Tracking The Value Of The World’s Major Brands

Several companies run annual brand valuations. It is a good business for advertising and marketing firms to be viewed as experts on brands. Brand values are based on the cash flow they create, and there are a number of ways to measure that. The mathematical parts of the formulas are relatively easy. The part that is hard, because it requires skilled forecasting, is what the reputation and value of a brand is likely to be three or four years from the date the values are set. It would have been hard half a decade ago to predict that AIG (AIG), the brand of the world’s largest insurance company, would be virtually worthless today, or that Facebook would be an extremely valuable brand. There is both art and science to determining the future of brands.

The two most prominent brand lists are the “Best Global Brands” done by Interbrand. This list comes out every September. The criteria for this list are complicated. Interbrand will only offer a valuation based on publicly available financial data. This rules out some companies that probably should be on the list. A brand must have at least one-third of revenues outside of its country of origin. The other big driver of value in the Interbrand model is “the brand’s ability to secure ongoing customer demand (loyalty, repurchase and retention) and thus sustain future earnings.” There has to be a portion of the measurement that is subjective. The 2008 Interbrand list had Coca Cola (KO) in the No.1 spot with a value of $66.7 billion, followed by IBM (IBM) at $59 billion, and Microsoft (MSFT) at $59 billion as well. The figures for the one hundred names on the Interbrand list rarely moved more than 8% up or down from the 2007 rankings.

The other major annual brand rating is the BrandZ Top 100 Brands. Brandz says that its data is based, in part, on” the published, extensive results of over 650,000 people who were quizzed across thirty-one countries, comparing over 23,000 brands.” The firm that handles the valuation and posts the list is Millward Brown, a unit of advertising and marketing giant WPP. BrandZ’s methodology is calculated by analyzing the dollar value of each brand in the ranking as the sum of all future earnings the brand is forecast to generate, discounted to a present day value. There is a good deal of subjective work that goes into the list as well, like any predictive model. BrandZ’s method creates a list that is quite different from the Interbrand list. Google (GOOG) is the most valuable brand in the world, according to the 2009 study, worth just over $100 billion. Microsoft is next at $76.2 billion, followed by Coca Cola at $67.6 billion.

24/7 Wall St. reviewed both lists and looked at how they were compiled to supply a brief analysis of the present situation and future prospects of the most valuable brands and those that have gained or lost the most value over the last year. The BrandZ list was the major guide for this review. It is the more recent study of the two and has many more brands from overseas, especially from Asia where brand values may well be growing faster than they are in the US, Japan, and Europe.

24/7 Wall St. looked at the top eleven brands on the BrandZ list in terms of total value and several of the major brand values that rose or fell the most. BrandZ told 24/7 Wall St. that brand values moved significantly this year, more than past years, largely because of the global economic upheaval.
THE BIGGEST BRANDS

1. Google (GOOG) is assigned a value of just over $100 billion, up 16% from last year. The company’s market cap is only $143 billion, so the company’s name and its long-term value are relatively close together. The financial value of the brand may be complicated to calculate but the most basic number, Google’s operating income, will be about $7 billion this year. That number is no longer growing quickly which puts that future value of both the company and the brand at some risk. The search engine business may not show double- digit revenue growth the way it has in the past. Google will have to rely on new business, especially its software applications and Android mobile operating system to keep its earnings growth at historic levels. Google’s financial future without them is nowhere near as compelling as its past.

2. Microsoft has a value of $76.2 billion, up 8%. That increase is surprising because the world’s largest software company had a tough year. It was not able to do much to increase its share of the search engine business and its core operating system and enterprise software units did not do as well as they have in the past. Microsoft, and many financial analysts who cover the company, would make the argument that the next two years should be unusually good ones both in terms of growth and profits. The company’s new Bing search product and its alliance with Yahoo! (YHOO) give it a chance to make inroads against Google, which currently dominates the market, especially in the US and Europe. The release of Windows 7 will offer Microsoft the chance to get millions of consumer and enterprise PC users to upgrade from older versions, particularly the current OS flagship Vista, which has been unpopular with many customers. Microsoft will be able to make the case before the end of this year that it is back on track to be a growth company, if Windows 7 and Bing prove that they have substantial momentum.

