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Master Thesis
ZARA: A Case Study about Brand Valuation
Porto 2011
Master Thesis
ZARA: A Case Study about Brand Valuation
EXECUTIVE SUMMARY
The 100 most valuable brands in the world increased their value last year
by 3,7% to a total of USD 1,203 thousand million (based on Interbrand 2009 and
2010 database). This seems to be somewhat controversial given the financial
crisis that we are experiencing. However, one may think that is especially during
these times that there are the major opportunities for mergers and acquisitions.
Following this, when we consider a transaction, the first issue that we think
about is how determine its right pricing. Some assets, such as properties and raw
materials, can be easily identifiable and converted into a monetary value. In turn,
the brands, as others intangible assets, despite may be the most important assets
in many business, they cannot be explicitly valued.
Hereupon, and motivated by the chance of ZARAs brand acquisition by
Hennes & Mauritz AB (H&M), we will try, along this dissertation, to find out a
reliable way to calculate the ZARAs brand value.
Firstly, we are going to approach some essential concepts that are critical
for a better comprehension of all the case study. Therefore, we will focus more on
the topic of brand valuation. Our purpose is to describe the different motivations of
brand valuation as its different approaches.
The second major part of this work is the review of the Brand Rating, BBDO
Brand Equity Evaluator and Interbrand models. Every method will be presented
in particular and afterwards critically assessed by means of the list of the compiled
requirements. After these three analyses, we gather the conditions to select the
one most appropriate to valuate ZARAs brand. Due to the limitations present in all
models, the brand valuation will be a long road of options and reviews.
Nevertheless a monetary value will be reached and so, we will meet the
requirements that enable to start the negotiations between buyer and seller.
Keywords: brand valuation, brand valuation methods, Interbrand.
GREETINGS
TABLE OF CONTENTS
LIST OF FIGURES..................................................................................................... 6
LIST OF TABLES ...................................................................................................... 7
LIST OF ABBREVIATIONS....................................................................................... 8
INTRODUCTION........................................................................................................ 9
PARTE I LITERATURE REVIEW AND ZARAS PRESENTATION..................... 11
1.
2.
3.
4.
VALUATION ......................................................................................................... 31
4.1. The Different Approaches ....................................................................... 32
4.1.1. Financial............................................................................................. 33
4.1.2. Consumers Perspective .................................................................... 36
4.1.3. Integrative Methods ........................................................................... 37
4.2. The Selected Methods ............................................................................ 38
6.
7.
VALUATION ......................................................................................................... 68
REFERENCES......................................................................................................... 71
APPENDICES .......................................................................................................... 77
APPENDIX 1: ZARA'S BRAND VALUATION BASED ON INTERBRAND MODEL .77
APPENDIX 2: ZARAS BRAND VALUATION BASED ON INTERBRAND MODEL
BY CHANGING RBI TO 40% ................................................................................... 78
ANNEXES ................................................................................................................ 79
ANNEX 1: H&M AND ITS OTHER BRANDS ........................................................... 79
ANNEX 2: BEST GLOBAL BRANDS, 2010 RANKINGS ......................................... 80
ANNEX 3: CASH FLOW COMPUTATION ............................................................... 86
LIST OF FIGURES
Figure 1. ZARA's Sales Contribution by Sales Format ........................................... 17
Figure 2. ZARAs Business System ........................................................................ 18
Figure 3. A Product Market Positioning Map .......................................................... 19
Figure 4. Characteristics of Brand Valuation Approaches ...................................... 33
Figure 5. Financial Approaches .............................................................................. 34
Figure 6. Icon Iceberg ............................................................................................. 41
Figure 7. The Brand Rating Formula .................................................................... 43
Figure 8. Process to Calculate Brand Equity for the Purpose of Acquisition Applying
the BBDO Brand Equity Evaluator................................................................. 46
Figure 9. The BBDO Five-level Model ................................................................. 47
Figure 10. Overview of the Interbrand Method ....................................................... 51
Figure 11. S-curve .................................................................................................. 53
Figure 12. Example of ZARAs Market Segmentation ............................................ 57
Figure 13. Branded Own Label Drivers/ Role of Brand........................................... 61
Figure 14. Cash Flow Computation ........................................................................ 86
LIST OF TABLES
Table 1. Best Global Brands of Fashion Industry 2010 Rankings ........................ 22
Table 2. Examples of Goodwill Payments in the Eighties. ..................................... 24
Table 3. Perspectives and Reasons for Brand Valuation ....................................... 26
Table 4. Required Criteria for Brand Valuation Methods in Case of Acquisition .... 31
Table 5. Fulfilled Criteria by Brand Rating Brand Valuation Method ...................... 44
Table 6. Fulfilled Criteria by BBDO Brand Equity Evaluator Brand Valuation
Method...................................................................................................... 50
Table 7. Fulfilled Criteria by Interbrand Brand Valuation Method ........................... 54
Table 8. ZARAs Financial Analysis Applying the Interbrand Valuation Method .... 58
Table 9. ZARA Demand Analysis Applying the Interbrand Valuation Method ........ 62
Table 10. The ZARAs Brand Strength Score and their Evaluation Criteria ........... 63
Table 11. ZARAs Brand Value Calculation by Applying the Interbrand Valuation
Method.................................................................................................... 65
Table 12. ZARAs Brand Value in Euros and Dollars ............................................. 66
Table 13. ZARAs Brand Value by Assuming Different Brand Discount Rates and
Long Term Growth
Rates................67
Table 14. ZARAs Brand Valuation based on Interbrand Model ............................. 77
Table 15. ZARAs Brand Valuation based on Interbrand Model by changing RBI to
40%.....................................78
Table 16. Best Global Brands of Fashion Industry 2010 Rankings ...................... 85
LIST OF ABBREVIATIONS
BBS
BEE
BEES
BEVA
CAPM
CF
Cash flow
cf.
compare
EBIT
EVA
GDP
i.e.
