PRIYAGOLD Valuation by Brand Finance... But How is this Valuation Done??

Recently, the valuation of Surya Foods’ flagship brand PRIYAGOLD was done at Rs.1200 crores. This gave the Noida-based food company reason to cheer before the company floats an IPO later this year.

The valuation was done by Brand Finance. Now the important question is, how is this Brand Valuation actually done!! I am trying to explain this in through this post…

It is nearly twenty years since RHM, a UK-based food manufacturing company, placed the value of its brand portfolio on the balance sheet as part of its defense against a hostile takeover bid. While it was not the first instance of brand values being capitalized on the balance sheet, the context and subsequent result caused many accountants to fall off their stools in horror.

Since then, Brand Valuation has gained increasingly more importance over the years.

Brand Finance is an independent consultancy, headquartered in London, which focuses on the management and valuation of brands and branded businesses. Since 1996, Brand Finance has performed hundreds of brand valuations with an aggregate value of over $150 billion.

Brand Finance calculates brand values using the ‘Royalty Relief’ approach. This approach is recognized by technical authorities worldwide. The methodology used to value a brand is briefly explained in the text below.

The future revenues of the brand over a five-year explicit period are estimated taking market growth, competitive forces, historic sales and analysts’ projections, growth assumptions into consideration. A Royalty Rate is applied to the future revenues to determine the Royalties that would be payable for the use of the brand by a third party. The determined royalties are then discounted and the NPV calculated gives the Brand Value.

The Discount Rate is determined using the Brand Beta Analysis (proprietary of Brand Finance) that uses a Brand Rating corresponding to the brand. The Brand rating is similar to a credit rating and delivers insight into the underlying strength of the brand and illustrates how valuations require a robust analysis of a brand’s performance in order to determine its value.

According to Brand Finance, the top ten brands in the world by value are listed below in decreasing order of their brand value:

1. Coca-Cola
2. Microsoft
3. Citi
4. Wal-Mart
5. IBM
6. HSBC
7. GE
8. Bank of America
9. Hewlett-Packard
10. Marlboro

Product Patronage Matrix

Product patronage Matrix is an interesting concept that was introduced by Louis P. Bucklin in his book titled 'Retail Strategy and Classification of Consumer Goods'.

Product Patronage Matrix builds from the foundation of classification of goods and stores the cross-classification of the each product motive with each patronage motive, a three by three matrix is created representing nine different types of customer buying.

The following are the product motives which are derived from customer attitudes towards a product:

Convenience Goods: Those goods, for which the customer before his need arises, possesses a preference map that indicates a willingness to purchase any of a number of known substitutes rather than to make the additional effort required to buy a particular item

Shopping Goods: Those goods for which the customer has not developed a complete preference map before the need arises, requiring him to undertake search to construct such a map before purchase

Specialty Goods: Those goods for which the customer before his need arises, possesses a preference map that indicates a willingness to expend the additional effort required to purchase the most preferred item than the most readily accessible substitutes
Similarly, the following indicate the patronage motives which are derived from consumer attitudes towards a retail establishment.

Convenience Stores: Those stores for which the customer before his need for some product arises, possesses a preference map that indicates a willingness to buy from the most accessible store

Shopping Stores: Those stores for which the customer has not yet developed a preference map, requiring him to undertake a search to construct such a map before purchase

Specialty Store: Those stores for which the customer before his need arises, possesses a preference map that indicates a willingness to buy from a particular establishment even though it may not be the most accessible