Thursday, April 2, 2009

The power of a brand name

I am sorry about the long hiatus from posting but I was at Disneyworld last week with two of my children. As we wandered from one line to another, frantically collecting fast passes along the way, I perused the merchandise that I passed by and pondered the power of a brand name. Every conceivable item that can be fashioned into Mickey Ears has been, from T-shirts to mugs to waffles. And once the Mickey logo is put on a product, the price takes a quantum leap upwards.

To me, this captures the power of a brand name. Stripped to basics, it allows you to charge a higher price for exactly the same product. Very few companies have this type of power, and if they do, it clearly pays off big time in pricing power.

What are the implications for valuation? A brand name company will have a higher value than an otherwise similar company (same products, same total revenues) without the brand name. Note, though, that I am not suggesting that we attach brand name premiums to intrinsic valuations as I have seen some people do. If you do your discounted cash flow valuation right, the brand name should already be embedded in that value. It is in every input in the valuation from base year profits, to margins to returns on capital to value. Adding a premium to a discounted cash flow valuation usually results in a double counting of the brand name value.

I have watched with some trepidation the attempts by accountants to try to put brand name value on the balance sheet, In fact, I have a paper on valuing brand name and other intangibles that you may find interesting:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1374562

I value Coca Cola's brand name value in this paper and develop general frameworks that can be used to value several categories of intangible assets. More on brand name and the consequences for corporate finance and valuation on the next few posts.

4 comments:

Garry said...

The reputation of brand name is fragile, it requires a lot to maintain and might be destroyed in one single safety/quality accident. I agree with you that adding a premium because of brand name accounts to double counting of brand value, but should we explicitly build the risk of losing brand value into our valuation model? (Maybe using historical data of brand performance and integrity ranking report of firms from third party, to estimate probability of incurring impairment of brand value),
It might be unrealistic to do the estimation, in fact I feel that my logic is a little bit inconsistent, your comments is appreciated!

Aswath Damodaran said...

That is a good point. Unlike tangible assets, brand name value can be destroyed overnight by an action (Coca Cola's introduction of New Coke... Michael Jackson promoting your product)... You can build it into value by assuming that excess returns from brand name can fade quickly.

Uiucfinance said...

The reputation of a brand name is not only fragile, but also expensive to maintain.

When I think of brands, I immediately think of Nike. The super sized contracts offered to pro athletes not only bring in money directly via those branded products, but keep the "Nike" image intact. Maybe I'm a little off base here, but would you then consider these types of contracts CAPEX?

Aswath Damodaran said...

Brand name may be expensive to maintain, but the cost has to weighed against the benefits. Nike may spend a lot preserving their brand name, but I think lots of other companies would be glad to trade with Nike.