What's your brand worth?

A new study by Brand Finance Canada puts a value on credibility with customers.

Ask any self-respecting CEO to tell you how much his company's assets are worth, and he'll be able to tell you how much he paid for each piece of equipment, how much it's worth today and what it will be worth five years from now. Ask the same CEO how much his biggest brand is worth and you'll likely get a blank stare. That's not surprising. After all, it's a simple task to figure out the value of a tangible asset like machinery or a warehouse full of widgets. But how do you begin to put a dollar value on the customer satisfaction, loyalty and other intangible elements that make consumers choose one brand over another?

Brands are money: many Canadian companies have brands that are worth billions of dollars, according to a new study conducted by Toronto-based Brand Finance Canada with the Institute of Communications and Advertising, and sponsored by Canadian Business. Yet that value appears almost nowhere on the balance sheet and is never really fully assessed until a company is sold and the buyer has to justify the purchase price.

It's not a perfect study. Researchers had to estimate the strength and visibility of Canada's best-known brands and estimate the impact those brands had on the company's revenues. As a result, some companies with high revenue and brand recognition — like Nortel, Air Canada and Zellers — scored highly, even though their brands are looking a little rusty.

As well, the study looked at only Canadian companies with publicly available revenue data, which forced the elimination of some of Canada's most iconic brands. For instance, Molson — with an estimated brand value of $1 billion — is included, but its closest rival, Labatt, didn't make it, since Belgium's InBev now controls the company. Tim Hortons (named Canada's best-managed brand in a Canadian Business survey earlier this year) was not included, since the company is now owned by Ohio-based Wendy's International. Roots wasn't assessed either, since it's controlled by a private company that doesn't release sales data.

Banks and insurance companies dominate the list of Canada's most valuable brands, with Royal Bank of Canada topping the list. According to Brand Finance, the RBC brand is worth more than $4.4 billion — just over 10% of the its total market capitalization (see chart). “The Royal Bank is a dominant brand in Canada,” says Jonathan Knowles, managing director of Brand Finance Canada and author of the report. “It's hard to imagine any type of financial survey where the Royal Bank would not come out on top, given its size and the strength of its business.”

But much of the success of the Royal Bank is based on the confidence its brand inspires in consumers, says Ann Louise Vehovec, RBC's senior vice-president of brand and communications. While the Royal Bank has not undertaken a formal brand valuation of its own, it does measure all of its marketing to ensure that it's adding to the overall health of the RBC brand, she says. “Never underestimate the sense of confidence that people want when they are dealing with a financial services provider,” she says.

Everything from advertising and sponsorship deals to the way customers are treated by tellers are considered part of RBC's overall branding effort. And maintaining the integrity of the Royal Bank name is especially important in the financial services sector, where consumers are bombarded with offers for cheaper mortgages, mutual funds or other services.

The prominence of financial brands on the list is an indication of both the power of those businesses and the conservative nature of Canadian consumers, says Knowles. All of Canada's Big Five banks rank in the Top 10 of Canada's 25 most valuable brands, with insurance companies Sun Life, Manulife and Great-West Lifeco all making the list. “Canadians may have a love-hate relationship with their banks, but they like to do business with big stable companies,” says Knowles. “And there are few companies that are bigger and more stable than Canada's banks and insurance companies.”

While the Brand Finance study shows that Canada has some very powerful brands, almost none of them are known outside of Canada. No Canadian brands have appeared on the New York-based Interbrand annual survey of the world's most valuable brands, since companies on the list need to derive at least 20% of their revenues outside their home country. Without that qualifier, the Royal Bank would have ranked 70th, ahead of global brands such as Porsche, Prada and even Starbucks, but still miles away from Coca-Cola, whose global brand is worth an estimated US$67 billion.

Besides banks and insurance companies, Canada's other most valuable brands are rounded out by retailers such as Loblaw, Sobeys and Canadian Tire, telcos like Bell, Telus and Rogers, and oil and gas companies such as Petro-Canada and Esso. But while packaged-goods companies like Pepsi, Gillette and Kelloggs dominate the Interbrand global list, only a handful of such companies appear on the Canadian list. McCain Foods, the New Brunswick producer of frozen french fries and orange juice, is ranked 16th, with an estimated brand value of about $1 billion. Loblaw, whose President's Choice brands revolutionized the grocery business, ranks third, with a brand value of $3 billion.

That's a clear reflection of the Canadian marketplace, says Alan Middleton, professor of marketing at Toronto's Schulich School of Business. “It's clear why the banks and telcos are so high up on the list,” he says. “They're among the most aggressive advertisers in Canada.”

Determining just how much a brand is worth is not an easy proposition. Investors, analysts and CEOs can easily track the value of their companies' plants, machinery and receivables. Traditionally, the “goodwill” item on a company's balance sheet was the only place where companies could include a brand value that would account for the excess of the purchase price over the tangible value of an asset it acquired.

But valuing a brand requires much more than merely looking up the company's goodwill footnote in its annual report. Instead, you have to assign a monetary value to intangible brand components like patents, trademarks and logos, as well as ethereal notions like corporate reputation, consumer awareness and just how willing consumers are to spend money on your products.

The Brand Finance study uses the “relief from royalty” method to calculate brand values. Basically, that means researchers determined how much the company would have to pay a third party to license the brand had it not owned the brand itself. In other words, if Rogers Communications (owner of this magazine) didn't own its portfolio of brands, it would have to pay another company more than $1 billion a year to slap those logos and trademarks on its video, cable and media properties.