3. Coca Cola (KO) has a brand price tag of $67.6 billion. That is up 16% from 2008. Coke however has a problem. Its case sales growth is relatively slow. Unit volume was up 4% in the second quarter. Coke does say it gained market share in the nonalcoholic ready-to-drink beverage business. Growth overseas was unusually strong. In North America, it was nearly flat. In the last quarter, Coke’s revenue dropped 9% to $8.3 billion. Operating income was down 9% as well to $2.4 billion. Coke is a brand that will generate predictable cash flow for years, just as it has in the past. But, Coke is becoming something of a commodity. It is no longer up against only Pepsi (PEP). It has to do battle with drinks from Red Bull to bottled water. Coke’s future is predicable, but not compelling.

4. IBM’s (IBM) brand was valued at $66.6 billion, a 20% increase. The huge tech giant has probably done as well at profitable diversification as any major business based in the US. Only a modest amount of the company’s sales and operating profits come from hardware. In the second quarter, revenue fell 13% to $23.3 billion, but net income rose 12% to $3.1 billion. Those figures demonstrate one of the key components of keeping brand value high:  controlling margins through expense management. In the second quarter, IBM’s grow margins rose to 45.5% from 43.2% in the same quarter a year ago. All three of its largest business units had substantial improvements in margins. Brand diversification has worked extremely well at the firm. Systems and technology is now the fourth IBM operating unit in terms of sales. Technology services and software are at the heart of the firm’s growth now. Mainframe computers are nearly an afterthought.

5. McDonald’s (MCD) has a brand value of $66.6 billion, up 34%, which should not be a surprise to anyone. The world’s largest restaurant chain has over 31,000 stores which should put it close to market saturation. McDonald’s should not be able to grow much with that number of locations, but same-store sales were up 4.3% in July. The figure was 7.2% in Europe which is in a recession even deeper than in the US. The increasing value of the brand has to be based, at least in part, on innovation. The hamburger market may not be expanding quickly, so McDonald’s has attacked, successfully, the breakfast and premium coffee markets, a victory of creativity over size.

6. Apple (AAPL) came in with a BrandZ valuation of $63.1 billion, up only 14%, which is a bit of a shock no matter how the measurement was made. Apple has been able to continue to successfully sell iPods at an astonishing rate even though it has already shipped 200 million of them since 2001. Mac sales have at least held their own, and, by many measures, are still taking market share from PCs. The iPhone has been an unqualified success. The firm’s financial results bear out what its unit sales indicate. Apple’s revenue in the last quarter went from $7.5 billion to over $8.3 billion. Operating income rose from just under $1.4 billion to almost $1.7 billion. If Apple’s brand value is only moving up at a 14% rate, it is the only thing at the company that is growing that slowly.

7. China Mobile (CHL) is the largest Asian firm on the list. It has a brand value of $61.2 billion, up 7%. China Mobile is the world’s largest cellular operator, and its NYSE market cap is $231 billion, making it one of the most valuable companies in the world. Last year the number of subscribers that company had hit 457 million, up almost 24% from the end of 2008. The case against more rapid growth at China Mobile is that the market on the mainland has become much more competitive with smaller firms like China Unicom fighting for a larger piece of the market. The more optimistic case is that China’s GDP is still growing at over 7% and cellular service penetration in rural areas is low. China is also at the earliest stages of 3G adoption which means there could be a renaissance of the wireless industry in the world’s most populous nation.

8. GE (GE) is the largest brand to lose value compared to last year, down 16% to $59.8 billion. GE has hit its worst patch in decades. It has a lot to prove to change the perception of the company among investors. GE traded at over $38 in April 2008. It made an extraordinary drop to $5.87 in March based on concerns that the level of toxic assets on the balance sheet of its financial unit were so high that it could cause unprecedented loss and force the company to beg for federal aid or raise huge sums of money. The shares are back to $14, but the market value of GE is down almost $300 billion in less than two year. GE has convinced most of Wall St. that its money unit is fairly safe, but the rest of the company is doing poorly, primarily due to the economy. GE’s net earnings fell 49% last quarter to $2.7 billion. The most disturbing part of the firm’s performance in the period was the drop in earnings and revenue at its big energy and technology infrastructure units. A complete analysis of the GE brand has to be very hard. Some of the company’s largest units, like NBC Universal, don’t carry the parent company’s name. No matter how the company is parsed, the corporation and the brand face a tough year.

