From marketing guru to Prophet

Sinclair is now an academic partner at Prophet and clearly carries an enormous amount of respect within that organisation given his involvement in their seminars and valuation projects.

The story of how a small South African company got to be involved in setting global standards for brand valuation is quite remarkable.

The start of something big Sinclair started on the development of a tool to measure brand equity at Wits University in the early 1990s when brand equity had recently become an academic topic. "I was inspired by the work of Kevin Lane Keller who now is professor of marketing at the Tuck School of Business at Dartmouth College in New Hampshire. Kevin's book Strategic Brand Management is now in its 3rd edition and he is also co-author of Philip Kotler's Marketing Management. It was Kevin's ground-breaking article in the Journal of Marketing (January, 1993) that set the scene because in it he gave form and definition to this relatively new concept.

"Interbrand's was the only valuation methodology at the time and since I got to know it quite well I believed there might be a different way to value brand equity. In 1996 this became my doctoral topic and I started work on my research proposal under the supervision of Professor Duncan Reekie. I graduated in 2002 after six years of model development drawing on Wits knowledge and expertise in disciplines such as corporate finance, actuarial science, statistics and accounting," said Sinclair

The model was first publicly exposed in 1998 at an IMM breakfast function. Robin Jones of The Agency was there and told Johan Huyser about it. Huyser had just listed Billboard at the time and they were in the money. He wanted to buy the model because he could see its potential. Sinclair was paid a handsome sum for 50% with a subsequent earn out. He had to use his funds as working capital and had some early success with the Sunday Times, Financial Mail, MNet and I & J foods. Billboard didn't last and 18 months later Sinclair bought BrandMetrics back for a nominal amount.

Golden times

"Since 2000 we have valued over 375 brands among which are the country's leaders. The total value of all these brands, if we exclude Brand SA, (which I did twice in 2004 and 2006 - it was a world first to value a nation brand, is over R300 billion. The introduction of CGT was a boon and we did complete brand portfolios of AVI (National Brands, I & J and the cosmetic business - Indigo), Distell, Foschini, Ellerines, Imperial and others. These were golden times," said Sinclair.

He graduated with a PhD from Wits in 2002 and was awarded a masters in commerce from Wits in 1991; so in effect, he had studied continuously for about 14 years). One foreign external examiner in his notes said this about his work: “I firmly believe that the research conducted by Mr Sinclair is unquestionably of PhD standard. He is at the absolute forefront of global thinking in terms of measuring brand equity and is one of the very few people working at the interface of marketing, accounting and operations research-type modelling.”

Two principles guided the development of Sinclair's model: a) It had to conform to acknowledged corporate finance methods; b) It had to incorporate the consumer (end-user) as the source of brand cash flows. This had not been achieved before.

Very sophisticated

The concept of economic profit (EVA) states that companies that generate profits that exceed the cost of capital, have developed intangibles that are sustainable and competitive. Brands are the lynch-pin for many firms in earning economic profit. "Our finance operation therefore examines the income statement and balance sheet and extracts the economic profit. We have a very sophisticated approach to estimating what proportion of economic profit is ascribable to the brand.

"Where we radically diverge from other approaches is in our use of franchise run and decay. These two combine to model the entire expected economic life of the brand we are valuing. So, the earnings of a brand we are measuring could have a franchise run of (say) seven years and a decay of 25. This means we will project the current earnings for a total of 32 years. The franchise run is normally upward trending and the decay always trends down to meet the base line which is the normal profit. Most other approaches use a five-year DCF plus a perpetuity.

"The basis for our approach is two-fold: we examine the product category in a systematic way. This sets the number of years of expected economic life for a notional strong and weak brand. We then conduct market research to find out how all the brands in the category are perceived. A special treatment of the results gives a brand strength score for the category strong brand, the weakest brand and ours. A mathematical algorithm transforms the brand strength scores into years of expected economic life.

"The brand value is the capitalised present value of the cash flows captured over these years," said Sinclair.

