13 Sep’18

Should Your Toothpaste Company Launch a Frozen Food Line? A Closer Look at Brand Extendibility

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Brand equity (often equated with brand value) is an all-encompassing measure of the benefits that a company receives from its brand as a result of its cumulative marketing and brand maintenance efforts. There are various valuation methodologies that attempt to assign a specific monetary value to a given brand which range from simple cash flow models to complex combinations of various rankings and analyses (such as the methodology used by Interbrand). In an article titled Brand Equity: An Overview published out of the University of Virginia, brand equity is said to encompass the following measures:

Brand Association: What triggers consumers to think of the brand and what comes to mind when they see the brand

Brand Vision: The way the brand presents itself and reflects the overall business strategy

Brand Positioning: How to brand positions itself in the target market relative to competitors

Brand Image: How consumers view the brand and what target personas the company wants to associate with the brand

Brand Awareness: A measure of how well consumers recognize the brand; on a scale from “Unaware” to “Top of Mind Awareness”

Brand Loyalty: How likely consumers are to switch between brands within the same product category

 Brand Extendibility: Potential to leverage the positive perceptions associated with the brand to new customers

Each one of these components of brand equity deserves to be explored at length; however, this piece will focus on exploring Brand Extendibility in further detail. As mentioned in a previous post, the direct monetary benefits that a well-constructed brand offers the company are traditionally boiled down to 2 main categories; the ability to charge premium prices, and diminishing marginal marketing costs as a company expands. Brand Extendibility is the main value driver of the second category. A company can introduce its brand to new customers in 1 of 2 ways. First, a company can launch a new product in a new product category. Modern tech companies are a great example of utilizing Brand Extendibility in this way. For example, Amazon has successfully launched products in the e-reader, virtual assistant, tablet, and smart TV product categories (among many others) all under the Amazon name which has become known for its highly efficient and customer centric image. The second method of brand introduction to new customers is extending to a different target market within the same product category. Proctor & Gamble has done an excellent job of this over the years. For example, P&G has extended the Tide brand to many different subcategories within the broader detergent category, and has extended its Crest brand to many different subcategories of the broader oral care category. Under both of these brand extension methodologies, a strong brand relieves the parent company of a great deal of marketing and other brand building expenses. Similar to the concept of economies of scale, where a company’s fixed costs become less significant as production of a product increases, Brand Extendibility reduces the significance of marketing costs as the brand extends to new products and customers.

It is important to remember, however, that a brand can be over extended. When this happens, the value of the brand can actually take a hit, as the intended messages and associations begin to get diluted (appropriately called “Brand Dilution”). Think Harley-Davidson Perfume, or Colgate Beef Lasagna. You can imagine the rugged image of Harley taking a hit as bottled fragrances hit the shelves, and Colgate’s association with freshness and cleanliness beginning to fade when depicted next to layers of marinara sauce in the frozen foods section. The lesson is not only to intelligently manage the brand internally, but also to develop restrictions on who licenses your brand and under what terms. Unfortunately, there are times when a brand extension is attempted without the company’s permission.

Such was the case with In-N-Out Burger, when a micro-brewery launched a new beer called the “Neapolitan Milkshake Stout” back in July. The Neapolitan Milkshake may be ubiquitous with the burger chain for some west coast residents, but the real problem was the proposed can design for the beer, which mimicked the In-N-Out soda cup design almost exactly and used a clear copy of the company’s logo bearing the text “In-N-Stout.” You can imagine the In-N-Out executives’ reaction to seeing their clean-cut brand being used to market what some would consider a vice. If this were a deliberate move made by In-N-Out burger to try and extend their brand to the adult beverage market, we would have to question the thought process behind the decision and wonder whether or not this would actually serve to damage the family-friendly brand. In this case, however, the release of the product was out of the company’s control, and thus, swift action was the only way to mitigate such potential damage to brand equity. Fortunately, In-N-Out’s legal team crafted arguably the perfect response; issuing a pun-filled cease and desist notice which has received a great deal of publicity to date. One could argue that this response and the press coverage that followed may have actually resulted in increased brand equity.

Surprisingly, this is not the sole case of a questionable brand extension into the beer arena. Back in 2015, breakfast cereal brand Wheaties teamed up with a micro-brewery in Minnesota to launch the “HefeWheaties” beer in an intentional brand extension effort. Whether or not this extension positively or negatively affected the Wheaties brand equity can be debated; however, the value-add of Brand Extendibility is clear. When a recognizable and respected brand is used in the marketing of a new product, the marketing team benefits from all past branding efforts and is relieved to a certain degree of expenses that they would normally have to incur in launching an entirely new brand. Imagine the relative expenses that Apple (the world’s most valuable brand) will undertake when it finally launches its rumored Apple Car, compared to the expenses that will arise when Wheaties inevitably launches its own electric vehicle.

Full article here
31 Jul’18

Preventing Brand Value from Going Up in Flames

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A brand can be one of a company’s most valuable assets. As written in a previous post, 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 publicly reported asset values.

Traditionally, the value that a brand (including all accompanying trademarks, copyrights, etc.) provides to a company can be boiled down to 2 main categories; ability to charge premium prices, and 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 different ways, which results in higher priced phones, computers, tablets etc. While 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 excessive prices.  The value of the Apple brand is on full display when looking at industry profit statistics. According to 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 previous quarter.

