When brands fail, does brand valuation too?

Last month Wally Olins, the man synonymous with the London brand agency that still bears his name, pronounced brand valuation an “utterly meaningless process”.

The bedrock on which many brand consultancies, accounting and valuation firms have built their reputations and practices, Olins pulls no punches on the value of brand valuation, describing it as “about as meaningful as sticking your wet finger in the wind and shouting out a number.”

He says this “ apparently rational process” is conducted through a “series of complex, arcane and to a lay mind more or less incomprehensible statistical measurements” but which ignores a number of well known truths.

“The truth is that brands of all kinds jump around all the time. They are in fashion, then they go out of fashion. They are well managed, then they are badly managed; brand managers become too risk averse or take too many risks.”

And his point is well made. Here in Australia we only need to look at a company like Babcock and Brown (B&B). Founded in 1977, this international finance and investment company had at one time 28 offices and in excess of 1,500 employees worldwide including offices in Europe and the United States. In December 2006 it had a market capitalisation of just over $8.5 billion and in 2007 its share price peaked at AU$33.90 but by December 2008 its share price had nose-dived by 99.6% to AU$0.14, representing a market capitalisation of less than $50 million. Last week the company was placed into voluntary administration.

Here Olins’ point is easy to support. Obviously, if a brand like B&B has no financial value (as the B&B board announced in January) - on what basis can any brand valuation be made?

Similarly, as BusinessWeek ranked Citibank the number 11 brand in the world in 2007 with a valuation of U$23 billion by 2009 some estimates put its brand value at around $9 billion and with that its ranking would fall to around number 40. No one can or would dare predict what Citibank’s brand value will be by the end of 2009. And given the level of US government assistance (US$25 billion to date), it’s brand may yet cease to exist (like I saw Washington Mutual close it’s doors and disappear overnight) and what then is the meaning of any valuation?

It Olins is does oversimplify of the brand valuation process in that it does examine both net present value as well as attempts to construct an idea of future value. However, he is right about how often brand valuation is trumpetted as an absolute measure of value and that, almost without exception in most valuations I have seen, the process takes no account of what either customer or market perception and sentiments is for a brand.

And Olins is only half right when he says brands have “no objective, absolute value” but the truth is that brand valuation can be used to establish an objective value but its ability to measure “absolute” value that is somewhat questionable.

The four standard brand valuation methodologies accepted by both the Financial and Accounting Standards Board and the International Accounting Standards Board for use on balance sheets around the world do provide an objective guide to what people should pay for brands. However, they can, in no way, be used to demonstrate absoluteness

The real fact is that by any measure there has only been a small reduction in the brand value of most of the world’s top brands and as market conditions and sentiments change values continue to change. Last week brands like Apple, Google, UPS and Amgen were being touted as possible replacements in the venerable Dow Jones Industrial Average for stricken companies like Citi Group, General Motors and General Electric.

Brand values do reflect balance sheets, market trends and sentiment but can only do their best to take account of black swan moments. In that way there can be no absolutes, and that is meaningless.

This blog was also cross-posted in Marketing Magazine Australia on March 17.