IAS
IFRS
ISO
No.
Number
NOPAT
NPV
p.
page
pp.
pages
PWC
PricewaterhouseCoopers
RBI
WACC
INTRODUCTION
Nowadays the list of valuation models is too large (Salinas, 2009) for
we address all of them in this work. Thereby, in the second part of this
dissertation, we will sort out those that gather more consensus about
consistency and are applied more frequently. Additionally, they should meet
largely the requirements established along the work and must be suitable for
the purpose of the valuation.
Nevertheless, brand valuation is far from being a consensual subject
or an exact science. The discussion about the best method to calculate the
brand value is still an open issue, since systematic analysis have proven that
each of the existing methods has its owns limitations. In fact, over our
process of ZARAs brand valuation, we had to take some assumptions, in
which the difficult task as to make them as plausible and coherent as
possible. Moreover, consider that a brands value depends on its capacity to
create value now and in the future, there is always going to be uncertainty
along the process.
10
1.1.
Brand
11
of the seller(s) and differentiate them from the goods of competitors (as cited
in Keller, 1998). Similarly to this consideration is The American Marketing
Association definition, which defined a brand as a name, term, sign, symbol,
or design, or a combination of them, intended to identify the goods and
services of one seller or a group of sellers and differentiate them from those
of competitors (as cited in Wood, 2000). On the same line of perception is
the concept of the Marketing Science Institute that defined brand as the
strong, sustainable and differentiated advantage with respect to competitors
that leads to a higher volume or a higher margin for the company compared
with the situation it would have without the brand. The differential volume or
margin is the consequence of the behavior of the customers, distribution
channels and the companies themselves.
To sum up, there are different definitions for brand however; all of
them converge on the issue of brand providing identity and/or difference
between competitive offerings.
1.2.
Brand Equity
12
delivery costs, that is realized because of the impact of its branding. With the
same point of view are Simon and Sullivan (1993) that defined brand equity
as the incremental cash flows which accrue to branded products over and
above the cash flows, which would result from the sale of unbranded
products2. In this perception the profit results from the differential revenue
between a branded and a generic product (Salinas 2009, p.14).
An alternative view that breaks free from the financial perspective,
highlighting the judgments made by consumers, is the consumers
perspective. This approach of brand equity is regarded by Keller (2002) as
the differential effect that brand knowledge has on consumer or costumer
response to the marketing of the brand. For Keller, brand knowledge is
essentially defined in terms of two components, brand awareness and brand
image. Another well-known approach of brand equity is that of Aaker (1996)
who defined the concept as a set of assets and liabilities linked to a brands
name and symbol that adds to or subtracts from the value provided by a
product or service to a firm and/or that firms costumers. These assets and
liabilities on which brand equity is based differ from context to context, but in
Aakers view, they can be usefully grouped into four categories: brand
loyalty, brand name awareness, perceived brand quality and brand
associations. A simpler concept is from Leuthesser (1988) that refers to
brand equity as a qualitative parameter that is caused by the set of
associations and behaviors on the part of a brands customers, channel
members and parent corporation that permits the brand to earn greater
volume or greater margins than it could without the brand name.
Accordingly to Kartono and Rao (2005) studying brand equity solely
from the perspective of either the firm or the consumer may be inadequate.
They justified that while assessing brand equity from the perspective of the
firm can provide a measure of the financial value of the brand to the firm, it
neglects the fundamental basis of the brand equity concept, which suggests
that the equity of the brand its not merely a dollar-metric value but also an
2
The incremental cash flows are based on the value consumers place on branded products
and on cost savings brand equity generates through competitive advantages (Simon and
Sullivan 1993).
13
1.3.
Brand Valuation
14
2.1.
15
2.2.
Zara Presentation
16
vision of the group, coordinated the activities of the concepts, and provided
them with administrative and various other services.
17
for design and three months for manufacturing (Ghemawat and Nueno,
2006).
18
19
implying longer lead times and spend more money on advertising. The H&M
prices also tended to be slightly lower than ZARA. However, both brands
have important similarities; they are European based companies, in a
segment of fashion forward at lower prices and have a strong international
expansion strategy. Regarding this last point, is important refer that H&M had
been quicker to internationalize, generating more than half its sales outside
its home country by 1990, 10 years earlier than Inditex (Ghemawat and
Nueno 2006, p.5).
The Gap had been founded in 1969, in San Francisco and had
achieved stellar growth and profitability through the 1980s and 1990s with
what was described as an unpretentious real clothes stance. Its store
operations ere essentially U.S.-centric and in 1987 when Gap had begun its
international expansion, they faced certain difficulties in finding locations in
some markets, in adapting to different costumer sizes and preferences, and
in dealing with more severe pricing pressures than in the United States. By
the end of the 1990s, supply chains that were still too long, market
saturation, imbalances and inconsistencies across the companys store
chains and the lack of a clear fashion positioning had started to take a toll
even in the U.S. market. In 2001 a failed attempt to reposition to a more
fashion-driven assortment, a massive decline in The Gaps stock price and
the departure, in 2002, of its long-time CEO, Millard Drexler (Ghemawat and
Nueno 2006, p.5) caused a Gaps loss of competitiveness among its main
competitors
and
simultaneously
Gaps
brand
value
is
decreasing
20
Interbrand evaluates brand value on the basis of how much it is likely to earn for the
company in the future. Interbrand uses a combination of analysts projections, company
financial documents, and its own qualitative and quantitative analysis to arrive at a net
present value of those earnings (Bloomberg Business Week).
