It has long been acknowledged that powerful brands drive consumer choice, improving business performance and ultimately increasing shareholder value. However, for the first time the extent of this effect has been quantified.
Valuation and strategy agency Brand Finance has been tracking the brand values of hundreds and thousands of the world’s top brands for nearly ten years. For the first time it has taken a retrospective look at the share price of the brands it has assessed, revealing a compelling link between strong brands and market performance.
The most striking finding is that an investment strategy based on the most highly branded companies (those where brand value makes up a particularly high proportion of overall enterprise value) would have led to a return almost double that of the average for the S&P 500 as a whole.
Between 2007 and 2015, the average return across the S&P was 49%. However by using Brand Finance’s data, an active investor could have generated a return of up to 97%. Investing in companies with a brand value to enterprise (BV/EV) ratio of greater than 30% would have generated a return of 94%. Investing exclusively in the 10 companies with the highest BV/EV ratios would have resulted in a 96% return.
There was a similar, though lesser, effect for brands rated as AAA or AAA+ according to Brand Finance’s Brand Strength Index (BSI™). This is the system Brand Finance uses to determine the royalty rate to be applied to a brand’s revenue information as part of a brand value calculation. A letter grade or ‘brand rating’, analogous to a credit rating, is awarded to each brand based on the results of its BSI™ assessment. A strategy based on investment in all AAA and AAA+ rated brands would have led to a return of 54% over the eight years from 2007. However if only top-rated US brands were targeted, the return would have been 87%.
Brand Finance Chief Executive David Haigh comments, “Investors should treat the findings cautiously and speak to Brand Finance before embarking on a brand-value-based investment strategy. However these findings demonstrate clearly the fundamental role played by brands in driving business performance. Anyone tasked with delivering for or reporting to shareholders should have brand strength and brand value at the forefront of their mind.”
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Important Information / Disclaimer
Brand Finance does not provide investment advice or recommendations. It is not responsible for any decisions taken by an investor.
This release is issued by Brand Finance for promotional purposes only.
This release is not intended to be relied upon as the basis for an investment decision, and is not, and should not be assumed to be, complete. This release does not itself constitute an offer to subscribe for or purchase any interests or other securities. Any investment is subject to various risks, none of which are outlined herein. All such risks should be carefully considered by prospective investors before they make any investment decision.
You are not entitled to rely on this Release and no responsibility is accepted by Brand Finance or any of its directors, officers, partners, members, employees, agents or advisers or any other person for any action taken on the basis of the content of this release. Neither Brand Finance nor any other person undertakes to provide the recipient with access to any additional information or to update this Release or to correct any inaccuracies therein which may become apparent.
No undertaking warranty or other assurance, express or implied, is made or given by or on behalf of Brand Finance or any of its respective directors, officers, partners, members, employees, agents or advisers or any other person as to the accuracy or completeness of the information or opinions contained in this Release and no responsibility or liability is accepted by any of them for any such information or opinions.
Past performance is not indicative of future results. The value of investments may fall as well as rise and investors may not get back the amount invested. Changes in rates of foreign exchange may cause the value of investments to go up or down. No representation is being made that any of the companies Brand Finance has analysed will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.
Investors should always seek their own independent financial, tax, legal and other advice before making a decision to invest.
Statements contained in this Release that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Brand Finance. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. In addition, this Release contains “forward-looking statements.” Actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements.
Certain economic and market information contained herein has been obtained from published sources prepared by third parties and in certain cases has not been updated to the date hereof. While such sources are believed to be reliable, neither Brand Finance nor any of its directors, partners, members, officers, employees, advisers or agents assumes any responsibility for the accuracy or completeness of such information.
No person, especially those who do not have professional experience in matters relating to investments, must rely on the contents of this Release. If you are in any doubt as to the matters contained in this Release you should seek independent advice where necessary.
This Release has not been submitted to or approved by the securities regulatory authority of any state or jurisdiction.
Brand Finance is the world’s leading brand valuation consultancy. Bridging the gap between marketing and finance, Brand Finance evaluates the strength of brands and quantifies their financial value to help organisations of all kinds make strategic decisions.
Headquartered in London, Brand Finance has offices in over 20 countries, offering services on all continents. Every year, Brand Finance conducts more than 5,000 brand valuations, supported by original market research, and publishes nearly 100 reports which rank brands across all sectors and countries.
Brand Finance is a regulated accountancy firm, leading the standardisation of the brand valuation industry. Brand Finance was the first to be certified by independent auditors as compliant with both ISO 10668 and ISO 20671, and has received the official endorsement of the Marketing Accountability Standards Board (MASB) in the United States.
Brand is defined as a marketing-related intangible asset including, but not limited to, names, terms, signs, symbols, logos, and designs, intended to identify goods, services, or entities, creating distinctive images and associations in the minds of stakeholders, thereby generating economic benefits.
Brand strength is the efficacy of a brand’s performance on intangible measures relative to its competitors. Brand Finance evaluates brand strength in a process compliant with ISO 20671, looking at Marketing Investment, Stakeholder Equity, and the impact of those on Business Performance. The data used is derived from Brand Finance’s proprietary market research programme and from publicly available sources.
Each brand is assigned a Brand Strength Index (BSI) score out of 100, which feeds into the brand value calculation. Based on the score, each brand is assigned a corresponding Brand Rating up to AAA+ in a format similar to a credit rating.
Brand Finance calculates the values of brands in its rankings using the Royalty Relief approach – a brand valuation method compliant with the industry standards set in ISO 10668. It involves estimating the likely future revenues that are attributable to a brand by calculating a royalty rate that would be charged for its use, to arrive at a ‘brand value’ understood as a net economic benefit that a brand owner would achieve by licensing the brand in the open market.
The steps in this process are as follows:
1 Calculate brand strength using a balanced scorecard of metrics assessing Marketing Investment, Stakeholder Equity, and Business Performance. Brand strength is expressed as a Brand Strength Index (BSI) score on a scale of 0 to 100.
2 Determine royalty range for each industry, reflecting the importance of brand to purchasing decisions. In luxury, the maximum percentage is high, while in extractive industry, where goods are often commoditised, it is lower. This is done by reviewing comparable licensing agreements sourced from Brand Finance’s extensive database.
3 Calculate royalty rate. The BSI score is applied to the royalty range to arrive at a royalty rate. For example, if the royalty range in a sector is 0-5% and a brand has a BSI score of 80 out of 100, then an appropriate royalty rate for the use of this brand in the given sector will be 4%.
4 Determine brand-specific revenues by estimating a proportion of parent company revenues attributable to a brand.
5 Determine forecast revenues using a function of historic revenues, equity analyst forecasts, and economic growth rates.
6 Apply the royalty rate to the forecast revenues to derive brand revenues.
7 Discount post-tax brand revenues to a net present value which equals the brand value.
Brand Finance has produced this study with an independent and unbiased analysis. The values derived and opinions presented in this study are based on publicly available information and certain assumptions that Brand Finance used where such data was deficient or unclear. Brand Finance accepts no responsibility and will not be liable in the event that the publicly available information relied upon is subsequently found to be inaccurate. The opinions and financial analysis expressed in the study are not to be construed as providing investment or business advice. Brand Finance does not intend the study to be relied upon for any reason and excludes all liability to any body, government, or organisation.
The data presented in this study form part of Brand Finance's proprietary database, are provided for the benefit of the media, and are not to be used in part or in full for any commercial or technical purpose without written permission from Brand Finance.