Valuation of Brand “Coca-Cola” Essay Sample free essay sample

The planetary drink industry consists of the entire grosss generated through the sale of soft drinks. beers. cyders. flavored alcoholic drinks ( FABS ) . liquors and vinos. For the intent of this study we are concentrating merely on the soft drinks sectors as that is where coca Cola trades in. The planetary drinks industry had entire grosss of $ 1749. 4 billion in 2010. stand foring a CAGR of 1. 9 % for 5 twelvemonth period of 2006-2010. The industry prognosis is that the industry will slow and will hold an awaited CAGR of 1. 8 % for five twelvemonth period of 2010-2015. A study by Rabobank. planetary fiscal services says that industry consolidation will take topographic point in 2012-2013 and will be driven by the five mega tendencies such as volatility. emerging market demand. bifurcation of value. convergence of distribution and sustainable sourcing. Soft drinks have been a usage of transition among the young person of modern coevalss which sets up this class for future coevalss. With borders acquiring slim. it is of import that trade names continue to pull new clients and sponsor them towards their trade name. Consumer conversations are progressively driving the perceptual experience of the trade names which implies that the soft drinks and drinks trade names will hold to concentrate more on client battle and expression for new entry points. The soft drinks section contributed gross of $ 559. 8 billion in 2010 holding a portion of around 32 % in the overall drink industry. The Coca-Cola Company is the taking participant in the planetary drinks industry. bring forthing 16. 3 % portion of the industry’s value and following is PepsiCo. Inc. which accounts for 9. 2 % of the industry. Coca-Cola turned 125 old ages immature in 2011 and has set a 2020 vision with focal point and strength along the 6Ps of Net income. Peoples. Portfolio. Partners. Planet and Productivity. Coca-Cola continues to busy a alone topographic point in the Black Marias of the people worldwide. It is besides puting one million millions of dollars in India to increase presence and penchant and outpace rivals and envis ages China to go its biggest market finally. We have carried out a rating of the â€Å"Coca-Cola† trade name and have used by and large accepted trade name rating methodological analysiss viz Income based rating method ( Dividend Discount Approach ) . Market base trade name rating methods ( Relative Evaluation ) . Cost based Brand rating method ( Historical Method ) . We have provided a principle for the assorted methodological analysiss indicating out the pros and cons of the assorted methodological analysiss. The trade name rating has been carried out based on the amalgamate financials and prognosiss provided by the company on public beginnings. The trade name rating is based on 2011 informations available in Annual Report FY 2012. The rating of the trade name as per the above methods is estimated at around 100 bn $ based on our analysis of the trade name and the company and topic to the premises and restrictions described in this study. COCA-COLA Company The Coca-Cola Company engages in the fabrication. distribution and selling of non-alcoholic drink dressed ores and sirups. The company owns the world’s most valuable trade name: Coca-Cola and is sold in more than 200 states worldwide. Most of the Coca-Cola’s merchandises are manufactured and sold by bottling spouses. who convert them into finished packaged merchandises for sale to distributers and other clients. Its major drink merchandises include Coca-Cola. caffeine free Coca-Cola. Cherry Coke. Diet Coke. caffeine free Diet Coke. Diet Coke Sweetened. Coca-Cola Zero etc. It operates its concern through six concern sections: North America. Eurasia and Africa. Europe. Latin America. Pacific and Bottling investings. The company has divided its operations into sections based on geographic operations. The Coca-Cola system is non a individual entity from a legal or managerial position and the Company doesn’t ain or command the bottling workss. The company common stock is listed on the New York Stock Exchange. traded under the heart KO. The company has been one of the 30 companies in the Dow Jones Industrial Average since 1987. As of December 31. 2011 there were about 2. 3 billion portions outstanding and 252. 197 stockholders of record. The company had cyberspace runing grosss of $ 46. 542 manganese in 2011 with an runing income of 10. 154 mn $ which is a important growing vis-a-vis 2001 which had grosss of 35. 119 mn $ and runing income of 8. 449 mn $ . Per capita ingestion – the mean figure of 8 ounce helpings ( 250 milliliter ) helpings of drinks people consume each twelvemonth in a given market is a cardinal index of the growing potency. 