Presentation at PUC-RIO
October 8, 2012
Valuing Brand Leveraging Strategies
with Real Options
Lenos Trigeorgis
(joint work with Francesco Baldi)
Agenda
1
Introduction/Motivation
2
Brand equity development and leveraging as multistage option
3
Valuation of Starbucks’ brand leveraging options and impact on share
price (under growth scenario –June 2007)
4
Revised appraisal based on alternative forward brand leveraging
strategies (under downturn conditions –Dec 2008)
5
Assessment of risks underlying brand leveraging strategies
6
Conclusions/Implications
2
1
Introduction/Motivation
 In today’s knowledge economy, the sources of competitive advantage
have shifted from tangible to intangible assets (Foray and Lundvall,
1996; Eustace, 2000)
 50-90% of corporate value derives not from (physical) assets in place,
but from leveraging IP/intangible assets
 Brand represents a key market-based intangible asset that can shape
a firm’s competitive advantage
 Given high market uncertainty (changes in customer needs or product
opportunities), it is crucial for managers to pursue a flexible brand
leveraging strategy (Ambler, 2000; Fisher, 2007)
3
Introduction/Motivation
 Some challenging marketing issues:
How can a parent brand be exploited as a flexible platform in pursuing brand
expansion or extension opportunities?
How can the firm actively manage such embedded marketing flexibility?
How can management assess the risks posed from leveraging brand assets?
(Aaker, 2004)
 We revisit brand valuation and management, merging ideas from marketing
and finance to understand marketing flexibility. We build on two key ideas:
(1) effective brand management presupposes brand equity valuation ability (Keller and
Lehmann, 2003);
(2) brand is an intangible asset that can be leveraged (similar to tangible assets)
providing managers with important leveraging (brand expansion and extension)
options (Srivastava, Shervani and Fahey, 1998)
4
Main Research Challenges
 Keller and Lehmann (2006): “How do you assess the
option value of the extension potential of a brand?”
Brand – whose equity can be developed and leveraged
over its life-cycle - should be actively managed contingent
on future developments
 In developing a dynamic or active brand management,
we also respond to a second research challenge (Keller
and Lehmann, 2006): “How should a brand be built and
managed as a growth platform?”
5
Dominant Literature Streams/ Brand Equity Measures
Brand Equity Measures
Customer-based measures
Market-based
firm performance outcomes
(attitudes, awareness, image,
loyalty, knowledge)
Product Market
Financial
(premium price, volume, revenue or profit)
(DCF of brand licensing,
multiples/transaction prices)
(present focus)
(present + future potential?)
Brand Option Premium
(brand expansion + extension options)
(present + future options)
6
A Conceptual Framework
FIRM VALUE (V)
TANGIBLE ASSETS (or ASSETS IN PLACE) (TA)
INTANGIBLE ASSETS (IA)
(ADJUSTED EQUITY VALUE or AE)
(PV OF GROWTH OPTIONS or PVGO)
SPECIFIC INTANGIBLES (SI) GENERIC INTANGIBLES (G)
(STAND-ALONE)
(GOODWILL)
TA
MARKET-DRIVEN
TA
MARKETINGRELATED
INTANGIBLES
TECHNOLOGYRELATED
INTANGIBLES
INFRASTRUCTURERELATED
INFRASTRUCTURERELATED
INTANGIBLES
Intangibles
1. Infrastructure-related IA





2. Technology-related IA






Firm Reputation
Skilled/Motivated Human Capital
Organizational Capabilities, Culture and Processes
Info. Systems, Control and Decision-Support Systems
Commercial Licenses and Generic Assets
3. Marketing (or Customer)-related IA
Research & Development
Patents and Licenses
Industrial Secrets
Databases/Software
Technology or Production Know-how
Design/Styling







Name/Logo of Company
Brand/Expansion & Extension
Loyal Customer Base &
Cross-Selling Potential
Promotion & Advertising/
Marketing Strategies
Product Guarantees
Graphics, Label & Packaging
Public Relations
2
Brand Equity Life-cycle Development - Staging


I. Launch –quality perception created such that the consumer, through feeling of
superior performance, can positively assess the brand and store it in memory

II. Reinforcement – positive attitudes stored in memory influence consumption
behavior (if readily retrievable). Managerial actions foster attitude accessibility
making the brand easy to remember (maintaining consistent brand image)

III. Leveraging/Exploitation – strong parent brand equity leveraged by
(i) Brand expansion of existing products to new markets or customers
(new geographic areas, market segments or distribution channels)
(ii) Brand extension of parent brand to new products (line or categories)
Brand equity built during first two stages and exploited during the third.