To determine that value, Brand Finance looked at the financials of Canada's largest companies and industry sectors, and estimated brand royalty rates for each. Those rates where tweaked up or down based on the strength of the brand in consumer awareness, favourability, advertising spending and retail presence. Those royalty rates were then applied to the companies' revenue stream, with a higher rate going to consumer streams over business-to-business, where branding has less of an effect on sales.

The survey does not include massive global brands like Coca-Cola, IBM or Ford that are controlled by foreign companies and don't break out their Canadian revenue. But other essential American brands such as Sears Canada and Esso (owned by Imperial Oil) were included because they are owned by Canadian public companies.

The study also assumes that the more you spend on advertising, the greater value you add to your brand. However, any junior brand manager will tell you that a product that fails to live up to its advertising hype will actually damage the value of the brand. Remember those expensive “Aubergine” ads that were going to save Eaton's from ruin?

In essence, any static measure of brand is flawed since a brand is made up of so many dynamic variables that ultimately boil down to what founder Jeff Bezos described as, “What people say about you when you're not in the room.”

An example of that weakness can be seen in the value assigned to brands such as Air Canada. Brand Finance estimates the value of the airline that has just emerged from bankruptcy protection at just over $700 million. The airline (which was picked as the worst-managed brand in our Canadian Business survey) scores high in the brand awareness category, but most travellers know Air Canada as the airline whose surly staff inform them that their flight has been delayed. However, the airline's deep roots in the Canadian psyche give it historical leverage with consumers. “It's not that Canadian consumers want Air Canada to disappear,” says Knowles, “They just desperately want that airline to get their act together.”

Air Canada is attempting to revive its haggard brand by spending $28 million on an advertising campaign featuring Canadian chanteuse Celine Dion, a reworked logo and new employee uniforms. However, it will take more than just new uniforms to prove to customers that it is no longer the unfriendly and tardy airline it once was, says Middleton. “Celine can sing until she's blue in the face, but until you get the airplanes flying on time, it's not going to have any impact on your brand value,” he says.

Despite its lacklustre performance, Air Canada still has about 10 times the revenue (although not profits) of WestJet, its dogged competitor. WestJet clearly has a stronger brand than Air Canada, but under the Brand Finance model its brand would be valued at just $80 million to $90 million. Other significant brands whose revenue just wasn't enough to put them on the list were internationally known brands such as Research In Motion and Four Seasons Hotels and Resorts.

With all those weaknesses in determining the value of a brand, investors do it all the time, using a lot less scientific methods. Just look at the stock market, where the value of a company's tangible assets makes up a smaller and smaller portion of its valuation. Just 20 years ago, companies on the S&P 500 were trading at an average of 1.3 times the value of their tangible assets. As of this year, that ratio had risen to more than 4.5 times — with the value of the brand making up a larger portion of that valuation, says Knowles.

That ratio is much lower in Canada — about 2.4 times, reflecting the number of capital-intensive businesses like oil and gas, mining, and forestry on Canada's stock market. However, the value of branding is more important to Canada's technology, financial and communications companies, where tangible assets account for only 20% to 30% of valuation.

And the stock market is rewarding companies that pay attention to their brands. Over the past four years, a hypothetical portfolio of the 15 companies with the most valuable brands outperformed the TSX composite index by more than 50%.

But just having a high brand value is not an accurate predictor of future revenue growth. After all, does anyone think that the power of the Nortel brand is going to save the company from its accounting woes? Or would anyone bet that the fact Canadian consumers are aware of Zellers will help the discount retailer stave off competition from U.S. giants like Wal-Mart? Not likely.

But there is no dispute that a good solid brand helps explain why the stock of some heavily branded companies trades at a higher multiple than their competitors. And that emphasis on good branding is becoming even more important as consumers are bombarded with an increasing amount of advertising for products and services with little or no qualitative differences. Today, coffee is hot, beer is cold, cellphones pick up calls from just about everywhere, and there are very few lemon cars being produced. “Building and maintaining your unique brand has never been so important as in a market like Canada, where there are more than 100 types of cellphone plans, 2,500 different types of mutual funds and more than 200 varieties of potato chips,” says Knowles.

Companies can no longer rest on the laurels of their old brands. Today, they must rally everyone from their frontline employees to senior managers of all departments, not just marketing, to focus on keeping their brands healthy. “Marketing and branding is the last unfair advantage that is really available to companies now,” says Rupert Brendon, CEO of the Toronto-based Institute of Communications and Advertising, which sponsored the report.

Unfortunately, all too often the people in the marketing and finance departments not only don't work together, they barely speak the same language. While marketers concentrate on building market share and increasing customer awareness and satisfaction, the CEO is focused on building shareholder returns. But by talking about brand in terms of monetary value and linking it to the company's bottom line, marketers can bridge that gap and help both departments achieve their business goals, says Brendon.

Companies that realize just how important their brand is to their overall success are moving marketing decisions out of the marketing department and into the boardroom. Eventually, Brendon would like to see the chief branding officer take on as much influence as the corporation's chief financial officer.

That may still be a long shot. After all, while most companies pay lip service to investing in their brand, they still see it as a cost rather than an investment. Few would risk cutting their maintenance budgets for fear of letting the value of their physical assets deteriorate. At the first sign of a weakening economy, however, marketing is the first to be slashed.

The true value of a brand is determined not by the size of its advertising budget, but by the overall strength of its business and the clarity with which it communicates that to its customers. Ultimately, brands are valued not by consultants or even CEOs, but by consumers.