Given the immense value that a well-established brand can provide, it is unsurprising that many companies take extreme measures when it comes to protecting that asset. The traditional measures that companies take to protect their brand include setting 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 “traditional” 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 copyrights by employing staff to search for instances where such use does not comply with their standards in an effort to intervene and avoid any lasting damage to the brand.

Aside from these traditional efforts, some companies take brand protection to the next level. According to a recent BBC article, 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 furnace that captures the energy from the process for re-use (which does little to please the environmental proponents who oppose this process). Over the past 5 years, it is estimated that more that £90 million worth of Burberry goods have suffered the fate of the furnace – 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 million 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 developing new intangible assets.

It is important to note that Burberry is not alone in the practice of destroying its unsold goods for the purpose of protecting its brand. Constant pressure from shareholders for expansion and production often pushes fashion companies to produce excess stock – presenting them with the choice between costly inventory repurchases (regularly followed by destruction) or running the risk of brand dilution and devaluation. The measures that these companies go to in order to protect their brand is a clear indication 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.

Full article here
05 Jun’18

Geoffrey the $500M Giraffe

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The Toys “R“ Us bankruptcy has been in the news over the last year. The company’s downfall has been well documented, and the unfortunate fate of the brand that has been ubiquitous in the toy world for several generations of kids and parents was emotional for many. Although a variety of shortcomings of the company’s long-term strategy and operations have come to light, it seems that a solid intellectual property strategy may be offering the toy retailer a small “saving grace” as its story comes to a close – or at least some hope for the company’s creditors.

As part of the bankruptcy proceedings, Toys “R” Us is auctioning off much of its intellectual property (IP) to help cover its debt and legal fees. The IP in the sale includes the Toys “R” Us name, the Babies “R” Us brand, a collection of domain names, and the beloved Geoffrey the Giraffe mascot and logo.  More specifically, according to an article on Entrepreneur.com, the sale of the IP is expected to cover $200 million in debt and anticipated legal fees of up to $348 million (fees which they keep accruing at an astounding rate of $1,745/hour, according to one NY Times article)– for a total of nearly $550 million. Important to note is that the IP value proxy for Toys “R” Us was determined based on a likely value to be realized at an auction. Historically, intangible assets have sold at steep discounts through the auction process, and the true value of the IP assets is presumably much greater in the hands of the buyer.

According to US generally accepted accounting principles (GAAP) as well as the international financial reporting standards (IFRS) a company’s internally-generated intangible assets, including brands and related trademarks, are not reported as an asset on the company’s balance sheet.  As a result of this reporting gap, investors, as well as the general public, never gain a full understanding of the fair value of such intangible assets. In this case, although an official valuation of the Toys “R” Us brand has not been disclosed in the company’s financial statements, we get a glimpse at just how valuable a solid IP portfolio can be, as we see its potential to cover millions in debt and legal fees. For purposes of this post only, we compared the anticipated IP value of $548 million against Toys “R” Us’ last available balance sheet as of October 28, 2017, as seen below:

We specifically highlight the comparison of IP value to the Total Asset Value of Toys “R” Us. We see that the assumed IP value represents 8% of the total reported assets for the company – a significant proportion for an asset that goes unreported. Naturally, one would classify any asset representing 8% of the total book value as a fairly significant asset. However, when we look at some of the world’s most valuable consumer brands, we see that brands can actually have the potential to account for a far more significant portion of Total Asset Value, as reported on the balance sheet. Every year, Interbrand (a UK-based marketing consulting firm) publishes its “Best Global Brand Rankings” in which it ranks companies by the value of their respective brands. To better understand the hidden, off balance sheet value of IP assets, we applied the same IP Value-to-Total Asset Value ratio that we examined with Toys “R” Us to 3 of the top-ranked consumer brands in the study. According to Interbrand’s 2017 brand ranking study, Apple, Coke, and Nike boast brand values of $184 billion, $70 billion, and $27 billion respectively. Taken alone, these values are significant; however, when compared to the Total Asset  Value on each company’s balance sheet, we begin to see the true magnitude of these unreported assets. Below is a table showing the brand value as a percentage of the most recently reported Total Asset Value for each of these 3 companies:

It is eye opening, to say the least, seeing the relative value of these “hidden” assets for some of the world’s largest companies. Nike, for example, owns a brand that is worth over 100% of the total value of its publicly disclosed assets. Apple’s brand is reportedly worth 50% of its total asset value – and it is important to remember that the Interbrand values do not include other forms of IP, such as patents, technology, know-how, etc. which are highly valuable intangible assets for Apple.

Since internally generated intangible assets are not reported in financial statements, in many cases, the public does not gain an understanding of the assets’ fair value until these assets are sold independently or as part of an M&A deal.  When a company experiences financial distress and is forced to liquidate its assets to pay back creditors (see the Nortel IP auction for one of the most famous instances), often IP assets are the only assets which have value, since they can be monetized at the hands of a new buyer. Such is the case with Toys “R” Us; we did not see the true value of Geoffrey the Giraffe until it was too late.

Full article here