21
Furthermore, H&M takes responsibility for the integrity of its operation chain,
from employees to materials. The Gaps value was at No. 84, having fallen of
position No. 78 that ranked in 2009. As a curiosity, the last time that Benetton
belonged to the Interbrand rank about best global brands by value was in
2001, occupying the position No.100.
2.3.
Standards
The International Financial Reporting Standards (IFRS) 2008,
recognizes together with the International Accounting Standard (IAS) 38
(paragraph 1 to 133) the accounting treatment for intangible assets that are
not dealt with specifically in another Standard.
IAS 38 defined an intangible asset as an identifiable nonmonetary
asset without physical substance and established that an asset is identifiable
when it: (i) is separable (capable of being separated and sold, transferred,
22
23
Seller
Nestl
Rowntree
83
Grand Met
Pillsbury
88
Cadbury Scheppes
Treber
75
United Biscuits
Verkade
66
Beyond that, other acquisitions have shown that brands can create
value and justify high market to book multiples. Thats what happened with
the Nestl deal to Rowntree. In 24 June 1988, The New York Times
announced that Rowntree P.L.C. today accepted the 2.55 thousand millions
of dollars buyout offer from Nestl S.A., ending a months-long takeover fight
for the British confectioner, the maker of Kit Kat chocolate bars. This was the
largest foreign takeover ever of a British company. This acquisition was aim
of considerable attention around the world, since various bids to acquire
Rowntree were refused. On this subject, Kenneth Dixon (Rowntree's
chairman in 1988) clarified that the bids were too low for its valuable and
well-recognized brands. In the end, Rowntree was acquired by Nestl by two
24
and a half times the pre-bid price and eight times the net asset value of the
company.
The overall trend was that acquisition prices for companies with strong
brands were consistently higher than the value of their net tangible assets
(Salinas 2009, pag.34). The Ford Company, for instance, paid 6.2 thousand
millions of euros for the Jaguar brand. Such a high brand value can only be
explained by the existence of knowledge structures that can be efficiently
tapped, i.e. a brand identity that motivates consumers to accept a higher
price, remain loyal to the brand, buy it again and again and recommend it to
others (Zimmermann et al. 2001, p.13). In such cases, the difference
between market value and book value is called goodwill, and could represent
different types of intangible assets, among which the brand seems to be the
most valuable.
In short, brands can be one of the most valuable assets a company
owns, but also tend to be the least understood (Roberts 2011). Is brand
valuation only important for acquisition purposes? How can we measure
brand value? These issues are what we will discuss in the next sections.
3.2.
There are different purposes to value a brand and every purpose can
be classified by its internal or external scopes of application (Soto 2008,
p.27). According to Salinas (2009, pag.50 based on Haigh and Knowles
2004), we can group them in three distinct applications: valuations for brand
management purposes, valuations for accounting purposes and valuations
for transactional purposes.
Brand valuations for management purposes are typically based on
dynamic business models and on the role that the brand plays in the models
key variables. On the other hand, valuations for accounting and transactional
purposes focus on a value at a giver point in time (Salinas 2009, p.51). On
25
Scopes of
Application
Purposes
Brand Management
Internal
Accounting
External
Trademark-backed securitization
Tax planning
Acquisition of a company
Mergers of companies
Internal
Transactional
External
Brand strategy
Budget allocation
Performance evaluation
Incentive system for managers
3.2.1.
26
27
acquired brands must be included in the balance sheet (Salinas 2009, p.52).
For this actual regulation, brand valuation is indispensable, which contradicts
with the older practice of recording the purchase price in excess of the net
acquired assets as a single figure under goodwill (Salinas 2009, p.52).
3.3.
30
The table bellow shows a checklist with the requirements that brand
valuation methods must to fulfill to be suitable for the case of acquisition,
especially regarding to Hennes & Mauritz take over ZARA. To provide a
simplified overview, the requirements will be grouped into three categories:
methodical requirements, covering content and relevance of results.
Categories
Methodical Requirements
Covering Content
Relevance of Results
Requirements
Validity
Reliability
Objectivity
Cost-Efficiency
Transparency
Feasibility
Past oriented-results
Present oriented-results
Future oriented-results
Complete Picture
Financial Figure
31
4.1.
32
Financial
Brand
Valuation
Approaches
Consumers
Perspective
Composite
Financial/
Consumers
Perspective
4.1.1. Financial
The methods of financial approach consider the financial market
performance data to determine a monetary brand value. This value can be
explained by the contribution made by a brand in effect, its utility value
that derived from the entire range of performance generated by a product
concept. Customers overall willingness to pay for a product is used to identify
their willingness to pay for specific product features, one of which is the
brand itself, and its value can be ascertained as a result (Zimmermann et al.
2001, p.21).
The financial approach can be also subdivided into cost, market and
income approaches, as we can see by the following figure.
33
Financial
Approaches
Cost
Market
Income
Brand Value
(based on)
Replacement
or
Reproduction
Cost
Brand Value
(based on)
Value of
Comparables
Brand Value
(based on)
Future
Income
Capitalised to
Present Value
The International Organization for Standardization (ISO) is one of the worlds biggest
developers and publishers of international standards, that published, in 2010, a model
designated BSI ISO: 10668: Brand Valuation: Requirements for monetary brand valuation.
