Earlier this month, brand valuation experts, Brand Finance, declared Ferrari the most powerful brand in the world, ahead of Google, Coca-Cola, PwC and Hermes.
Ferrari were quick to print up the t-shirts, with Chairman Luca di Montezemolo acknowledging the accolade and thanking all the workers at Maranello who make the company’s exceptional products.
We got in touch with David Haigh, CEO of Brand Finance, who was kind enough to provide access to his team and the data used in their latest report. The rest of this article makes use of this data, unless specifically stated otherwise.
Back in October I spoke with Mike Rocha of rival firm Interbrand, during which time I suggested that brands such as Ferrari, MINI, Aston Martin and Jaguar Land Rover, all deserved greater credit in their 2012 list of the Best Global Brands. This was based on the notion that brand power was a more relevant tool for management than the absolute brand value.
So, instead of just publishing news of Ferrari’s success, we decided to look beneath the covers and understand the reasons ‘why’ Ferrari are top-dog among acknowledged brand leviathans such as Toyota, BMW, Volkswagen and Mercedes-Benz.
But before getting too tied up in the absolutes of these valuations, it’s important to realise a couple of things; firstly, it’s relatively easy to manipulate the results to deliver any value you’d like – every valuation includes a subjective assessment of risk and uses 3rd party data – from Bloomberg in the case of these figures from Brand Finance. Plus you need to understand the accounting treatments being applied to cash and debt, which hugely influence the enterprise value of a business.
“..it’s relatively easy to manipulate the results to deliver any value you’d like.”
For example Fiat, who own Ferrari, Maserati, Chrysler, Jeep and component maker Magneti Marelli has a heavily-depressed enterprise value (net debt plus market cap) of $8.5 billion, based on a market cap of $6.8 billion. But within this figure, the profitable Maserati business is afforded zero value, while Fiat’s loss-making European car business contributes a negative amount.
This results in the rather odd situation where Fiat’s stakes in Ferrari and Chrysler alone amount to more than the total enterprise value of the business. The reason seems obvious – they own just 58.5% of Chrysler and need the rest of this stakeholding to survive. Therefore the magnitude of Fiat’s predicament is factored into its risk profile, together with the need to finance such an acquisition through debt (which depends on its cost of capital and the value of its business as an asset).
When Ferrari are separated out, we see an enterprise value (EV) of $6.01 billion with their brand accounting for 61% of that – $3.64 billion.
To put that in perspective, looking through the list of premium automotive brands, we have BMW and Daimler-Benz with brand power values of 22% and 21% respectively. Both companies are heavily leveraged (with high levels of debt financing their growth), hence their high EVs of $104.5 billion and $95.0 billion each (compared with market caps of $58 billion and $56 billion). Volkswagen Group are in a similar position, $100.7 billion enterprise value with a brand power of 24% – which reflects the considerable investment they’ve also made in their future business.
Unsurprisingly, Ferrari’s nearest competitor is Porsche. With a year-on-year sales increase in February of 18.2 per cent (30.5 per cent in the U.S.), the German powerhouse delivers a brand power of 43% on an enterprise value of $26.1 billion.
No other car maker comes close, although excluded from Brand Finance’s calculations are Rolls-Royce, Bentley, Lamborghini and Aston Martin – all of them too small to register on Bloomberg’s radar.
|Brand||Enterprise Value (USD billions)||Brand Value (USD billions)||BV:EV (%)|
|* Audi has considerable cash reserves, which results in the unusual situation of its enterprise value being lower than its market cap of $32.3 billion.|
|All data was provided by Brand Finance Ltd over a period of several weeks, and is accurate as of 7th March 2013.|
To add further insight, Brand Finance provided us with a breakdown of brand value per country. As you can see, it’s a two-horse race between Germany and Japan, with the old-guard in Detroit trailing a distant third.
Although the Koreans (Kia and Hyundai) are making great strides, there’s still a long way to go before they influence customer choice due to the appeal of their brands.
Compared to 2012, Germany and Japan are up – by 13.2 per cent and 9.4 per cent respectively. France is down – by 5.0 per cent, while Korea, UK and Italy are all up – by 5.2 per cent, 17.1 per cent and 23.7 per cent.
Although China is down by 10 per cent, watch out for new brands such as Qoros, which are looking to buck the trend by offering a range of innovative (and European influenced) designs targeting the premium sector.
Luxury beats utility in the race for brand value
In recent years Ferrari has excelled at making great driving cars. It wasn’t always this way, the company made some questionable products back in the ’90s, leaving many enthusiasts (including myself) taking our custom elsewhere (principally to their rivals in Stuttgart).
But Ferrari survived and indeed flourished, because they retained the appeal of a premium couture brand. Even though their ‘Tailor Made’ program is relatively new, part of the allure of buying a Prancing Horse is the feeling of buying something unique and special.
The same is true of Rolls-Royce, Bugatti, Aston Martin and Bentley.
Such allure is not lost on the accountants. Where the value of BMW reflects a price/earnings (P/E) ratio of around 7, Ferrari is viewed by some analysts as being on a par with other luxury goods brands with 20-25.
To understand why, you need to first consider the brand as a competitive asset. Every business, whether it be a car maker or grocery store, must build a competitive advantage in its sector. At one extreme if a business had no competitive advantage it would be starting from scratch each morning – introducing itself to customers and finding ways of differentiating itself against its competitors. As competition increases, so does the sophistication of what qualifies as an advantage.
