FMCG firms take to brand valuations

A few months ago, Godrej Consumer Products (GCPL) wondered why its Cinthol brand was growing slower than fellow soap brand Godrej No 1. In its quest for the answer, it embarked on a valuation exercise and came up with a revelation.

The potential value of its top five brands - Cinthol, Fairglow, Godrej No 1, Ezee and Godrej Powder Hair Dye - was Rs 3,900 crore. Their realised value at that time was pegged at only Rs 2,600 crore.

This had a significant influence on Godrej's strategy. The thing to do was to take steps to ensure higher performance through more "consumer offers", like advertising to customers, than "trade offers", which are to retailers.

"The guidelines suggested by the exercise will help us keep adding value to our brands," says Hosehdar Press, the company's executive director and president.

GCPL has also decided to publish a detailed report on the exercise in its annual report.

Brand valuation measures mainly two criteria - the potential profitability of the brand and non-financial factors like brand recall as compared with competitors.

In India, such exercises have been undertaken mostly by large conglomerates, such as Tata, since it is easier to quantify the royalty to be charged from group companies using the corporate brand name.

However, of late, companies across sectors, especially fast-moving consumer goods and telecommunications, have been valuing their individual brands.

In the FMCG sector, brand valuation used to be popular mainly among multinational companies. However, sources say a clutch of home-grown entities are taking the route.

Among these companies are Marico, Dabur India, Sun Earth Ceramics (the maker of Sonora tiles), Cholayil (the maker of Medimix) and personal care services firm VLCC.

Disclosing the value of brands enables companies to have better investor relations and consumer perception. It also helps in tackling corporate litigations considering the rise in trademark cases, say companies.

For Surya Foods, the maker of Priyagold biscuits, this exercise was a precursor to the initial public offering. The value ascertained by the company for its brands was Rs 1,200 crore.

"We undertook the exercise to give a better picture to our potential consumers, distributors and retailers about the value of our brands," said B P Agrawal, the company's managing director. The company will use insight from the exercise to implement expansion plans nationwide.

Experts say brand valuation is more than a mere marketing tool: it has become a key management application.

For multinational companies such as Coca-Cola and PepsiCo, brand valuation is central to the strategy, which determines their marketing spend for each brand and gives them a competitive advantage. It is also a significant contributor to enterprise value.

"For Indian companies to partner the International Financial Reporting Standards (IFRS), brand valuation is crucial," says Sanjiv Agrawal, partner, Ernst & Young.

"It helps companies to take key corporate decisions like selling a brand, setting up a joint venture, an acquisition, or towards improving brand performance. It's also a check on the performance of their brand managers,"

"With more companies getting listed, or heading abroad to raise capital, and a flurry of mergers and acquisitions, global accounting standards expect companies to be transparent about their business operations, which includes listing brand valuation figures in financial statements," said Unni Krishnan, managing director of Brand Finance India, a global brand consultancy company.

"There is also a growing realisation among companies that cutting costs is not the only way to create value. While brands are intangible assets, they are central to businesses like in the FMCG sector and, therefore, cannot be left unaccounted for," he said.

VALUABLE LESSONS

Godrej Consumer Products realised that a lot of the value of its brands was untapped. It tweaked its strategy to focus more on "consumer offers" through advertising, rather than "trade offers" for retailers.

For Surya Foods, the maker of Priyagold biscuits, brand valuation was a precursor to the initial public offering. Insight from the exercise is also being used as it expands nationwide.