The document specifies a framework for brand valuation, including objectives, bases of
valuation, approaches to valuation, methods of valuation and sourcing of quality data and
assumptions. It also specifies methods for reporting the results of such valuation (ISO
website).
34
what other purchasers in the market have paid for assets that can be
considered reasonably similar to those being valued. The application of the
market approach shall result in an estimate of the price reasonably expected
to be realized if the brand was to be sold.
The income approach requires the identification of future income,
profits or cash flow attributable to the brand over its expected remaining
useful life, and discounting or capitalizing them to present value (Salinas
2009, p.63). According to ISO: 10668 the income approach measures the
value of the brand by reference to the present value of the economic benefits
expected to be received over the remaining useful economic life of the brand.
One of the advantages of these models has directly to do with the
data sources they need. Because they are based entirely on figures from
within the company, there is no need for costly, time-consuming efforts to
gather external data. A further benefit is that the models are relatively easy to
use, allowing brand value to be computed swiftly and economically
(Zimmermann at al. 2001, p.21).
However, the methods of the financial approach are not out of some
drawbacks. The result produced by all these models is the brands monetary
value from an accounting perspective. Because they ignore the consumers
role in the generation of brand value, some important information is lost, or
rather it is not even recorded in the first place (Zimmermann at al. 2001,
p.21). In the Zara case, for example, the brand has become, in a short time,
one of the most valuable brands worldwide. So, it seems to be very important
to include in the brand valuation some past variables and the reasons for the
brand fast rise.
Another point of criticism, this time from an analysts perspective, is
that some methods of this approach do not take the competitive environment
into account when arriving at a valuation (Zimmermann at al. 2001, p.22).
Zara is a fast fashion brand that competes strongly with H&M and others
fashion brands so; Zaras competitive environment must be taken into
account when we calculate its brand value.
35
36
37
4.2.
38
the brand future potential. In practical terms, Brand Rating is an easy method
to use and understand.
The following one will be BBDO Brand Equity Evaluator. In my
opinion, the research undertaken by BBDO in 2001 and 2002 and published
in two papers (cf. Zimmermann et al., 2001 and 2002), were one of the most
complete materials that I have found about the subject under study. In
addition, they show greater academic rigor and professionalism. Another
aspect that was on the basis of its choice was the fact that the purpose of
brand valuation is taken into consideration when we value a brand.
The third and final method that we will analyze is the Interbrand
Model. It is the most popular brand valuation method worldwide and its brand
consultancy was the first, in the world, to achieve, the ISO 10668 certification
(in 2010). As mentioned in chapter 4.4.1, ISO 10668 is the international norm
that sets minimum standard requirements for the procedures and methods
used to determine the monetary value of brands.
39
Brand Rating
Some authors make a different division of analysis of the Brand Rating model. For
example, Salinas 2009 (pp.158-164) divides the Brand Rating brand valuation method in six
modules. In this study, we adopted the BBDO (Zimmernann et al. 2001) division because is
more clear to perceive. However, at final, the components analyzed are the same
independently of the methodology used.
40
The icon iceberg analysis is based on the Icon Brand Trek approach
that is purely based on the principles of behavioral science. It is often
represented by the image of an iceberg, because the process followed to
value a brand uses an analogy to the iceberg.
Brand awareness
Subjective perception of
advertising pressure
Memorability of advertising
Brand uniqueness
Clarity of internal image
Attractiveness of internal
image
Brand appeal
Trust in brand
Brand loyalty
41
obtained represents the earning-capacity value of the brand, i.e., the brand
added value.
The following and last step is the brand future score and according to
Zimmernann et al. 2001 (p. 61) it reflects future values and quantify curves.
The Brand Rating determines an index that describes the brand potential (for
example, in terms of its capacity to access new distribution and expand into
new segments) and represents the existing brand protection. Thus, the brand
future score allows one to forecast the brand added value into future periods
(Salinas 2009, p.161).
42
43
Categories
Methodical Requirements
Covering Content
Relevance of Results
Requirements
Brand Rating
Validity
Reliability
Objectivity
Cost-Efficiency
Transparency
Feasibility
Past oriented-results
Present oriented-results
Future oriented-results
Complete Picture
Financial Figure
Limited
Limited
44
5.2.
45
Figure 8. Process to Calculate Brand Equity for the Purpose of Acquisition Applying the
BBDO Brand Equity Evaluator
Source: BBDO Brand Equity Excellence Vol. 2 (Zimmernann et al. 2002, p.23).
The BEE model references four brand equity determinants, that are:
the market quality, the dominance of the relevant market, the international
orientation and the brand status. The market quality component describes
the environment in which a brand operates. Depending on the brand type,
this includes the brands industry and/or relevant market. This factor is
gauged by means of the following indicators for each industry, or other
relevant market defined on a different scale: sales performance, net
operating margin and degree to which sector is brand-driven (Zimmermann
et al., 2002, p.17). The second determinant is the market dominance that
analyze which market is more important for the brand, that all local and
foreign markets. This factor refers to the brands sales strength relative to
competing companies in the same sector and the resulting value can be
interpreted as an indicator of the brands potential for dominance of the
relevant market (Zimmermann et al. 2002, p.17). The international orientation
is defined as the brand sales at foreign markets relative to the total sales of
the brand and is interpreted as an indicator of the brands potential for
international development. The last component is the brand status and is
expressed as the brand strength and attractiveness perceived by consumers.