2011 Per Capita Snap Shot ( Beginning: 2011 Annual Review. World Wide Web. coca-colacompany. com ) Coca-Cola BrandConsumers frequently prefer merchandises that have a strong. positive image. Brand Association plays an of import portion when people think and feel the trade name both on witting and subconscious degree. Thus it is imperative that any trade name should make the right image in the heads of the consumer. Coca-Cola has been a planetary patron of athleticss by agencies of tie ining at the international degree to the local degree so that is exposed to consumers at maximal touch points. It therefore places itself as an icon and taking trade name that mentally and physically encouragements consumer associations. Awards received by Coca-Cola in 2011: 1. Topped Interbrand’s ranking of the 100 Best Global Brands for the 12th back-to-back twelvemonth. The estimated trade name value of Coca-Cola increased 2 % to 71. 9 bn $ in 2011 as per Interbrand. 2. Ad Age saluted this trade name for marketing excellence and identified it to be the Marketer of the Year. Furthermore. Coca-Cola remains the figure one consumer merchandise fan page on Facebook. 3. Advanced to figure 6 on FORTUNE magazine’s 2011 list of the World’s 50 most admired companies. 4. Moved up to no 8 on Barron’s ranking of the World’s most well-thought-of companies 5. Moved up five musca volitanss to figure 12 on Diversity Inc magazine’s top 50 companies for Diversity list for 2011 The company’s efficient trade name direction system has successfully established a planetary trade name. At present. Coca-Cola possesses a strong trade name individuality in the planetary market for which its gross revenues are quickly increasing. R elevance of the Study One of the critics of rating has been that it fails to capture the value of trade name names and other intangibles. Brand name is one of the assets which strike instantly when intangible assets are talked about. Brand names are powerful plenty that it allows a premium to be charged for precisely the same merchandise without the trade name taking to greater net income borders and higher net incomes. A trade name name company will hold higher value than an otherwise similar company without the trade name name. Having a universe renowned trade name has its benefits. Some of them are: * Allows to bear down a premium for precisely the same merchandise * A trade name name company will hold higher value than an otherwise similar company without the trade name name * If we accept the purpose that trade name names have values it is logical to follow up and traveling in front in gauging them * Effectss of trade name are multi-bound as it affects all the 4P’s of Marketing as coke in the late eightiess made the error of believing that their trade name name come from gustatory sensation and started experimenting with the merchandise seting full company to hazard. * Gross saless * Pricing Policies* Financing costs* Brand names represent one of the long permanent competitory advantages to concerns. * Top trade name names in 1925 were still alive in 2000 as per a selling diary The best manner to believe about how much a trade name adds value to the company is to believe about what will go on to the firm’s value if it loses the trade name. This is really hard to cipher as a trade name is an built-in portion of the house impacting gross revenues to fundss. In this undertaking we confront this job and lay down a methodological analysis of valuing trade name values which generate hard currency flows for concerns but are hard to insulate. Why Coca-cola Brand rating is clearly brought out when: * There are no quality differences between a company’s merchandise and those of its rivals * There is at least one company in the sector that is genuinely generic We can non believe of any ground why one Soda should sell for a monetary value higher than another. based on properties like monetary value and quality. Thus we feel any differences in borders between coke and a generic sodium carbonate is due to the BRAND NAME that coke has built up over the period of clip. Besides. Coca Cola was ranked figure 1 trade name name in the universe by Business Week magazine. Thus it is non surprising that assorted ratings in the yesteryear have assumed 80 % of Coca Cola’s value coming from its trade name name. Besides the attacks that we adopt while rating assumes that a generic company exists and we have entree to its fiscal statements. Furthermore. trade name name is the lone ground for differences in net incomes of the two companies. He nce this attack is more appropriate in valuing trade name name such as Coca Cola but less in valuing say Sony or Goldman. Objective of the Study How much can Coca Cola deal due to its trade name name?ORWhat is the Evaluation of the Brand â€Å"Coca Cola† ? The attacks used by analysts to value trade name names are frequently ad-hoc and may significantly exaggerate or minimize their value. Firms with good – known trade name names frequently sell for higher multiples than lesser-known houses. The standard pattern of adding on a ‘brand name premium’ . frequently set randomly. to dismiss hard currency flow value. can take