Schurch explains that it’s a “spreadsheet-driven process,” which quantifies the metrics and assigns them different weightings. The most important metric, Schurch says, is brand support and how it relates to the metrics addressing trends. He says that analysis has helped shift the finance department’s perception of brand support, helping them to view spending on advertising and the like more as an investment than an expense.
“Traditional finance directors would look to reduce costs all the time—’We can always improve short-term profitability by turning off the support tap.’ But we assess it as an investment. It is about encouraging the right behaviour in the business,” he says.
Into the Future
At least once a year now, RHM’s finance department assesses each brand’s value. To do so, Schurch uses a forecast of a brand’s annual economic value added (EVA) for five years. “The EVA figure is then adjusted to discount it for things like ‘technical functionality’—such as, a cake might be the only one of its type in the market—to distil what EVA is due purely to brand reputation,” he explains. This adjusted EVA forecast is discounted back to a net present value (NPV) using a discount rate based on a brand’s strength as calculated with the seven metrics. In practice, the discount rate usually ranges from 7% to 15%. Finance also assesses likely returns on advertising before any funding is committed, using classic discounted cash flow techniques treating advertising spend as a long-term investment.
“You are only as good as your assumptions, but you do have a rigorous framework,” says Schurch. “I use the results to test for deterioration in the brands. If there has been any, then I’ll jump all over marketing.”
A recent example he cites is Bisto. With a market share of 62% in the UK and annual sales of about £90m, it’s one of the company’s oldest and strongest brands. A brand-valuation exercise last year showed some deterioration in its scores, leading to the conclusion that RHM had been taking it for granted and not giving it sufficient support. The result was a decision to increase the annual support budget by 30%, or £1.5m.
Schurch says that he, like other CFOs, has little interest in the debate about finding a static value so that brand assets can be put on the balance sheet. “I’m much more interested in corporate value, and a lot of reporting standards seem to be going that way. We think with our system we’re at a place where the financial community can understand what we’re doing.”
The Tough Questions
Not everyone is a fan of the brand valuation concept. Patrick Barwise, professor of management and marketing at the London Business School, has long argued against putting intangible values on the balance sheet. He contends that the essence of brand value is like reputation, and is not something that can be separated properly from the business as a whole and quantified. If a company isn’t buying or selling a brand, he says, putting a theoretical value on it requires forecasting the future, which itself depends on a whole range of hard-to-quantify variables.