Brand equity development like compound (multi-stage) growth option
Brand Development as Multistage Option
(1)
(2)
(3)
(4)
(5)
PARENT BRAND BUILDING OPTIONS
BRAND LEVERAGING OPTIONS
PARENT BRAND BUILDING
STAGE
BRAND LEVERAGING
LAUNCH
REINFORCEMENT
BRAND EXPANSION
Launch Option
Reinforcement Option
Expansion Option
BRAND EXTENSION
LINE
EXTENSION
STAGE
Extension Option
(4)
OPTION
OPTION
E L  max(I L  eL PBV;0)
E R  max(I R  eR PBV;0)
E
EXP
 max(I EXP  eEXPPBV;0)
CATEGORY
EXTENSION
(5)
E EXT  max(I EXT  eEXT V;0)
Expanded Brand Equity Value (BEV) Matrix
BRAND EXPANSION
BRAND EXTENSION
iv
ii
(CUSTOMERS)
Existing
(3)
New Distribution
Channel
(5) New Products in New
Markets
BRAND EQUITY
LEVERAGING
MARKETS
New Geographic Area
New Market Segment
BRAND EQUITY
LEVERAGING
New
(1)
(2)
i
iii
(4) New Products to Existing
Customers (cross-sell)
PARENT-BRAND
BUILDING
(launch & reinforcement)
Line Extension
Existing
New Categories
New
PRODUCTS
11
Brand Equity Leveraging Options
E = Max(- I + e*V; 0)
(1)
(2)
(3)
(4)
(5)
12
Expanded Brand Equity Value (E-BEV)
E BEV  PBV  E EXP  E EXT
Parent Brand Brand Leveraging
Value
Options
E-BEV
ExpandedEquity Value  Value of Net Assetsin Place PBV  Brand Leveraging Options
Base DCF component
Growth Options component
13
Valuing Starbucks’ Brand
 Starbucks is the world’s leading retailer of specialty coffee with one of the most
recognizable brands (83% of U.S. adults are aware of Starbucks and 85% of Starbucks
customers will recommend Starbucks to others)
 Besides the high quality of its coffee, complementary products and services (which can be
replicated), Starbucks’ brand is based on providing a broader coffee-related “third place
experience” (third gathering place outside of home and work) that creates an emotional
connection with consumers (non-replicable)
“The human connection: it’s the foundation of everything we do. One customer, one community, one great cup of coffee
at a time. That seemingly simple relationship, which today develops in more than 10,500 Starbucks stores around the
world, inspires millions of people to embrace us as their neighborhood gathering place. That same connection is at the
heart of our passion to innovate and grow in new markets, with new tastes, new sounds and new experiences.”
--Howard Schultz (Chairman) and Jim Donald (President and CEO), Starbucks Corporation 2005 Annual Report
 Starbucks replicated its business model at new locations in US and around the world
building on its third-place experience, constantly increasing its range of products and
services in innovative ways (from refined and enlarged beverage and food menus to new
products ranging from appliances, to CDs, WiFi services, movies and books)
14
3
Initial Valuation: June 1, 2007 (Up market)
Current Price ($30) vs. Analyst’s target ($42).
What Can Explain the $12 Premium? Is it Brand/ IA Options?
STARBUCKS CP (NasdaqGS:SBUX)
After Hours: 29.06
0.07 (0.24%) as of Jun 1 on 06/01/07
Last Trade:
29.13
Day's Range:
28.73 - 29.15
Trade Time:
Jun 1
52wk Range:
28.03 - 40.01
Volume:
10,994,066
Change:
0.32 (1.11%)
Prev Close:
28.81
Avg Vol (3m):
12,418,800
Open:
28.80
Market Cap:
21.58B
Bid:
28.60
x 1000
P/E (ttm):
36.97
Ask:
31.75
x 500
EPS (ttm):
0.79
1y Target Est:
41.63
Div & Yield:
N/A (N/A)
PRICE TARGET SUMMARY
Mean Target:
40.91
Median Target:
42.50
High Target:
47.00
Low Target:
32.00
No. of Brokers:
16
Expanded BEV Matrix for
BRAND EXPANSION
(1)
BRAND EXTENSION
Geographic Retail Expansion
(Own Stores)
(a) US; (b) International
(2)
New Mkt Seg./Licensed Stores
(5)
(a) Music
(a) US (airports, B&N)
i. CDs Sales via Stores
(b) International (JVs)
New
(3)
.
