Following the introduction of plain packaging for tobacco products and repeated calls to extend the legislation to other sectors, Brand Finance has once again analysed the potential impact of such a policy on food and beverage brands in four categories: alcohol, confectionery, savoury snacks, and sugary drinks. Responding to growing demand for more up-to-date analysis, this second iteration of the Brand Finance Plain Packaging report builds on the findings of the original 2017 study and is being launched today at the Food Ethics Council’s Food Policy on Trial event in London.
Eight major brand-owning companies are predicted to lose a total of US$234.0 billion, with alcohol and sugary drinks brands the most vulnerable. Given the growth of brand values over the last two years, the estimation is nearly US$50 billion larger than the US$186.7 billion calculated in 2017, when the first study was conducted.
Alcoholic drinks producers like Heineken, AB InBev, and Pernod Ricard would see 100% of their revenues exposed to the legislation, jeopardising the current business model.
Pernod Ricard, at 36.2%, has the largest proportion of enterprise value at stake. Similar to other drinks giants, AB InBev and The Coca-Cola Company are both set to lose over a quarter of their enterprise value. They are also the two corporations in the study with most absolute value at risk: US$64.6 billion and US$57.2 billion respectively.
PepsiCo, owner of popular snack brands such as Lay’s, Doritos, and Cheetos, as well as its iconic eponymous soft drink brand, would see over two-thirds of its brands affected by legislation, the highest proportion of any company outside of alcoholic beverages.
An extrapolation of the results to all major alcohol and sugary drinks brands, points towards a potential loss of US$430.8 billion for the beverage industry globally.
The estimates refer to the loss of value derived specifically from brands and do not account for further potential losses resulting from changes in price and volume of the products sold, or illicit trade. Therefore, the total damage to businesses affected is likely to be higher.
This should raise concerns not only for brand owners, but also for governments, policy makers, marketers, and campaigners.
David Haigh, CEO of Brand Finance, commented:
“Since we produced the first Brand Finance Plain Packaging report in 2017, a number of other countries have either implemented – or legislated for – plain packaging for tobacco products. With health advisors labelling obesity ‘the new smoking’, it is not surprising that there have been repeated calls for this type of legislation to be expanded into the food and drinks sectors. It is obvious, however, that this would severely damage these companies’ business values.”
David added: “However, the predicted loss of brand contribution to companies at risk is just the tip of the iceberg. Plain packaging would also lead to losses in the creative industries, including design and advertising services, which are heavily reliant on FMCG contracts.”
Plain packaging is often referred to as a branding ban or brand censorship. By imposing strict rules and regulations, the legislator requires producers to remove all branded features from external packaging, except for the brand name written in a standardised font, with all surfaces in a standard colour.
An increasing number of countries are introducing strict regulations on the marketing and advertising of food and drink products in an attempt to prevent obesity and lifestyle diseases. With calls for more intrusive measures growing, the prospect of further applications of plain packaging looks increasingly likely.
In 2015, the WHO-backed Tobacco Atlas, called for extending plain packaging to alcohol and some food and drink products. In 2016, Public Health England released a report calling for plain packaging to be considered for alcohol. In October last year, Ireland passed a Bill to introduce mandatory, sizeable health warning labels on all alcohol products, cautioning against the risk of cancer. Earlier this year, UK think tank, the Institute for Public Policy Research, called for plain packaging to be extended to all confectionary, crisps and sugary drinks, to put them on ‘a level playing-field with fruit and vegetables’.
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About Brand Finance
Brand Finance is the world’s leading independent brand valuation consultancy, with offices in over 20 countries. Brand Finance bridges the gap between marketing and finance by quantifying the financial value of brands.
Brand Finance helped craft the internationally recognised standard on Brand Valuation – ISO 10668, and the recently approved standard on Brand Evaluation – ISO 20671.
Brand Finance is a chartered accountancy firm regulated by the Institute of Chartered Accountants in England and Wales (ICAEW), and also the first brand valuation consultancy to join the International Valuation Standards Council (IVSC).