46
To determine the brand status, the BEE uses the BBDO Five-level Model
(illustrated in figure 9) however, no distinction is made between industries. At
the end of the analysis, the four components are fused into a weighting
factor.
Figure 9. The BBDO Five-level Model
Source: BBDO Brand Equity Excellence Vol. 2 (Zimmernann et al. 2002, p.19).
The BBDO Five-level Model assumes that a brand with strength will
ascend to higher developmental levels in the model. Accordingly, a brand
must first pass through a lower development level to reach the next highest
level8 (Zimmermann et al., 2002, p.17).
The analytical process of the BEE method starts with the calculation of
the cash flow (formula for cash flow computation in annex 3). Since the
acquisition is the purpose of our valuation, the BEE determined that this
analysis should be based on forecast gross cash flow values for a planning
horizon of three years a period within can be determined in a higher rate of
precision9.
Exceptions to this rule are, of course, possible: A brand may on occasion skip a level in
the brand development process and make up for it later (Zimmermann et al., 2002, p.19).
9
According to Zimmermann et al. (2002, p.22), forecasts of cash flow over longer periods
are subject to extreme uncertainty; even experts with far reaching knowledge of their
industries are not in a position to make concrete, well grounded forecasts for such an
extended timeframe. This is particularly true of brands in fast-evolving sectors.
47
Due to the existence of time value of money, the gross cash flow
calculated from the brand in different moments in time must be discounted at
the moment of its valuation. Therefore, the next stage consists in determine
the discount rate through the CAPM (Capital Asset Pricing Model)10.
Finally, the last step consists in multiply the discounted gross cash
flow value (the monetary basis) by the weighting factor to have the brands
value.
48
49
Categories
Methodical Requirements
Covering Content
Relevance of Results
Requirements
Validity
Reliability
Objectivity
Cost-Efficiency
Transparency
Feasibility
Past oriented-results
Present oriented-results
Future oriented-results
Complete Picture
Financial Figure
BBDO BEE
Limited
Limited
Limited
Table 6. Fulfilled Criteria by BBDO Brand Equity Evaluator Brand Valuation Method
Source: (author).
5.3.
Interbrand
50
the brands function to secure future demand and thus reduce operative and
financial risks (Interbrand Zintzmeyer & Lux, p.2).
Financial Analysis
Economic Value
Added (EVA)
Demand Analysis
Role of Brand Index
(RBI)
Brand Earnings
Strength Analysis
Brand Strength
Score (BSS)
Brand Risk
(Discount Rate)
11
Interbrand, in its commercial literature, used synonymously the terms "EVA, intangible
earnings and economic profit.
51
52
Brand Risk/
Discount Rate
100
53
Categories
Methodical Requirements
Covering Content
Relevance of Results
Requirements
Validity
Reliability
Objectivity
Cost-Efficiency
Transparency
Feasibility
Past oriented-results
Present oriented-results
Future oriented-results
Complete Picture
Financial Figure
Brand Rating
Limited
Limited
54
5.4.
The Choice
55
6.
6.1.
6.1.1. Segmentation
According to Interbrand, consumers purchasing behaviors and
attitudes towards brands differ from one market sector to another, depending
on product type, distribution and other market factors. For this reason, the
value of a brand can only be determined precisely through the separate
assessment of individual segments that represent a homogenous customer
group.
Following this, we can segment ZARA market, for example, by
separate its different channels (women, men, trafaluc and kids) from the
different 77 countries (Inditex Annual Report 2010) where the brand is
present (see figure 12).
After brand valuation has been made for each segment, the overall
value of a brand is the sum of the different segment values. In this
particularly case of ZARA brand valuation, we cannot consider the market
segmentation because we will not have access to the necessary detailed
information. Thus, we will just value ZARA brand as a whole.
56
France
Women
Portugal
etc.
France
Men
Portugal
etc.
Brand
France
Trafaluc
Portugal
etc.
France
Kids
Portugal
etc.
57
Years
(-)
(=)
(-)
(=)
(-)
(=)
2007
Branded Revenues
% Growth of Branded Revenues
Operating Costs
EBIT
EBIT Margin
Tax
% Tax
NOPAT
Capital Employed
% Return on Capital Employed
CAPM
EVA
6264
5173
1091
17,5%
257
24%
834
2661
41%
6,2%
165
669
2008
2009
6824 7077
8%
4%
5757 5972
1067 1105
15,5% 15,6%
224
265
21%
24%
843
840
3334 3810
32%
29%
207
236
636
604
Thousands of Euros
Table 8. ZARAs Financial Analysis Applying the Interbrand Valuation Method
Source: on the basis of (Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
58
Reports 2007, 2008, 2009 and 2010; p.257, p.278, p.221 and p.193,
respectively). Therefore, a charge from the capital employed, based on the
cost of capital is subtracted to NOPAT, to arrived at EVA.
To determine the cost of capital, we will use the unlevered CAPM
(whose discount rate is a proxy of WACC) and thus, we will assume that
ZARA only uses equity to finance its activity, i.e., its an unlevered company
(on the basis of Fernndez 2011, pp.22-25).
The formula of the CAPM applied was:
E(ru) = rf + E [(rm rf)] "u
where,
E (ru) - represents the cost of capital i.e.,
! the expected rate of return on equity
assuming only equity financing,
rf - is the risk free interest rate,
rm - the expected market return and,
u - is the assets beta factor, i.e., the stocks sensitive to market movements.
service,
value
for
money,
recommendation,
among
others.