New Distribution Channels
ii. Online Downloads
via Starbucks.com
iii. via iTunes (Apple)
(a) Grocery Channel (Kraft)
(b) Movies & Books
(b) Vending Machines (Pepsi)
(i) via Stores; (ii) via iTunes
(c) Ready-To-Drink (Disc, soda)
MARKETS
Entertainment business
(d) Foodservice distr. (rest., hotels)
(CUSTOMERS)
(4)
Existing
Warm Breakfast
& Lunch
PARENT-BRAND BUILDING
(coffee-related & compl.
products/3rd place exper.)
Line Extension
Existing
New Categories
New
PRODUCTS
17
Basic Inputs for DCF Valuation
Benchmarks
Source
Risk-free rate
Beta (adjusted)
Equity Risk Premium
Cost of Equity
Tax Rate
Cost of Debt
Target Debt/Equity Ratio
Terminal Growth Rate
WACC
Our Valuation
Morgan
Stanley
Deutsche
Bank
June 2007
Dec 2008
4,2%
1,05
5%
9,4%
36%
4,0%
na
2,5%
9,0%
5,0%
1,25
5%
11,3%
33%
na
na
1,5%
8,0%
4,7%
1,10
5%
10,2%
38%
5,5%
20%
6,0%
8,8%
4,2%
1,05
5%
9,5%
34%
6,3%
29%
2,0%
7,9%
18
Standard DCF (g=6%) and Base DCF (g=0%)
June 2007
Base DCF
0
REVENUES
-COGS
-DEPRECIATION
JOINT VENTURE INCOME
EBIT
-TAXES
PROFIT AFTER TAX (EBIAT)
+DEPRECIATION
-INCREASE IN NET WORKING CAPITAL
-CAPITAL EXPENDITURES
FREE CASH FLOW FROM OPERATIONS
Present value of FCF
Terminal Value (g= 6,0%)
PV of Terminal Value
7787.0
-6600.0
-387.0
94.0
894.0
-332.5
561.5
387.0
-771.0
177.5
1,593.2
Enterprise Value
- (Debt + Leases)
34,807.1
22,791.1
93%
24,384.3
3,111.1
Equity Value
21,273.2
as % of Enterprise Value
Share Price
0
Terminal Value (g= 0%)
PV of Terminal Value
7787.0
-6600.0
-387.0
94.0
894.0
-332.5
561.5
387.0
-771.0
177.5
3,776.3
Enterprise Value
- (Net Debt)
17,164.1
11,238.8
75%
15,015.1
3,111.1
Equity Value
11,904.0
as % of Enterprise Value
Share Price
2
2008E
11900.0
-10129.0
-598.0
135.0
1308.0
-501.6
806.4
598.0
-59.0
-1094.0
251.4
212.2
3
2009E
14575.3
-12372.6
-731.3
167.1
1638.5
-613.8
1024.7
731.3
-69.5
-1337.1
349.3
270.9
4
2010E
17755.5
-15053.3
-884.8
210.6
2028.0
-746.7
1281.2
884.8
-83.0
-1497.1
585.9
417.5
5
2011E
21517.2
-18209.2
-1061.8
267.4
2513.6
-904.0
1609.6
1061.8
-92.6
-1646.9
931.9
610.2
1
2007E
9663.0
-8201.0
-478.0
113.0
1097.0
-421.4
675.6
478.0
-69.0
-478.0
606.6
557.3
2
2008E
11900.0
-10129.0
-598.0
135.0
1308.0
-501.6
806.4
598.0
-59.0
-598.0
747.4
630.9
3
2009E
14575.3
-12372.6
-731.3
167.1
1638.5
-613.8
1024.7
731.3
-69.5
-731.3
955.2
740.9
4
2010E
17755.5
-15053.3
-884.8
210.6
2028.0
-746.7
1281.2
884.8
-83.0
-884.8
1198.2
853.9
5
2011E
21517.2
-18209.2
-1061.8
267.4
2513.6
-904.0
1609.6
1061.8
-92.6
-1061.8
1517.0
993.3
$27.18
Base DCF
REVENUES
-COGS
-DEPRECIATION
JOINT VENTURE INCOME
EBIT
-TAXES
PROFIT AFTER TAX (EBIAT)
+DEPRECIATION
-INCREASE IN NET WORKING CAPITAL
-CAPITAL EXPENDITURES
FREE CASH FLOW FROM OPERATIONS
Present value of FCF
1
2007E
9663.0
-8201.0
-478.0
113.0
1097.0
-421.4
675.6
478.0
-69.0
-995.0
89.6
82.3
$15.21
19
Base DCF for
 Base DCF under no-growth (g=0) gives firm value $15B
 Expected Capex to support growth beyond year 5 is I5 =
$15.1B ($12B in PV) --allocated to various expansion and
extension plans according to their relative weight
 (Gross) PV of CFs from tangible assets in place and the
parent brand (V1) is $27B (NPV = V – I or V = NPV + I)
 Equity value (reflecting TA and parent brand), after
adjusting for net debt and leases ($3.1B), is EV = $23.9B
20
21
Brand Equity Value (June 1, 2007)
 Starbucks’ brand leveraging options value (PVGO) is $9.85B or
$12.5/share (about 40% of Po of $30 or 30% of total long-term value
of E-EV of $33.75B (=$23.9+9.85) –and equal to the differential
between analysts target price of $42 and current price of $30)
E-BEV
ExpandedEquity Value  Value of Net Assetsin Place PBV  Brand Leveraging Options
