How & Why do we assign a value to the brand

1. Brand Valuation Methodology
Let’s Value “Nike” … or any other brand
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"If this business were split up, I would
give you the land and bricks and mortar,
and I would take the brands and trade
marks, and I would fare better than you.”
- John Stuart, Chairman of Quaker Oats

3. Why would you attempt to put a value on a brand?
Brand is an investment
If the company is put on the market for acquisition, the buyer and seller should be able to
assign monetary value to the brand and evaluate the investment/bid. In other words, the
brand premium that the investor would pay for is the difference between the branded
business that is being sold and the value of a similar business (with similar assets) but
without the brand recognition.
 Although Nike is a leading brand in North America, its presence is still growing in other
global markets. The question arises: “if the company is to be sold today, what value should be
used to account for brand premium (awareness and liking of the brand that leads to purchase
decision) in developing markets that allows the company to earn its global revenue?”
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4. Why would you attempt to put a value on a brand?
Brand is an investment into a sustainable advantage over competition
Manufacturing, design, performance and management strategies can be duplicated by
competition and even improved upon. When competitive advantage from operations
disappears, weaker brands become irrelevant. But under similar conditions, timeless brands
retain their customers and continue to hold the market share. To enhance the value of the
brand (strengthening sustainable advantage), inputs in a form of investments need to be
made. In turn, these investments need to be justified to the upper management and
evaluated against other projects ROIs.
 In 2013, Nike’s marketing spend was enormous US$2.7 billion on it in 2013 (equivalent to
11% of total revenues). The company described it as “demand creation, with a significant part
of it spent on buying endorsement for the swoosh logo.”
Was it too much or too little?
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START: Market
Communication
Strategies
Customer’s brand
awareness level
Purchase
decision
Profits
Market
Communicat
ion ROI

5. Why would you attempt to put a value on a brand?
Brand is an investment into a sustainable advantage that captures and
retains the market share
When brand is evaluated in detail, questions about the brand arise that will give insight into
brands attributes that might not have been apparent. Questions can be about evolving customer
taste, market awareness (TOMA or not?), value perception and market position compared to
constantly moving forward competition, which all feeds into the band equity analysis.
 Nike focuses on building its brand via strong relationship with a global consumer, appealing
to different demographics and aspirations. Overall price levels and distribution channels in
the sportswear market are established and easy to copy. But starting with 2011, Nike
emerged as a market leader by introducing innovation into the product that is now
connected to the Nike brand name. The company still holding its position today. What is the
value and importance of each brand attributes, i.e. innovations, brand awareness, social
customer interactions in pre-purchase phase, that lets Nike sustain leading position?
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6. Approaches and methodology explained
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Impact of the Name on Customer Preferences Approach - looks at pre-purchase communication with the
customer and builds on the brand loyalty. This approach can be used to value Nike, as it concentrates on
the pre-purchase phase to build its brand recognition, but we would need to do extensive market surveys
and product testing to assign $ value to the brand name based on how many people are influenced by a
brand name alone.
Price Premium Approach - utilizes price/value
perception that usually happens during the
purchase decision. Customers observe price
levels in the market and decide on what they
would pay for various features and
characteristics.
Replacement Value Of the Brand Approach – a
cost of establishing a comparable name and
business
Stock Price Approach – the stock market
adjusts the price of a firm to reflect future
prospects of its brand
Earning Power Approach – discounted present
value of future earnings attributable to brand
equity assets

7. Value the Nike brand
Approach: Comparing Enterprise Vale / Sales ratio for a premium and non-premium (or
lesser premium) brand in the same category
Reason: A premium brand gives a firm the benefits of charging a higher price for the same
category of products. This leads to higher margins, profit-sales ratios and enterprise value.
Thus the brand name and value is proportional to the price charged by the firm because of
it being a premium brand
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Value of brand name = {(V/S)b- (V/S)g} * Sales where
(V/S)b = Enterprise Value of Firm / Sales Ratio with the benefit of
the brand name
(V/S)g = Enterprise Value of Firm / Sales Ratio of the firm
with a generic product or lesser known brand name.
Methodology: We have calculated the (V/S)
ratio of three brands (Nike, Adidas and Brown
Shoes Co (BWS) which fall in the same industry
category on the stock exchange. This helps us
give the Nike brand value w.r.t Adidas as well
as a very generic unknown product in the
same category.
The calculations are shown in the following slide…

