Would like to do a light-hearted sharing today.
With some correction of yesteryear’s big brands, and the more important admissions by some companies that their brands may not be worth as much, it got me thinking on two aspects:
1) Just how much is a brand worth, anyway?
Say an arbitrary renowned sporting brand that people can relate to and identify strongly with. Isn’t the brand’s worth already priced into its premiums when consumers buy their products? Is that not the reason why people are willing to pay hundreds of dollars for a pair of surfing boardshorts, or thousands of dollars for a luxury bag, when the same could be had for a few ten dollars, quality aside?
A) So a brand’s worth might be the additional revenue it commands over a given number of years, or in investing lingo, an earnings multiple.
B) Or is a brand’s simply worth what another investor or potential buyer is willing to pay?
Suppose a fund named Visionary Incubator is willing to pay 2b for a company’s brand named Sexy – surely the company’s brand must be worth 2b, right? I mean, it just got sold for 2b. Subsequently Visionary Incubator sells the same brand 1 year later to another fund named Quantum Edge for 10b – now what is Sexy worth? Suddenly the value gets blurred – it should now be worth somewhere along 2b and 10b, right?
Clearly, we might label Method A as more conservative, being grounded by potential future sales and earnings; whereas we might say Method B is a little more airy fairy as anyone, or someone can make a decision one fine day to reduce said value for Sexy brand to 500m, just because; and investors will get hit by a impairment cost, their book value suddenly gets shaved.
This is ignoring the hair-raising instances where the arbitrary Quantum Edges might be related parties to the Visionary Incubators, which does question the definition of willing, but that’s a topic for another day.
These are not theoretical questions, it happens in business and investing; and the decision to make an impairment can be a very real, pragmatic and personal one – because a new CFO and/ or CEO may not want their hands tied in managing the company from here on out, and they may want to look good 1 to 3 years on, with a lower equity, profit and return of Equity (ROE) base to improve from. Of course, we know that there might not be much real improvement, but at least they can look good and get paid more.
2) Just how relevant is the brand and its worth, anyway?
Even with Method A, there is an assumption to the earnings multiple, which sometimes makes an ass out of you and me when the brand no longer carries equal relevance. For instance, a technology company can claim its brand as being worth hundreds of billions of dollars today, and actually hold it in their accounts, but what is to say the brand associated with the technology edge could not be replaced or rendered obselete overnight?
Just within the past two decades, we saw the decline of Yahoo search engine when Google dethroned them, we saw MP3 players rose and vaporised as a category, Nokia was the world’s number one phone brand until smartphones rendered them obsolete. Overnight, billions of dollars of brand values sublimed.
Technology race aside, the consciousness of consumers are also increasingly lifted – What used to be cravings for sugar, fried and crunchy food is now increasingly transmuted to cravings for healthier options. Boost Juice is suddenly more profitable than sugared and convenient drinks. Organic food and healthier oil is resurging to be more valuable than “higher yield by whatever methods” crops. Pollution-free, environment-friendly and veganism ideals are the new sexy. Are you sure these sugared drinks and processed food’s brand values are solid?
Q) Does your portfolio companies contain high amounts of “discretionary” brand value, and are their offerings relevant amidst the changing appetite of consumers?
By the way, this is what we consider sexy.