A couple of days ago I was making some observations about the way brand valuations seem to be disconnected from the values of companies.
In response we received a comment from a member of Interbrand saying,
Firstly, let’s be clear that there is no link to stock market prices and brand valuation. As you know, stock markets set a price on a company based on investors’ perceptions of whether share price will go up or down.
However Interbrand does make an argument that there is a connection between the valuation of a brand and the stock price based on their own study with JP Morgan.
Several studies have tried to estimate the contribution that brands make to shareholder value. A study by Interbrand in association with JP Morgan (see Table 2.1) concluded that on average brands account for more than one-third of shareholder value. The study reveals that brands create significant value either as consumer or corporate brands or as a combination of both.
Table 2.1 shows how big the economic contribution made by brands to companies can be. The McDonald’s brand accounts for more than 70 percent of shareholder value. The Coca-Cola brand alone accounts for 51 percent of the stock market value of the Coca-Cola Company. This is despite the fact that the company owns a large portfolio of other drinks brands such as Sprite and Fanta.
This is an interesting connundrum.
If there is no connection between stock prices and brand valuation, then the Interbrand/JP Morgan study is wrong. But if there is a connection, then there is a tremendous disconnect between the valuations put on brands by Interbrand and others and the market valuations of the companies.
I do not mean to single out Interbrand. Brand Finance and others have similar measures. It is just that Interbrand is the most public in their efforts with BusinessWeek.
It is well established by this time that brands have value (sometimes a negative value!). No disagreement there. So how does a company place a value on that? It has been and will continue to be debated for quite some time. The brand valuation method of Interbrand is among the best in the market. Even so — there is a commonsense logic that the brand valuations published in BusinessWeek are highly inflated.
The relative values of one brand to another probably hold true. But the actual numbers? Unlikely. Is the Cit brand really worth $20 billion?