9. Vodafone (VOD), the huge UK-based cellular carrier had a 45% increase in its brand value to $53.7 billion, marking the largest percent increase among the top ten brands. Vodafone has a market cap of $113 billion based on the ADS shares it trades on the NYSE. That is much higher than Verizon’s (VZ) at $89 billion and below AT&T’s (T) which is $150 billion. Vodafone had a strong second quarter. Revenue rose 9% to 10.7 billion pounds. Free cash flow moved higher by 21 % to 1.9 billion pounds. The company had 313 million customers at the end of the period, much more than any of the American carriers. The success of Vodafone is its global diversification. It does business in most of the major European countries and does business in Africa and Central Europe where its business is growing rapidly. It also has a modest presence in India. In the US, Vodafone is a minority holder in Verizon Wireless. None of the other large cellular companies in the world can claim such a diverse portfolio.

10. Marlboro is obviously not the name of a company, but it is the world’s dominant cigarette brand with a value of $49.4 billion, up 33% from last year. Marlboro is the flagship brand of both Philip Morris International (PM), which does business in 160 countries outside the US, and Altria (MO), the US arm of what was formally a global company. Philip Morris does particularly well in Asia, which might be expected because government aversion to tobacco products is not terribly strong in the region. It shipped 83 billion units of Marlboro in the second quarter. Philip Morris has a market cap of $91 billion. Altria shipped 34.6 billion Marlboro units in Q2, out of a total of 40.6 billion units for the entire company.

11. Wal-Mart (WMT) has a brand value of only $41.1billion, up 19%. The number seems remarkably low. Wal-Mart is not only one of the world’s largest companies and the largest retailer; it has a market cap of almost $200 billion. Wal-Mart does have more than one brand and its Sam’s Club operation brings in a relatively large part of the firm’s revenue. The argument against Wal-Mart having a premium valuation may be that the retail industry in general is doing poorly and the recession and competition are likely to cap the company’s growth. Wal-Mart’s 8,000 stores drove over $400 billion in revenue in its last fiscal. The two strikes on Wal-Mart’s earnings power are obvious. One is that same store sales are only going up about 3%, which is good compared to most of the industry but hardly makes it a growth company. The other is that margins are remarkably low. In the last quarter, net income was $3.1 billion on revenue of $94.2 billion.

THE WINNERS

To get a list of brands that had representative increases in their brand valuations, 24/7 Wall St. eliminated some Chinese brands that are not well-known and where financial information is not readily available. This includes The Industrial and Commercial Bank of China which has a brand value of $38 billion which was up 38%, French retail group Auchan which has a brand valuation of $10.6 billion which was up 48%, global food retailer Aldi which has a market value of $8.6 billion up 49%, and the China Merchants Bank which has a brand value of $8.1 billion which rose 168%.

1. The most impressive increase among brands well-known in the US is Blackberry, the iconic business smartphone which is marketed by Research-in-Motion (RIMM).  It has a brand value of $27.5 billion, up 100%. That figure is extraordinary because the entire market cap of RIMM is only $42 billion. The Blackberry is still considered the clear market leader in the enterprise handheld business although it has started to have competition from Apple, Nokia, and a few of the Asian electronics companies. The financial power of the brand is clear. RIM revenue rose 53% from the same period the year before to $3.42 billion. The company added 7.8 million devices to reach a total of 28.5 million. RIM claims that it holds 55% of the US smartphone market. RIM is extraordinarily profitable and had net income of $643 million in the last reported quarter. RIM’s future is based to a very large extent on whether it can begin to expand into the consumer market for smartphones which is the stronghold of the Apple iPhone before Apple and other smartphone company’s erode the Blackberry’s share in the enterprise market. RIM’s ability to win that competition is what will keep its brand value high.

