Investors thumbing through the Royal Bank of Canada's financial filings will find an impressive array of assets. Right there in black and white are notations for $304 billion in total deposits, $187 billion in outstanding loans, and other hard assets that make the Royal Bank one of Canada's largest and most successful companies. But nowhere will you find a value for one of its most precious assets–its brand. That's too bad. That line would add another $4.5 billion to the company's bottom line, according to a new study of Canada's most valuable brands–which Royal tops for the second year in a row.
Financial services and telecommunications continue to dominate this second annual survey of the value of Canadian brands, conducted by U.K.-based Brand Finance in conjunction with Ceteris Canada, a Toronto-based tax valuation firm, and the Institute of Communications and Advertising. (The study was sponsored by Canadian Business magazine.) This year, however, the brand values of Canada's major oil companies increased, as companies such as Petro-Canada, Esso and Shell Canada all reaped the benefit of higher gas and oil prices. “The brands that appear in the survey are a good snapshot of the Canadian economy,” says David Haigh, the founder and CEO of Brand Finance.
While most companies pay lip service to how valuable their brand is, few can put a concrete dollar value on it. So the aim of this study is to show how much a company's reputation is worth. This may help bridge the gap between esoteric marketing departments and CEOs who prefer hard facts and figures, says Rupert Brendon, president and CEO of the Toronto-based Institute of Communications and Advertising. “Too often we have marketing people that talk about market share and a CEO who wants to hear about shareholder value,” he says.
Why is this gap problematic? Brand management seems straightforward–play up strengths through effective marketing; work through weaknesses before they become crises–but it's also expensive. Having dollar values put on the intangible product of all that effort helps explain and justify these costs.
But determining the value of something as amorphous as a brand is no easy matter. Traditionally, the “goodwill” line is the only place on a company balance sheet where brand value is counted. However, more and more accountants and tax authorities are asking companies to price their brands, in particular when entering into internal licensing and royalty agreements, or buying other companies' assets.
Brand Finance uses the “relief from royalty” method to calculate the hypothetical value of a brand. Essentially, researchers determine how much it would cost the company to rent their trademarks, logos and other brand-related assets from a third party. Using publicly available sales, market-share and advertising data, researchers estimate brand royalty rates for each of Canada's largest industry sectors. Those rates are then adjusted for each individual company by researchers who pore over market surveys, consumer research and company filings to determine the company's brand strength, consumer awareness, retail presence and marketing spending. The study only looked at brands controlled by those Canadian companies that disclosed financial data, so well-known U.S. brands such as Starbucks and Microsoft were excluded, as were some iconic Canadian brands such as Tim Hortons, which is controlled by Ohio-based Wendy's International.
There is no shortage of billion-dollar brands in Canada, but few are known outside our borders. No Canadian brands appear on New York-based Interbrand's annual survey of the world's most valuable brands, since those companies need to generate about a third of their earnings from international sales. (Without that caveat, the RBC brand would rank about 72nd on the Interbrand list–ahead of such well-known product labels like Audi and Levi's, but below Coca-Cola, with an estimated brand value of US$68 billion.)
The value of the RBC brand moved up a modest 2% over last year, largely a result of increased effort in marketing and public relations, according to the study. “We have invested more significantly in marketing communications over the past couple of years,” says Jim Torrance, RBC's director of brand strategy. “It is becoming a more competitive industry, and that is something we are responding to in terms of our marketing.”
As was the case last year, five of the Top 10 most valuable brands belong to banks or insurance companies. While it is no surprise that Royal Bank came out on top, what may seem odd is the relative strength of the Canadian Imperial Bank of Commerce brand. CIBC's brand value increased by 8% to $2.8 billion, despite the fact that its corporate reputation has taken a beating over the past year. The company endured numerous public relation snafus, the most prominent of which was its announcement that it was taking a pre-tax charge of $2.8 billion for Enron-related litigation. That bad press was offset by gains the bank made with consumers, including a further entrenchment of its successful partnership with President's Choice Financial, says Dean Morris, a tax valuation consultant with Ceteris Canada who worked on the study. “The difficulties CIBC had with Enron don't necessarily translate to consumers who are doing business with the bank,” he says.
Loblaw also saw the value of its brand increase over past year. The second-most-valuable brand in Canada was valued at an estimated $3.3 billion, up 13% from the previous year as a result of increased reported revenue and the continued success of its President's Choice brand. But Loblaw will need all the brand value it can get in the coming year. In November, the company warned investors that its profits may take a hit from increased competition from low-cost discount retailers like Wal-Mart.
As noted above, the brand value of Canada's oil-and-gas companies also increased, mostly on the strength of oil and gas prices. Shell Canada, for instance, saw the value of its brand increase by 33% to $917 million while Petro-Canada saw its brand value increase 26% to $1.2 billion. Not all of the increases came as a result of higher prices. The success of Imperial Oil's Esso loyalty program helped the company boost its brand value 23% to an estimated $1.5 billion.
But it wasn't all good news for well-known Canadian brands. Several companies–such as the beleaguered tech giant Nortel Networks–fell off. Air Canada also failed to make the cut. The airline, which came out of restructuring and experienced a drop-off in air travel following the war in Iraq, saw its brand value fall to $612 million, down from $730 million last year. However, the company's brand may receive a boost in coming years, as consumers respond to the carrier's new simplified fare structure.
Ultimately, the study is more art than science. Brands are, in the last analysis, valued not by consultants or CEOs, but by customers deciding to pay for the goods or service offered under that banner. But one thing is pretty clear: Canada's most valuable, best-managed brands, from Royal Bank to Canadian Tire, tend to belong to some of Canada's most successful companies. And while investors may not be able to find those billions in brand value on the companies' balance sheets, they will certainly see the increased sales and revenues those healthy brands add to the bottom line.