pressure from shareholders for expansion and production often pushes fash- ion companies to produce excess stock—presenting them with the Brand Licensing Sebastian Custodia Preventing Brand Value from Going Up in Flames A brand can be one of a com- pany’s most valuable assets. As discussed in “Geoffrey the $500M Giraffe” (http://foresightvaluation. com/geoffrey-the-500m-giraffe/), the value of a brand has the potential to cover millions of dollars in debt and fees during liquidation events and can even represent values greater than 100% of a company’s reported asset values. Such was the case when Toys “R” Us auc- tioned off much of its intellectual property, including the Toys “R” Us name, the Babies “R” Us brand, its collection of domain names, and the beloved Geoffrey the Giraffe mascot and logo to cover its accu- mulated debt and legal fees as a result of bankruptcy proceedings. Traditionally, the value that a brand (including all accompany- ing trademarks, copyrights, etc.) provides to a company can be boiled down to two main cate- gories: the ability to charge pre- mium prices and the ability to take advantage of diminishing marginal marketing costs as a company expands. A strong brand can allow a business to charge premium prices for its products and/or services, above and beyond what a consumer would typically be willing to pay. The most obvious example of this branding power at play is with Apple. Fanatics (myself included) will argue that Apple products are superior to the competition in many differ- ent ways, which results in higher priced phones, computers, tablets, etc. Although superior product features certainly contribute to the company’s premium prices, it is undeniable that the brand—which has become synonymous with quality, design, and innovation— drives consumers to pay exces- sive prices. The value of the Apple brand is on full display when look- ing at industry profit statistics. According an Investor’s Business Daily article published in February of this year, Apple claimed 87% of total industry-wide smartphone profits while only accounting for 18% of unit sales in the previ- ous quarter. (www.investors.com/ news/technology/click/apple-rakes- in-bulk-of-smartphone-profits-but- small-slice-of-unit-sales/). Going to Great Lengths to Protect Brands Given the immense value that a well-established brand can provide, it is unsurprising that many companies take extreme measures when it comes to pro- tecting that asset. The traditional measures that companies take to protect their brand include set- ting strict internal regulations on how the brand is used, as well as air-tight restrictions on how the brand is used externally for brand representatives or licensees. A good example of these “tradi- tional” brand protection efforts is the Louis Vuitton lawsuit against My Other Bag, claiming that the parody handbags dilute the “distinctive quality” of the Louis Vuitton trademarks. In fact, many companies actively police the use of their trademarks and
  3. 3. Copyright © 2018 CCH Incorporated. All Rights Reserved. Reprinted from The Licensing Journal, October 2018, Volume 38, Number 9, pages 20–21, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.WoltersKluwerLR.com choice between costly inventory repurchases (regularly followed by destruction) or running the risk of brand dilution and devalu- ation. The measures that these companies go to in order to pro- tect their brand is a clear indica- tion of just how valuable they are. Burberry and its peers watch tangible value go up in flames to secure the massive future cash flows made possible by their intangible assets. Sebastian Custodia is an Associate at Foresight Valuation Group, a Silicon Valley–based intellectual property advisory firm, where he specializes in the valuation of intellectual property assets including patents, brands, trade secrets and software. His experience in finance also includes work in M&A advisory, high-tech compensation consulting, and solar energy financing. He holds a B.S. in Finance from Santa Clara University and is currently pursu- ing his MBA at the USC Marshall School of Business.

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