If you can navigate your way through a venn diagram, then you’ll find most of what you need below.
Simply put, Ferrari is one of the most attractive automotive brands – every car maker wants to be like Ferrari, while the majority of drivers want to own one.
Take the launch of its latest hypercar, LaFerrari, at this week’s Geneva Motor Show. While the launch of such a car happens but once in a decade, Ferrari stole the show, placing its closest rival McLaren firmly in the shade.
As with Google, Coca-Cola or GoPro, Ferrari defines its sector. Tell someone you’ve just bought a supercar and the vast majority of people will ask “is it a Ferrari?” We call this a brand monopoly, where implicitly, a particular brand becomes the definitive choice.
Just won the lottery? Now you can buy that Ferrari. Sold your business? What better way to show your success than owning a Ferrari.
But the power of a brand extends well beyond its appeal. If few people know about a brand then its value will be limited, hence the task of promotion, sponsorship and advertising. It will not have escaped your attention that Ferrari is the most visible brand in Formula One – a sport with a global TV audience of more than 500 million people.
So, is Ferrari an exception to the rule?
Behind their desirable model range lies a sound business operation, one which understands the need to protect its brand from those who might abuse it. Own a Ferrari and the resale value of your car is closely linked to the way Ferrari ‘insist’ you maintain it – stray outside the official service and repair centres and you risk banishment from ‘La Famiglia’.
What can initially seem onerous, is in fact designed to protect their brand and the owners who benefit from its aura. One such benefit is being ‘invited’ to buy one of its limited series models, which in turn rewards such customers for their loyalty – to the brand.
So, it’s hardly surprising that Ferrari leads the brand power index, and although BMW or Mercedes may never replicate its outright appeal, one lesson that can be learned is how it mixes passion with perfection.
We are only human after all, and Ferrari knows better than most how to connect with our emotions.
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NOTE: The author was one of the architects of ValueBuilder, the ground-breaking shareholder value management (SVM) tool developed by Price Waterhouse in the mid-1990s.
Many Thanks to David Haigh of Brand Finance, for giving us access to the data used in preparing this article.
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Insight into: Methodologies
Brand Power is a relative term which reflects the proportion of a company’s overall business value which can be attributed to its brand. Smaller companies may have high power, even if their value is considerably lower (e.g. Ferrari vs Coca-Cola) and is therefore a true measure of performance rather than wealth.
There are numerous ways of valuing a brand, none of which are trivial. Brand is an intangible asset, included among a bucket of similar items more commonly referred to as IPR (Intellectual Property Rights) and unlike the main cash transactions of a business you value IPRs either by their cost to replace, their value on the open market or their contribution to income or economic benefit.
For obvious reasons, most businesses would have no idea what it cost to build their brand – they develop over many years and in the context of one-off moments in time. You could look back at BMW’s M division and attribute much of the value of its brand to the giant-killing E30 M3 competing in DTM and other global touring car series.
Could BMW (or another brand owner) rebuild that kudos for the same or less investment? In most cases, the answer to that question would be meaningless and certainly of little practical use.
How often have you browsed through eBay and found a major brand for sale? Probably never. Brands are regularly valued during acquisitions, or liquidation proceedings, but almost never under open market conditions since transactions are usually kept confidential. The actual value paid will also be subject to numerous conditions (payment structure employed, taxes, liabilities or some other market benefit gained), so in practice there’s no way of knowing the market value of a brand.
Which brings us on to the final method, that of valuing a brand based on its future economic benefit to its owner. Both the Royalty Relief method used by Brand Finance and Interbrand’s Brand Strengh based valuation approach follow this line of thinking, but differ substantially in the detail.
Interbrand’s Brand Strength framework considers both internal (management and employees) and external (customer) factors and covers every aspect of what, in their view, makes a strong brand. They assess this brand’s contribution to business results based on a proprietary set of data (and personal experience) which also takes into account the financial performance of the brand’s products or services, its strength relative to competition and the role played by the brand in persuading customers to make a purchase.
One disadvantage of this approach is the way risk is accounted for at several levels – both the brand index used to determine its strength and the discount rate applied in the NPV calculation take account of the risk associated with a brand’s financial forecasts.
Unlike Brand Finance, Interbrand publish only the brand value, which is why we weren’t able to rank the automotive brands last year and draw conclusions on their brand power.
Brand Finance use the royalty relief method, which has the advantage of being more commonly used (in legal cases and tax disputes). It assumes the business does not own its brand and therefore needs to license it from a third party trademark owner. Ownership of the trademark therefore ‘relieves’ it from paying a license fee (the royalty), and the fees that would be due can be used to estimate the proportion of future cash flows that are attributable to just the brand.
The final value relies on verifiable third party data, but still involves personal judgement. During a recent interview with David Haigh (CEO of Brand Finance), he expressed his belief that the royalty relief approach provides a more stable currency when used in rankings against other brands.
The real ‘skill’ is in determining the appropriate royalty rate, which often starts with a rule of thumb of being either 25% of net profit or 5% of turnover. Thereafter datasets of comparable royalties are used in arriving at an appropriate rate.
With either method, considerable expertise is required in calculating risk, attributing influence and applying an appropriate discount to the resulting cash flows.