to erroneous estimations. One of the benefits of holding a well-known and well-thought-of trade name name is that houses can bear down higher monetary values for the same merchandises. taking to higher net income borders and hence to higher price-sales ratios and house value. The larger the monetary value premium that a house can bear down. the greater is the value of the trade name name. Literature Review We studied the undermentioned documents in this field: * Valuation of trade names and rational capital by Pablo Fernandez: – This paper fundamentally is a alteration of assorted trade name rating methodological analysiss used worldwide. In peculiar. the paper has gone deep in to analyze the ratings of Kellogg’s and Coca-Cola performed by Damodaran and the method proposed by Interbrand. * Documents by Damodaran: – Damodaran has considered monetary value to gross revenues ratio to value a trade name. Specifically. he has taken the monetary value to gross revenues ratio for a branded company and another monetary value to gross revenues ratio for an unbranded company. that is. with private labels or generic merchandises. The difference when multiplied with the existent gross revenues of the company gives the trade name value of the company. * Houlihan Valuation Advisers: – The brand’s value is the present value of the company’s free hard currency flow less the assets employed multiplied by the needed return. Observe that the free hard currency flow attributable to the trade name is slightly similar to the EVA. This method does non do much sense. It replaces the hard currency flow attributable to a generic merchandise company with the assets employed by the branded company multiplied by the assets’ required return. * Roos J. G. Roos. L Edvinsson and L Dragonnett: – In the first portion of the article. they describe and analyze the â€Å"first-generation† rational capital patterns. the systematic visual image and measuring of the different signifiers of rational capital. The â€Å"second-generation† rational capital patterns expand on the â€Å"first generation† by consolidating the measurings in an aggregative rational capital index. Harmonizing to these writers. â €Å"intellectual capital† ( IC ) can be described as the difference between a company’s market value and its book value. * + legion other secondary resources available Data BeginningDatas beginnings are the accounting statements of the company for the last many old ages which are available in the Annual Reports available publically on the web site. The information on the trade name name outgo is collected for each twelvemonth. traveling back historically for the amortizable life of the trade name name. We chose 31 old ages as our amortizable life. we collect informations for each twelvemonth for the last 31 old ages ( 1980 onwards ) for the trade name name expenditures ( under historical cost attack ) . One of the generic companies identified is a Canadian drink maker call Cott Corporation and its financials are besides beginnings of of import informations available publicly. Evaluation Methodologies The criterion of value used is the 1 which a purchaser could be expected to pay for the trade name or marketer can anticipate to accept if the trade name was put on sale in an unfastened market with both parties holding entree to all the appropriate information. Besides we have assumed the concern to be a traveling concern for the rating. Trade names are more than merely the name of a company. It is a construct which creates value for the concern or the company as an organisation presenting economic values. stockholder wealth. prosperity and civilization. Brand if successful is one of the most valuable and rare assets that are recognized and due attention must be taken to work it to an organisations ain advantage. Due to its broad facets trade name is considered to be a really valuable plus and it influences the pick of clients. employees. investors and authorities governments. Trade names have a alone lastingness and in a commoditized market. it provides the organisation with a sust ained competitory advantage which can non be compared to any other plus in the balance sheet. Based on the information available for the trade name Coca-Cola and a generic company besides available as Cott drink. we have used the undermentioned methods for our rating: 1. Income based rating method ( Dividend Discount Model ) . 2. Market base trade name rating methods ( Relative Evaluation ) . 