believed to be of high value such as Louis Vuitton and Gucci can have only
an estimated brand value until they’re involved in a merger, acquisition or
buy-out. It also means that brands that have been acquired by conglomerates
and grown internally such as Van Cleef & Arpels of the Richemont Group
cannot be accurately evaluated.
How realistic and applicable is this viewpoint in the current business scene
and is it relevant for the global luxury goods industry? The answer is simple.
Brands must be evaluated, whether grown internally or acquired externally.
This especially provides a thorough perspective of the success and failure of
the branding efforts made by a company. This is imperative for luxury brands
that desire to remain competitive. It might seem contrary to the accounting
system, which is based on the reliability of data, as the subjective nature of
brand valuation creates a problem in accounting rules. However, this prudence
is losing its bearing in certain business aspects including branding.
All brands are grown internally until they are sold and then they become
external brands for the owners. As a result, all brands have internal value or
the potential of attaining value without external transactions. For example,
in 2001 private equity firm Equinox bought 51 per cent of Jimmy Choo.
Equinox later sold this stake in 2004 to venture capital firm Hicks Muse now
known as Lion Capital, in a transaction that valued the company at £101
million, although Jimmy Choo’s annual sales at the time were about £40
million. This sum was justifiable because of the efforts made by the owners
of Jimmy Choo to develop the brand strength internally before external
transactions.
On another level there are brands like Armani, which remains a privately
held company under the ownership of Giorgio Armani and hasn’t yet been
involved in acquisitions and buy-outs. How can such a brand that has been
meticulously nurtured since its launch in 1974 be accurately evaluated based
on its brand value if the principle of accounting were to be followed? Also
since brand value does not remain static but either appreciates or depreciates,
it is quite impossible to wait for a transaction to determine the result of a
company’s branding efforts. What if there is no transaction? Will the value of
the brand never be evaluated?
Accounting and finance serve as a structure for accountability in terms of
income, expenses, investments and taxation. When costs are accrued by a
company with respect to brand promotion, for example print advertising, they
are recorded as expenses and are often tax deductible. This was until account-
ing standards authorities realized that these expenses are rather investments,
which yield enormous results in terms of assets for the companies in question.
Thus these expenses began to be treated as investments and their returns as
assets. This led to the identification that the same system that uses the value
of a company’s assets generated by investments to estimate the future earn-
ing potential could be applied to brands. So brands began to be evaluated
through a method using forecast earnings projections.126
luxury fashion branding