Best Retail Brands: Our methodology
By Mike Rocha, Global Director, Brand Valuation
Interbrand’s brand valuation methodology determines, in both customer and financial terms, the contribution of the brand to business results.
A strategic tool for ongoing brand management, it brings together market, brand, competitor, and financial data into a single framework within which the performance of the brand can be assessed, areas for improvement identified, and the financial impact of investing in the brand quantified. It also provides a common language around which a company can be galvanized and organized.
We believe that a strong brand, regardless of the market in which it operates, drives improved business performance. It does this through its ability to influence customer choice and engender loyalty; to attract, retain, and motivate talent; and to lower the cost of financing. Our approach explicitly takes these factors into consideration.
CRITERIA FOR INCLUSION
There are several criteria for inclusion in Interbrand’s Best Retail Brands ranking.
Using our database of retail brands (populated with critical information over the past several years of valuing retail brands specifically) and with 35 years of consulting on retail brand experiences through Interbrand’s retail arm, Interbrand Design Forum, we formed an initial consideration set of leading brands.
All brands in the set were then subjected to the following criteria that narrowed the candidates:
- There must be substantial publicly available financial data. If the company does not produce public data that enables us to identify the financials of the branded business, as is sometimes the case with privately held companies, it cannot be considered for the list.
- Economic profit must be positive, showing a return above the operating costs, taxes, and capital financing costs.
- To be defined as a retailer, a brand must generate at least 50 percent of its revenues from sales through its branded retail stores and websites. For example, while Apple was considered, it failed to meet this requirement. In addition, we limit the list to those traditional stores and e-commerce sites that sell goods. In order to focus on traditional retail, we have excluded restaurants, auto dealerships, service providers, and gas stations.
There are three key components in all of our valuations: analyses of the financial performance of the retailer, of the role the brand plays in the purchase decision, and of the competitive strength of the brand.
This measures the overall financial return to an organization’s investors, or its “economic profit.” Economic profit is the after-tax operating profit of the brand, minus a charge for the capital used to generate the brand’s revenues and margins. A brand can only exist and, therefore, create value, if it has a platform on which to do so. Depending on the brand, this platform may include, for example, manufacturing facilities, distribution channels, and working capital. Interbrand, therefore, allows for a fair return on this capital before determining that the brand itself is creating value for its owner. We build a set of financial forecasts over five years for the business, starting with revenues and ending with economic profit, which then forms the foundation of the brand valuation model. A terminal value is also created, based on the brand’s expected financial performance beyond the explicit forecast period. The capital charge rate is determined by reference to the industry weighted average cost of capital.
ROLE OF BRAND
Role of Brand analysis is about understanding purchase behavior—the brand’s influence on the generation of demand through choice. It measures the portion of the decision to purchase that is attributable to the brand, relative to other factors (for example, purchase drivers like price, convenience, or product features). The Role of Brand Index (RBI) quantifies this as a percentage.
Customers rely more on brands to guide their choice when competing products or services cannot be easily compared or contrasted, and trust is deferred to the brand (e.g., organic foods), or where their needs are emotional, such as making a statement about their personality (e.g., luxury brands). RBI tends to fall within a category-driven range, but there remain significant opportunities for brands to increase their influence on choice within those boundaries, or even extend the category range where the brand can change consumer behavior.
RBI determinations for this study derive, depending on the brand, from one of three methods: primary research, a review of historical roles of brand for companies in that industry, or expert panel assessment. RBI is multiplied by the economic profit of the branded products or services to determine the earnings attributable to the brand (brand earnings) that contribute to the valuation total.
Brand Strength measures the ability of the brand to create loyalty and, therefore, to keep generating demand and profit into the future. Brand Strength is scored on a 0–100 scale, based on an evaluation across 10 key factors that Interbrand believes make a strong brand. Performance on these factors is judged relative to other brands in the industry and relative to other world-class brands. The strength of the brand is inversely related to the level of risk associated with the brand’s financial forecasts. A proprietary formula is used to connect the Brand Strength Score to a brand-specific discount rate. In turn, that rate is used to discount brand earnings back to a present value, reflecting the likelihood that the brand will be able to withstand challenges and generate sustainable returns into the future.
ABOUT BRAND STRENGTH
Our experience and knowledge show that brands in the ideal position to keep generating demand for the future are those performing strongly (i.e. showing strength versus the competition) across a set of 10 factors that are outlined below.
Four of these factors are more internally driven and reflect the fact that great brands start from within. The remaining six factors are more visible externally, acknowledging the fact that great brands change the world. The higher the Brand Strength Score, the stronger the brand’s advantage.
Clarity internally about what the brand stands for and its values, positioning and proposition. Clarity, too, about target audiences, customer insights and drivers. Because so much hinges on this, it is vital that these are articulated and shared across the organization.
Internal commitment to brand, and a belief internally in the importance of brand. The extent to which the brand receives support in terms of time, inﬂuence and investment.
How secure the brand is across a number of dimensions: legal protection, proprietary ingredients or design, scale or geographical spread.
The ability to respond to market changes, challenges and opportunities. The brand should have a sense of leadership internally and a desire and ability to constantly evolve and renew itself.
The brand is soundly based on an internal truth and capability. It has a deﬁned heritage and a well-grounded value set. It can deliver against the (high) expectations that customers have of it.
The ﬁt with customer/consumer needs, desires, and decision criteria across all relevant demographics and geographies.
The degree to which customers/consumers perceive the brand to have a differentiated positioning distinctive from the competition.
The degree to which a brand is experienced without fail across all touchpoints or formats.
The degree to which a brand feels omnipresent and is talked about positively by consumers, customers and opinion formers in both traditional and social media.
The brand is not only recognized by customers, but there is also an in-depth knowledge and understanding of its distinctive qualities and characteristics. (Where relevant, this will extend to consumer understanding of the company that owns the brand.)