3. Cost based Brand rating method Date of Valuation: Updated last on 09th Dec 2011. based on financials stoping 31 Dec 2011 Income based rating methods ( Dividend Discount Approach ) Price premium method: based on capitalisation of future net income watercourse premiums attributable to a business’ trade name above the grosss of a generic concern. without a trade name. Simply put. how much excess do I acquire which is attributable to the trade name To quantify this difference. we used the discounted hard currency flow attack and attempt and insulate the trade name name on the hard currency flows of the house. Here we try to mensurate the trade name value by comparing the hard currency flows of Coca-Cola with Cott Corporation. Market Base Brand Valuation Methods ( Relative Valuation Approach ) In this theoretical account of comparative rating. we try to gauge the trade name value by looking at how the market monetary values behave with and without the trade name name. We once more make usage of the generic house and cipher the EV multiple as the aggregative value doesn’t make much sense as Cott is a really little house as compared to coca-cola. Mathematically. Value of Brand = { ( V/S ) b- ( V/S ) g } * Gross salessThe V/S ratio ensures that the difference of size between the branded merchandise and the generic merchandise is taken attention of. We besides used the multiple EV/EBITDA and both resulted in different trade name values. Cost based Brand Valuation Method ( Historical Approach )Creation costs method: this trade name rating methodological analysis estimates the sum that has been invested in making the trade name. Valuation DescriptionMethod 1: 3 phase Dividend Discount Model attackMeasure 1:Here we footing is that Coca-Cola. the branded company and the generic company ( Cott Corporation ) are publically traded. Since it is hard to compare the aggregative market value because the generic company is really little as compared to Coca-Cola Company. Thus we compared the cardinal statistics for Coca-Cola and Cott Corporation for twelvemonth stoping Dec 2011: | Coca- Cola| Cott| Grosss ( USDm ) | 46. 542| 2335|Operating border ( after-tax ) | 15. 79 % | 4. 28 % |Tax return on Capital ( after-tax ) | 17. 90 % | 2. 80 % |We can clearly see the benefits of the trade name name. Coca-Cola generates more grosss and is well more profitable than Cott. So to acquire the value of the trade name we used the operating border attack. where we changed Coke’s runing border to do it equal to Cott keeping grosss changeless and Gross saless to capital ratio at current degree. We assumed a 3 phase growing period with a stable growing rate of g ( which would be a spot higher than the economic growing rate ) Here we tried to integrate the impact if Coca- Cola goes for a trade name extension and say comes up with T-shirts. This is done in the growing rate estimated STEP 2: Cash flows are estimated as per the growing rate. Expenses are likewise calculated based upon certain premises. We have calculated FCFF in this instance STEP 3: Generic MerchandiseWe tried to make a scenario by taking different values for the growing and operating net income per centum of the generic merchandise. The generic company here is Cott Corporation which is a taking provider of private label carbonated soft drinks headquartered in Canada. Snapshot: | Value of Coca-Cola|| With Current Margin| With Cott’s Margin|Tax Rate| 24. 50 % | 24. 50 % |Revenues| 46. 542| 46. 542|Period 1|Length. years| 10| 10|Reinvestment Rate| 0. 35| 0. 35|Operating Margin ( after-tax ) | 15. 79 % | 4. 28 % |Sales/Capital ( Turnover Ratio ) | 1. 13| 1. 13|Tax return on Capital ( After-tax ) | 17. 84 % | 4. 84 % |Growth rate during period ( g1 ) | 6. 24 % | 1. 69 % |Cost of Capital during period| 7. 10 % | 7. 10 % | Period 2|Length. years| 5| 5|Growth Rate| 5. 0 % | 5. 0 % |Tax return on Capital| 12. 0 % | 12. 0 % |Reinvestment Rate| 41. 7 % | 41. 7 % |Cost of capital in steady state| 7. 1 % | 7. 1 % |Payout Ratio| 52. 0 % | 52. 0 % | Period 3|Growth Rate| 1. 4 % | 1. 4 % |Tax return on Capital| 7. 1 % | 7. 1 % |Reinvestment Rate| 19. 7 % | 19. 7 % |Pn ( Payout ratio for the following period ) | 80. 3 % | 80. 3 % |E/S| 2. 892| 0. 637|Value of firm| 134621| 29629|Difference| 104991| | Brand Value| 104 bn $ | |This helped us to analyse the trade name value spread for different growing rates and the value of trade name name we got is 104 bn $ The attached excel shows the computations associated with the rating. Method 2: Relative Valuation Approach We would cipher the EBIT for the company which is from the branded portion by deducting the EBIT of the generic company A multiple would be calculated on the footing of certain parametric quantities and so net incomes of the assorted trade names in the same sector ( like Pepsi. Coca Cola ) would be multiplied to acquire the trade name value. The multiple we used here are EV/sales and EV/EBITDA. Valuing any trade name utilizing this method seems extremely subjective. non merely because of the parametric quantities used but besides because of the methodological analysis itself. However. analysing the strength factors for each brand/geographical area/format enables comparings to be made and may supply guidelines for placing the brand’s and company’s chief value drivers. increasing the brand’s strength and. hence. its value. 2011| Coca-Cola| Cott Corporation|EV/Sales| 3. 67| 0. 55|Difference| 3. 12| |Brand Value| 145037| 145 bn $ || | |EV/EBITDA| 14. 10| 6. 