60
To date, Interbrand does not reveal how the index could be exactly
calculated, which will make our valuation more subjective from this point.
According to Interbrand study (2008), about brands that have the
power to change the retail world, ZARA was ranked in sixth position (p.26).
The same study stated that international expansion is more successful when
brand is a key business driver and ZARA prove that in the most fickle world
of fashion, you can get it right (p.19). Beyond that, the best global brands
interim report (Interbrand 2009) says that a change in the role of brand in a
category requires innovation: new business models, delivery infrastructure,
and radical product benefit intensification and ZARA have done this
successfully (p.8). The report also refer that while all retail has suffered, fast
fashion brand ZARA has suffered less due to its low-cost to quality quotient
and ZARA as become a truly global force over the last few years (p.14).
Thinking together with the information presented in the previous
paragraph, we can conclude that ZARAs brand is one important purchase
driver amongst others, such as: the low-cost to quality of the products, the
stores preferred locations, that also include unique internal and external
architecture design (Inditex Annual Report 2009, p.16), the products image,
61
the quick delivery infrastructure under 48 hours from the distribution centre
to the stores (Inditex Annual Report 2009, p.16), the innovation, for example,
when in 2009 developed applications for iPhone and other smartphones,
the excellent costumer service and the rapid response to market needs. In
this sense, we can deduce that ZARAs brand contribution to demand is only
one important factor compared with others intangibles figures. For this
reason, and for be possible to continue with ZARAs brand valuation we will
assume that RBI is 30%. It should be stressed that this is a very subjective
value, which in turn will have a large impact on brand value, as we will
analyze in the chapter 6.2.
Years
EVA
(x) RBI
(=) Brand Earnings
2010
1
883
30%
265
2011
2
841
30%
252
2012
3
872
30%
262
2013
4
924
30%
277
2014
5
982
30%
295
Thousand of Euros
Table 9. ZARA Demand Analysis Applying the Interbrand Valuation Method
Source: on the basis of (Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
62
that these procedures require a lot of information about the brand, at which
Interbrand has access but we (for obvious reasons) dont have.
In this step, we will compare the brand against a notional ideal and
score it against common factors of brand strength (Interbrand 2008, p.33).
The following table shows the seven brand strength factors and their
evaluation criteria, as well as their maximum score and ZARAs brand score.
Brand Strength
Factors
Leadership
Stability
Market
Internationality
Trend
Support
Protection
Evaluation Criteria
Market share, market position,
market segment, brand awareness
History, current position, satisfaction,
customer loyalty
Competitive structure, market growth,
volume, sales
Presence in foreign markets, export
history
Consideration, attractiveness
Quality, consistency, share of
advertising, identity
Date of registration, legal coverage
and monitoring
Brand strength
Maximum
Score
ZARAs
Brand Score
25
22
15
12
10
25
19
10
10
100
82
Table 10. The ZARAs Brand Strength Score and their Evaluation Criteria
Source: on the basis of (Salinas 2009, p.228 and Fernndez 2001, p.14).
The maximum score that can be reached is 100 points. The ZARAs
brand scores are differently weighted as different maximum scores for each
of them are given.
According to Interbrand (2011, p.40), ZARA is growing and leading the
sector, due to international expansion, excellent local adaptation, and the
constant update of its collections based on runway fashion and urban trends.
Following this, we can confirm that ZARA is a leading and stable brand, that
continues to expand, increasing its sales through a clear, consistent, and
differentiated value proposition (Interbrand 2011, p.42). As to its international
expansion, we can add that ZARA is present in 77 countries all over the
world (Inditex Annual Report 2010).
64
Years
(=)
(=)
(=)
(=)
Brand Earnings
Brand Strenght Score
Brand Discount Rate
Discounted Brand Earnings
NPV of Discounted Brand Earnings (Years 1-5)
Long Term Growth Rate
NPV of Terminal Brand Value (beyond year 5)
Brand Value
2010
1
265
2011
2
252
2012
3
262
2013
4
277
2014
5
295
249
1127
224
218
218
218
82
6,2%
1,8%
5044
6172
Thousand of Euros
Table 11. ZARAs Brand Value Calculation by Applying the Interbrand Valuation Method
Source: on the basis of (Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
CFt
t
t =1 (1+ i)
NPV = "
were
CF
Although the brand value has an infinite life, the cash flow forecast cannot be
infinite. According to our assumptions, a five-year forecast will be assumed
(N=5), i.e., the present year 2010 and the four following years.
To calculate the net present value of terminal brand value beyond
year 5, we will use a long term growth rate (g), as follows:
NPVbeyondyearsN
# 1+ g &
CFN %
(
$ i " g'
=
(1+ i) N
65
$1+ g '
CF
)
t =N
N&
CFt
%i # g(
NPV = "
t +
(1+ i) N
t =1 (1+ i)
6.2.
2010
6172
7197
66
to reach a result. The role of branding index and the brand strength score
were not totally revealed by Interbrand and a small change in the value of its
figures would lead to a very different result from that obtained. For example,
a change of the role of branding index from 30% to 40% increases the
ZARAs brand value from 6.172 to 8.229 thousands of euros (appendix 2).
Following this, we can better understand why several authors pointed out as
the first drawback of Interbrand valuation model the higher subjectivity of
some parameters, especially those regarding to consumers view (section
5.3.2).
In the same way, we highlight the impact that the estimated variables,
brand discount rate and long term growth rate, have on brand value. For this,
we construct the following table that gives a short overview of how the
ZARAs brand value can vary if both variables had assumed slightly different
values.