Brand Finance’s brand value rankings have been certified by the Marketing Accountability Standards Board (MASB) through the Marketing Metric Audit Protocol (MMAP), the formal process for validating the relationship between marketing measurement and financial performance.
Royalty Relief Approach
Brand Finance’s proprietary valuation methodology was adapted to consider the impact to brand and enterprise value in the absence of certain branding elements as a result of plain packaging. Brand Finance uses the royalty relief method, a variant of the income approach to brand valuation. Under this method, brand value is represented as the net economic benefit that a licensor would achieve by licensing their brand in the open market.
Brand Strength Index
Brand Finance assesses the strength of a brand using a balanced scorecard of metrics evaluating marketing investment, stakeholder equity, and business performance, known as the Brand Strength Index (BSI) to determine a score out of 100 for each brand. A weak brand usually commands a BSI score in the range of 50 to 70. We assumed that in the absence of branded packaging, the score would be 60, the mid-point of this range, in order to keep the assessment of loss conservative.
Determining the Royalty Rate
The BSI score is used to set a royalty rate that the licensor could charge for licensing their brand. Brand Finance determines a royalty range for each specific industry, from 0% to a maximum percentage, based on the importance of brand to purchasing decisions in that industry. In luxury, the maximum percentage is high, in extractive industry, where goods are often commoditised, it is lower. The range is determined via reference to comparable real-world licensing agreements for that industry.
To determine the royalty rate for a specific brand, the BSI score is applied to the relevant royalty range. A BSI score of 60 and a royalty range of 0% to 5% would mean a royalty rate of 3% for that specific brand. The royalty rate is applied to a forecast of future revenues. The resulting figures are then discounted back to net present value to determine the value of the brand.
Since this methodology calculates the value of the brand to the owner and licensor of a brand but not the operator and licensee, a modifier was used to calculate brand contribution, which is the total value to a company that both owns and operates a brand. A rule of thumb in many licensing transactions is to calculate the uplift that would be created by a brand’s use and then split it 50:50 to start negotiations. Taking this assumption into account, the brand value was doubled in order to calculate the brand contribution.
Sample and Calculating the Implied Loss
We identified alcohol, confectionery, savoury snacks, and sugary drinks as potential targets for plain packaging legislation. For the analysis, eight major, international companies, predominantly from the Global Fortune 500 list, with multiple brands in at risk sectors were sourced as case studies. The companies analysed were AB InBev, The Coca-Cola Company, Danone, Heineken, Mondelēz International, Nestlé, PepsiCo, and Pernod Ricard.
When studying each company, we looked at all brands in the portfolio, with the largest brands representing at least 80% of each company’s revenue analysed individually and the smaller brands analysed collectively. Based on the branded products’ segment, brands were judged as belonging to the affected categories (such as alcohol, confectionery, savoury snacks, and sugary drinks) and unaffected categories (such as those operating in still water or yogurt).
The brands in the affected categories were analysed with BSI scores based on the present situation first, and then with scores tapering down to 60 over the five-year explicit period, to represent a phased plain-packaging scenario. The combined difference in brand contribution between these two sets of information is the total loss to brand and therefore enterprise value.
Extrapolation to the Beverage Sector
Our analysis shows that companies which own sugary drinks and alcoholic beverage brands will be impacted the most by the introduction of plain packaging legislation. Looking beyond the five drinks companies included in the study, the implied loss for the beverage industry as a whole after the introduction of plain packaging can be estimated at a whopping US$430.8 billion.
The multiples for this extrapolation were obtained by identifying the percentage loss of brand contribution for five companies from the sample that operate brands within the alcohol and sugary drinks categories. The multiples were then applied across Brand Finance’s database of the largest global beverage brands whose parent companies have an enterprise value of more than US$1.0 billion, to arrive at the estimated loss in brand contribution value to the sector.