8. Value the Nike brand. Explain approach and methodology
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Data Nike Adidas Brown Shoes Co
Stock Ticker NKE ADDYY BWS
Pre Tax Operating Margin 16.67% 7.04% 3.52%
After Tax Operating Margin 12.55% 4.90% 2.45%
Return on Assets 13.26% 6.09% 5.43%
Retention Ratio 77.77% 84.77% 56.25%
Expected Growth 1.63% 1.87% -7.28%
Cost of Equity 9.66% 8.00% 8.15%
Value / Sales Ratio 1.665 0.840 0.401
Value of Nike w.r.t. Adidas = (1.665-0.840)*Sales = 0.825*18.96 = $15.63 billion
Value of Nike w.r.t. Brown = (1.665-0.401)*Sales = 1.264*18.96 = $23.97 billion
As Adidas is a close substitute to Nike brand, the best estimation of the brand value for
Nike would be $15.63 billion

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Data Nike Adidas Brown Shoe Co(BWS)
Sales /Revenue 18.96 14.49 2.6
Operating Income 3.16 1.02 0.09156
Pre taxOperating Margin 0.166666667 0.070393 0.035215385
Effective Tax Rate 0.247094801 0.304425 0.305634165
Pre Tax Income 3.27 1.13 0.07774
Income Tax 0.808 0.344 0.02376
After Tax Operating Income 2.379180428 0.709487 0.063576136
After Tax Operating Margin 0.1254842 0.048964 0.02445236
Return on Assets 0.132618753 0.0609 0.054338578
Total Assets 17.94 11.65 1.17
BV of debt (previous year) 6.79 6.36 0.81376
BV of equity (previous year) 10.38 5.29 0.41372
Cash 3.34 1.59 0.06822
ROIC 0.1720304 0.070526 0.054841999
Return on Assets 0.1720304 0.070526 0.054841999
Retention Ratio 0.777777778 0.847711 0.5625
EPS 2.7 4.15 0.64
Dividend per share 0.6 0.632 0.28
Expected Growth 0.016341287 0.018688 -0.07283957
Reinvestment 0.226 0.188 -0.08444
Capex(-) 0.636 0.434 0.06373
Dep 0.452 0.264 0.05478
Change in WC(-) 0.042 0.018 -0.09339
Reinvestment Rate 0.094990694 0.26498 -1.328171316
Invested Capital 13.83 10.06 1.15926
Return on Invested Capital 0.1720304 0.070526 0.054841999
Length of High Growth Period 5 5 5
Cost of Equity 0.096552513 0.080046 0.081494593
Risk Free Rate 0.0275 0.0275 0.0275
Risk Premium 0.05 0.05 0.05
Marginal Tax Rate 0.04 0.04 0.04
Levered Beta 1.381050256 1.050917 1.079891862
Observed Beta 1.31 0.8328 0.76
Market Cap 75.115 14.57 1.16
Debt/Equity 0.090394728 0.436513 0.701517241
E/(D+E) 0.604542807 0.454077 0.337048261
D/(D+E) 0.395457193 0.545923 0.662951739
Cost of Equity 0.096552513 0.080046 0.081494593
Bond Rating A1 Baa2 B1
Default Spread for Rating 0 0 0
Pre-Tax cost of debt 0.0275 0.0275 0.0275
After Tax Cost of debt 0.0264 0.0264 0.0264
Cost of Capital= 0.090736805 0.063744 0.058779685
Value/Sales
PV of FCFF in high growth = 8.753349795 2.294235 0.505767359
Terminal Value 35.22014488 13.46076 0.713353849
Value of Firm Today 31.56681723 12.17711 1.041905877
Value/Sales 1.664916521 0.84038 0.400733029
Value of Nike wrt Adidas 15.63321386
Value of Nike wrt BWS 23.96891899