Growth Rate
6,4%
5693
5795
5901
6012
6128
Table 13. ZARAs Brand Value by Assuming Different Brand Discount Rates and Long
Term Growth Rates
Source: (author).
The processes of estimating the brand discount rate and the cash
flows growth rate in perpetuity are rather uncertain and subjective however,
as we can understand by the impact that they have on ZARAs value, they
are an important part on brand valuation, especially when its purpose is the
acquisition.
67
68
After selecting three valuation models, each one for its reason, we
present them theoretically and then we analyze them in a critical way,
exposing its main advantages and disadvantages. Following this, we
concluded that all methods have their own limitations. Despite the BBDO
Brand Equity Evaluator takes into consideration the purpose for which the
brand valuation is performed, this method together with the Brand Rating and
Interbrand methods still have lack of adaptation according to the purposes of
its applications. For example, none of the methods takes into consideration
the elimination of one competitor with the acquisition. This seems to be
extremely important for our case, since H&M by acquiring ZARA will
eliminate its biggest competitor. Will be ZARAa value to H&M the same as
for a company in a different sector, for example, in the food industry?
Another common limitation is that all methods are very opaque. The
information collected about the consumers view as well as the way it is
handled and incorporated in the model represent a high degree of complexity
and lack of transparency. In addition, is important to include the brand future
earnings in its calculation however, its determination is rather speculative.
For be possible to valuate ZARAs brand, by Interbrand model, we had
to take some values that seemed consistent with reality, netherless they are
subjective and some of the procedures for its determination are not fully
disclosed by Interbrand. Beyond that, these procedures require a lot of
information about brands (essentially qualitatively data), which Interbrand
has but we dont have.
As summary note, the thematic of financial brand valuation is still
recent. From the definition of brand to the application of a valuation model,
appearing problems and limitations, which means that there is even a long
way to go in this area. Hereupon, we leave an open question, how can we
optimised Interbrand brand valuation method to the case of acquisition?
69
CONCLUSION
70
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76
APPENDICES
Appendix 1
ZARAs Brand Valuation based on Interbrand Model
Years
2007
2008
2009
Branded Revenues
% Growth of Branded Revenues
Operating Costs
EBIT
EBIT Margin
Tax
% Tax
NOPAT
Capital Employed
% Return on Capital Employed
CAPM
6,2%
EVA
RBI
30%
Brand Earnings
Brand Strenght Score
82
Brand Discount Rate
6,2%
Discounted Brand Earnings
NPV of Discounted Brand Earnings (Years 1-5)
Long Term Growth Rate
1,8%
NPV of Terminal Brand Value (beyond year 5)
Brand Value (EUR)
Exchange Rate (EUR/USD)*
1,1661
Brand Value (USD)
Actual Year: 2010
Values in millions of euros
* Average Exchange Rate verified in 2010 (X-rates website)
6264
6824
8%
5757
1067
16%
224
24%
843
3334
32%
207
636
7077
4%
5972
1105
16%
265
21%
840
3810
29%
236
604
5173
1091
18%
257
24%
834
2661
41%
165
669
2010
1
8088
13%
6554
1534
19%
383
24%
1151
4321
36%
268
883
2011
2
8412
8%
6989,973
1421,547
17%
333
23%
1089
4004
36%
248
841
2012
3
8748
8%
7282,694
1465,287
17%
337
23%
1128
4128
36%
256
872
2013
4
9098
8%
7545,571
1552,329
17%
357
23%
1195
4373
36%
271
924
2014
5
9462
8%
7812,799
1649,017
17%
379
23%
1270
4645
36%
288
982
265
252
262
277
295
249
1127
224
218
218
218
5044
6172
7197
77
Appendix 2
ZARAs Brand Valuation based on Interbrand Model by changing RBI to 40%
Years
2007
2008
2009
Branded Revenues
% Growth of Branded Revenues
Operating Costs
EBIT
EBIT Margin
Tax
% Tax
NOPAT
Capital Employed
% Return on Capital Employed
CAPM
6,2%
EVA
RBI
40%
Brand Earnings
Brand Strenght Score
82
Brand Discount Rate
6,2%
Discounted Brand Earnings
NPV of Discounted Brand Earnings (Years 1-5)
Long Term Growth Rate
1,8%
NPV of Terminal Brand Value (beyond year 5)
Brand Value (EUR)
Exchange Rate (EUR/USD)*
1,1661
Brand Value (USD)
Actual Year: 2010
Values in millions of euros
* Average Exchange Rate verified in 2010 (X-rates website)
6264
6824
8%
5757
1067
16%
224
24%
843
3334
32%
207
636
7077
4%
5972
1105
16%
265
21%
840
3810
29%
236
604
5173
1091
18%
257
24%
834
2661
41%
165
669
2010
1
8088
13%
6554
1534
19%
383
24%
1151
4321
36%
268
883
2011
2
8412
8%
6989,973
1421,547
17%
333
23%
1089
4004
36%
248
841
2012
3
8748
8%
7282,694
1465,287
17%
337
23%
1128
4128
36%
256
872
2013
4
9098
8%
7545,571
1552,329
17%
357
23%
1195
4373
36%
271
924
2014
5
9462
8%
7812,799
1649,017
17%
379
23%
1270
4645
36%
288
982
353
336
349
370
393
332
1503
298
291
291
291
6726
8229
9596
Table 15. ZARAs Brand Valuation based on Interbrand Model by changing RBI to 40%
Source: author (on the basis of Interbrand Zintzmeyer & Lux, p.4 and Interbrand 2004, p.8).