In 2000 he had the mathematics converted to computer codes so that BrandMetrics was the only valuation methodology housed on the web. "All data are collected, uploaded into the model on the web and the algorithms do the calculation. Hence we are always consistent in approach and, of course, we have built up a massive database of normative data," he said.

In big demand

Since 2000 Sinclair has had several approaches by companies interested in acquiring the methodology. In 2001 he reached an advanced stage with a London-based company called Tempest which owned Added Value and what used to be Enterprise IG. He had been employed by Added Value in London to value London Electricity and Virgin Energy and was due to fly to London to sign and begin briefing them when an embargo was placed on all deals because of a bid to buy Tempest by WPP.

During the two months they had to wait, BrandMetrics doubled in size with two new clients: Coca Cola and Nike in SA. When Tempest contacted Sinclair again two months later he told them the price had gone up because of these new acquisitions. WPP was not interested.

BrandMetrics grew quickly and profited hugely from the introduction of capital gains tax (CGT) when companies had to value all their assets including brands.

"In 2004 Sinclair went to the USA and visited marketing academics at Dartmouth (Kevin Lane Keller); Harvard (John Deighton) and Emory (Raj Srivastava). Emory had just created the Zyman Institute for Brand Strategy (now called the Brand Academy) and Sinclair delivered what was subsequently called the inaugural seminar.

"Arising from that trip, Kevin Keller invited me to write a section on accounting and brands and also to write up the BrandMetrics methodology. Both appear in chapter 10 of the 3rd edition of his world-famous textbook Strategic Brand Management,” he said..

Textbook

"Even though I retired as Professor of Marketing and head of department at Wits five years ago, the university made me a professor emeritus and asked if I would teach brand strategy at the honours level. I have done that annually and the textbook I use is, naturally, Strategic Brand Management," he said

Sinclair made contact with Andy Pearce of Prophet and as a result of that contact, they bought the BrandMetrics' Intellectual Property and appointed Sinclair as an academic partner in the business. (www.prophet.com). He will be retained by Prophet at least until June of 2010 and there is a strong possibility that the contract will be renewed for a further period.

But this remarkable story does not stop there. A book has just been published by John Wiley called the International Brand Valuation Manual. The author is Gabriele Salinas. She reviews more than 50 approaches to brand valuation, of which 18, in her view, are commercially viable. Judging by the extent of correspondence Sinclair had with her last year and the material he had to provide on BrandMetrics, his approach will be well covered in the book. "Certainly her earlier research indicates that our model compares favourably with other major approaches," said Sinclair.

Booked

In October, 2008 he attended the annual conference of the International Association of Chartered Valuators and Appraisers (IACVA). It was held in Frankfurt and Sinclair was there as their guest to talk on Trademarks and Brands.

"As a result of my talk I was invited to write a chapter for their forthcoming book titled: IFRS Fair Value Guide: International Valuation Handbook. This also is to be published by John Wiley and will be released next February. I wrote the chapter on Trademarks and Brands and of course BrandMetrics is well covered.

Sinclair also has a good relationship with the International Accounting Standards Board (IASB) based in London.

"They set accounting standards for the world excluding the US and that will change sometime soon. These are the people who are introducing the International Financial Reporting Standards (IFRS) that you will have heard so much about in recent months.

"IFRS3 already considers brands to be assets when they are acquired as part of what the standard calls a business combination. Brands that are internally generated are at this stage not assets. It is a strange anomaly which is being addressed. The standard concerned is IAS 38 and it is being developed at the expense of the Australian government on behalf of the IASB. Last year and again this year they issued exposure drafts of the developing standards for comment. Last year I proposed five changes and four of these were incorporated into the revised standard which was issued earlier this year. I have now submitted the fifth in different language because I am determined that that aspect of brand accounting should be changed," Sinclair insisted

As part of this process Sinclair co-authored with Kevin Lane Keller a submission to the International Valuations Standards Committee which is trying to establish standards for the valuation of intangible assets for fair value purposes.

News just in is that Prophet intends introducing a new training program called Prophet University. The idea is for Prophet to capitalise on the great minds of their academic partners, such as South Africa's own Roger Sinclair.