2. Amazon (AMZN) has a brand value of $21.3 billion, up 85% from last year. The stock market likes Amazon. Its shares are up more than 60% this year to $85, and it has a market cap of $37 billion. Amazon probably gets its large improvement in value from two things. The first is that its earnings continue to be strong in a weak retail and e-commerce environment. Revenue for its last quarter rose 14% to $4.56 billion. Net income slipped slightly but investors seem to have been pleased by earnings guidance. More important than current numbers is Amazon’s potential. Like Apple, it is fearless in launching new brands, the most recent of which is the Kindle e-book reader which sells for $299 in its latest incarnation. Some analysts expect that Amazon will sell enough of the products for it to add substantially to the company’s revenue. That is possible, but premature. Amazon has been clever in getting into other business which could have very high margins. It acts as the hardware and software backend for a number of other retailers, using expertise and systems it already owns and has paid for. Amazon seems determined to turn over every rock it can find in the hope of finding money.

3. AT&T (T) has a brand value of $20.1 billion, which rose 67% last year. Wall St.’s perception is that the company’s success in wireless and broadband is outrunning its loss of landline customers. Its cellular operations have been helped immeasurably by iPhone sales. AT&T does have almost 80 million cellular subscribers, but it is up against hard competition from Verizon. Its profits on wireless data are impressive. The company’s U-verse fiber broadband and TV product is growing quickly has now has 1.6 million subscribers, but it is locked in competition with cable companies which cannot afford to lose subscribers and the big satellite TV operators. Holding it valuation over $20 billion next year will tough.

4. Red Bull has a valuation of $8.2 billion. It was not even on the list last year. Dietrich Mateschitz started Red Bull in 1987. The company now sells about four billion cans a year and has revenue of $3.4 billion. According to Forbes, this has made the founder a billionaire. Red Bull has made itself into the drink of choice for people who need more caffeine than twenty cups of coffee will give them.
THE LOSERS

1. Bank of America (BAC) and Citi (C) can be lumped together. BAC’s brand valuation dropped 53% to $15.4 billion. Citi’s was down 52% to $14.6 billion. These companies may not recover for years, if they do at all, based on the standpoint of the earnings power of the brands. They still have severe problems with consumer credit and commercial real estate exposure. It is not clear that they have solved the problems with the toxic assets on their balance sheets. The persistently pessimistic news that hovers around both companies has another by-product. Institutional customers are more likely to do business with financial firms which better balance sheets, like Goldman Sachs (GS), which lost 38% of its brand value down to $7.4 billion. Individual investors are more likely to use other brokers, including discount firms. And, for individual banks, regional and local banks may seem to be safer place to keep money, whether that turns out to be true or not.

2. Starbucks (SBUX) brand value dropped 40% to $7.3 billion. Starbucks ran the playbook on hurting a brand’s value. The public perceived that it did not offer enough value for the dollar, particularly as the economy fell apart. Starbucks over-expanded and ended up with too many stores, which forced it to close several hundred and lay-off thousands of employees. Since Starbucks is supposed to be a “good” company, that did not help its image. The firm was slow bringing out lowered-priced products which helped McDonald’s and Dunkin’ Donuts in their efforts to get market share from Starbucks. The company’s most recent earnings indicate that its same-store sales and revenue are at least beginning to stabilize, but the future of the company is going to be based on how well and how quickly it can dig itself out of a deep hole.

3. Yahoo!’s (YHOO) brand value dropped 31% this year to $7.9 billion. Not much has gone right for the company recently. It has continued to lose market share in the US search industry to Google. That may be helped by its new alliance with Microsoft. Yahoo! was badly hurt by the sharp downturn in the online display advertising market. That, and high costs, pushed the company’s operating margins down well below their historic levels. Yahoo! has fired several hundred people in the hope of improving profits. The firm’s problems now are fairly simple. Its deal with Microsoft should make the search segment of its revenue robust. Whether it can build a better content portal to bring in display advertising and compete with AOL and MSN is an open question and will be for at least another year.

4. Home Depot’s (HD) brand value is $9.3 billion, down 40% from last year. The cause of this drop can be boiled down to one word—“housing”. The company’s financial results are no longer in free fall but they are not going to recover soon. Revenue dropped 10% to $16.2 billion in the quarter ending May 3rd. Cost cutting actually allowed Home Depot to increase operating profit by 24% to $980 million. Same-store sales for the period fell 10.2%. Home Depot can’t cut costs fast enough, long enough, to make up for that.

Douglas A. McIntyre