78
ANNEXES
Annex 1
H&M and its other Brands
79
Annex 2
Best Global Brands, 2010 Rankings
Rank
Previou
s Rank
Brand
Country of
Origin
Sector
Brand
Value
($m)
Change in
Brand
Value
United States
Beverages
70,452
2%
United States
Business Services
64,727
7%
United States
Computer Software
60,895
7%
United States
Internet Services
43,557
36%
United States
Diversified
42,808
-10%
United States
Restaurants
33,578
4%
United States
Electronics
32,015
4%
Finland
Electronics
29,495
-15%
10
United States
Media
28,731
1%
10
11
United States
Electronics
26,867
12%
11
Japan
Automotive
26,192
-16%
12
12
Germany
Automotive
25,179
6%
13
13
United States
FMCG
23,298
2%
14
14
United States
Business Services
23,219
5%
15
15
Germany
Automotive
22,322
3%
16
16
France
Luxury
21,860
4%
17
20
United States
Electronics
21,143
37%
18
17
United States
Tobacco
19,961
5%
19
19
South Korea
Electronics
19,491
11%
80
20
18
Japan
Automotive
18,506
4%
21
21
Sweden
Apparel
16,136
5%
22
24
United States
Business Services
14,881
9%
23
23
United States
Beverages
14,061
3%
24
22
United States
Financial Services
13,944
-7%
25
26
United States
Sporting Goods
13,706
4%
26
27
Germany
Business Services
12,756
5%
27
25
Switzerland
Beverages
12,753
-4%
28
28
Sweden
Home Furnishings
12,487
4%
29
37
United States
Financial Services
12,314
29%
30
30
United States
Alcohol
12,252
4%
31
31
United States
Transportation
11,826
2%
32
32
United
Kingdom
Financial Services
11,561
10%
33
33
Japan
Electronics
11,485
10%
34
29
Japan
Electronics
11,356
-5%
35
34
United States
FMCG
11,041
6%
36
43
United States
Internet Services
9,665
23%
37
38
United States
Financial Services
9,372
1%
38
39
Japan
Electronics
8,990
-2%
39
40
Canada
Media
8,976
6%
40
36
United States
Financial Services
8,887
-13%
41
35
United States
Electronics
8,880
-14%
81
42
42
Netherlands
Electronics
8,696
7%
43
46
United States
Internet Services
8,453
15%
44
41
Italy
Luxury
8,346
2%
45
44
France
FMCG
7,981
3%
46
48
United States
FMCG
7,534
4%
47
45
United States
Business Services
7,481
-3%
48
50
Spain
Apparel
7,468
10%
49
47
Germany
Diversified
7,315
0%
50
49
United States
Automotive
7,195
3%
51
52
United States
FMCG
6,919
6%
52
57
United States
Financial Services
6,911
8%
53
55
Germany
Automotive
6,892
6%
54
63
Canada
Electronics
6,762
32%
55
54
United States
Media
6,719
3%
56
53
France
Financial Services
6,694
3%
57
58
Switzerland
FMCG
6,548
4%
58
60
France
FMCG
6,363
7%
59
56
United States
Electronics
6,109
-5%
60
61
United States
Restaurants
5,844
2%
82
61
NEW
United States
Beverages
5,777
N/A
62
62
Germany
Sporting Goods
5,495
2%
63
65
Germany
Automotive
5,461
9%
64
67
United States
FMCG
5,072
3%
65
69
South Korea
Automotive
5,033
9%
66
64
United States
Internet Services
4,958
-3%
67
81
Germany
Financial Services
4,904
28%
68
NEW
Spain
Financial Services
4,846
N/A
69
70
France
Luxury
4,782
4%
70
66
United States
Diversified
4,704
-6%
71
71
United States
FMCG
4,536
3%
72
74
Germany
Automotive
4,404
4%
73
75
Japan
Electronics
4,351
3%
74
NEW
United
Kingdom
Financial Services
4,218
N/A
75
80
United States
FMCG
4,155
8%
76
76
United States
Luxury
4,127
3%
77
77
France
Luxury
4,052
2%
78
NEW
United States
Alcohol
4,036
N/A
83
79
82
France
Alcohol
4,021
7%
80
NEW
Switzerland
Financial Services
4,010
N/A
81
92
Netherlands
Energy
4,003
24%
82
94
United States
Financial Services
3,998
26%
83
79
United States
Restaurants
3,973
2%
84
78
United States
Apparel
3,961
1%
85
NEW
Mexico
Alcohol
3,847
N/A
86
72
Switzerland
Financial Services
3,812
-13%
87
86
Germany
FMCG
3,734
5%
88
95
United States
Computer Software
3,626
15%
89
84
United
Kingdom
Alcohol
3,624
-2%
90
NEW
United States
Diversified
3,586
N/A
91
88
Italy
Automotive
3,562
1%
92
NEW
United
Kingdom
Alcohol
3,557
N/A
93
NEW
Netherlands
Alcohol
3,516
N/A
94
NEW
Switzerland
Financial Services
3,496
N/A
95
89
Italy
Luxury
3,443
4%
96
91
France
FMCG
3,403
5%
97
90
United States
Restaurants
3,339
2%
84
98
73
United States
Automotive
3,281
-24%
99
100
United States
FMCG
3,241
5%
100
98
United
Kingdom
Luxury
3,110
0%
85
Annex 3
Cash Flow Computation
86