34|Difference| 7. 76| |Brand Value| 93933| 93 bn $ | Detailss are in the excel attached.Method 3: Cost Based ApproachIn this we analyzed the sum that has been invested in constructing the trade name. We begin by presuming that around 40 % of the merchandising. general and administrative disbursals are spent in trade name edifice and so we try to capitalise this disbursal. We collect informations traveling back to 1980 and therefore we have 31 old ages data. We choose 31 old ages as the amortizable life utilizing a consecutive line agenda. As a consequence. we calculate the sum invested boulder clay day of the month in trade name edifice which we say as the value of the trade name. Year| Total Selling A ; Advertising| Brand Name Related Expense| Amortization this year| Unamortized expense| 1980| 1121| 448| 14. 46| 0|1981| 1189| 476| 15. 34| 15|1982| 1221| 488| 15. 75| 32|1983| 1376| 550| 17. 75| 53|1984| 1543| 617| 19. 91| 80|1985| 1579| 632| 20. 37| 102|1986| 1631| 652| 21. 05| 126|1987| 1777| 711| 22. 93| 161|1988| 2025| 810| 26. 13| 209|1989| 2235| 894| 28. 84| 260|1990| 2717| 1087| 35. 06| 351|1991| 3069| 1228| 39. 60| 436|1992| 3499| 1400| 45. 15| 542|1993| 3797| 1519| 48. 99| 637|1994| 4765| 1906| 61. 48| 861|1995| 5231| 2092| 67. 50| 1012|1996| 5597| 2239| 72. 22| 1156|1997| 5535| 2214| 71. 42| 1214|1998| 5699| 2280| 73. 54| 1324|1999| 5963| 2385| 76. 94| 1462|2000| 6016| 2406| 77. 63| 1553|2001| 6149| 2460| 79. 34| 1666|2002| 7001| 2800| 90. 34| 1987|2003| 7488| 2995| 96. 62| 2222|2004| 8146| 3258| 105. 11| 2523|2005| 8739| 3496| 112. 76| 2819|2006| 9431| 3772| 121. 69| 3164|2007| 10945| 4378| 141. 23| 3813|2008| 12124| 4850| 156. 44| 4380|2009| 11358| 4543| 146. 55| 4250|2010| 13158| 5263| 169. 78| 5093|2011| 17440| 6976| 225. 03| 6976|Total| | | 2316. 95| 504 77. 08| Value of Brand Name| 50 bn $ | Premises:1. 40 % of SGA each twelvemonth are associated with edifice up the trade name name with the balance used to bring forth grosss in the current twelvemonth 2. Amortization over 31 old ages utilizing consecutive line amortisation 3. Costss before 1980 are non taken into history due to miss of informations and information Conclusion A ; Uniqueness about this survey We have tried to gauge the value of trade name coca-cola by assorted methods and there are important differences in the value that have been estimated by different methods Method| Value of brand| Income based rating methods ( Dividend Discount Approach ) | 104 bn $ | Market Base Brand Valuation Methods ( Relative Valuation Approach ) | 145bn $ ( EV/Sales ) ; 93bn $ ( EV/EBITDA ) | Cost based Brand Valuation Method ( Historical Approach ) | 50 bn $ | The income based rating method gives us an intrinsic value of the trade name and that we believe is the most dependable given that the inputs are chosen suitably and with due attention. As it approaches from the company basicss. we assume the value of the Coca-Cola trade name to be within 20 % of the value calculated from this taken into history assorted estimate parametric quantities due to miss of clip and informations. The market based rating is a method of comparative rating and is the most normally used method in the market today. It carries with itself the disadvantages of what a typical comparative rating does. The pick of multiple as we have seen gives a scope of trade name value and it may sometimes be hard which one to t ake for. However. this is one of the easiest methods to cipher the trade name value. The cost based or the historical method is another appraisal which gives us a really low value. This is due to the fact that we have taken into history informations from 1980 onwards merely while the company is bing since 1886. So. a big sum of value is lost because of the non handiness of informations. We believe the existent trade name value to be decidedly higher than this value of 50 bn $ . However. the trade name rating procedure is really utile. since it helps place and measure trade name value drivers. This assessment consists of comparing a brand’s value drivers with those of other brands/companies. with the brand’s old drivers and with the proposed ends. The trade name rating procedure increases the sum of information held by the company about its trade name and it should be developed so that it can be used as a direction tool for value creative activity. A good trade name rating procedure is a tool that helps keep a coherent scheme over clip and assign selling resources systematically. In our analysis we have assumed that the trade name grows in a phase wise mode. but in world the trade name may turn at different rates throughout the skyline and therefore the trade name value calculated here is merely a contemplation of existent value. To suit these alterations. we carried out sensitiveness analysis with our variables being profitableness ( to explicate the dynamic concern ) and stable growing government ( to explicate the dynamic concern environment ) which can be seen in the affiliated excel.