Growth Options component
Base DCF component
 Expanded Equity Value, from adding the incremental value of the
brand expansion and extension options (PVGO of $9.85B) to the
company’s (gross) equity value reflecting its Net Assets in Place and
parent brand value ($23.9B), is $33.75B or $43/share (close to
median analysts’ target)
 The Expanded-BEV of Starbucks, reflecting the parent brand value
PBV (estimated based on DCF by BrandFinance Ltd at $6.2B) plus
the incremental value of the brand expansion & extension options of
$9.85B, is $16B or $21/share (about half of Starbucks target value of
$42 and about 2/3 its current price of $30)
E
E BEV  PBV  E
EXP
EXT
Parent Brand Brand Leveraging
Value
Options
22
Revised Valuation on Dec 31, 2008 (Down Market)
4
$ 45
40
35
$ 29.13 (June 1, 2007)
30
November 10, 2008
25
20
$20 (+96%)
15
$13 (+27% )
$ 10.20
10
$8 (-22%)
5
0
Nov-06
May-07
Base Case (Nov-09)
Nov-07
May-08
Historical Stock Performance
Nov-08
May-09
Oct-09
Current Stock Price
23
Revised Valuation of
Brand Options
Under Economic Downturn (Dec. 31, 2008)
 By Dec. 2008, Starbucks faced a more challenging economic,
competitive and operating environment:
 general economic slowdown –reduced customer demand/visits;
 fiercer competition –competitors (McDonald’s, Dunkin’ Donuts)
counter-offer with more affordable premium coffee;
 increase in dairy costs –price raises
 Founder Howard Schultz fires his CEO Jim Donald who had “become
delirious with success” and takes over.
 Since previous valuation shares dropped to 1/3 in year and half, from
$29.13 on June 1, 2007 to $9.46 as of Dec. 31, 2008
 Analysts’ views:
 Morgan Stanley: a) reducing growth or closing stores not enough; b) 1year target view of $13 based on store closures and product plans
 Deutsche Bank: overexpansion is source of value destruction
24
Revised Valuation of
Brand Leveraging Options
under Economic Downturn (Dec. 31, 2008)
 A revised DCF gives $6.7B ($9.00), close to Po of $9.46. Base equity value
under no growth is higher, $6.9B ($9.32). Should S maintain its current
(though scaled-down) growth strategy (g=2%), it would be destroying value
 Cost-cutting (e.g., limited store closings) and beverage and food innovation to
differentiate store experience not adequate for company recovery
 According to analysts, Starbucks should:
 stop focusing excessively on coffee (saturation);
 expand selectively to contain brand erosion and management distraction;
 leverage the customer base by becoming a total stomach destination (not just for
great coffee but also for a great quality meal)
25
Revised Valuation of
under Downturn (3)
Brand Options
 Base V(t2) = $13.7B
Competitive erosion yield () 5%; revised  of main business (V1(t2)) rose
(from 30%) to 80%;  of digital music (V2(t2)) rose (from 60%) to 120%
(SEE NEXT TABLE SUMMARY)
 In revising the brand leveraging options platform, the Expanded Equity Value
(E-EV) differs depending on alternative brand leveraging strategy
management chooses to implement under different future scenarios
 We thus consider a menu of various option-based brand leveraging
strategies underlying alternative static or dynamic managerial approaches
associated with brand portfolio leveraging strategies
 Each of these strategies (S1 to S7) focuses on a different type of brand
expansion/extension scenario with differing degrees of flexibility
26
Basic Inputs for Option Valuation
June 2007
(t1)
December 2008
(t2)
Initial Company Value (V1)
$ 27.0 bln
$13.7 bln
Volatility of Main Business (σ1)
Growth in V1
Initial Value of Digital Music Business (V 2)
30%
10,8%
$ 11.0 bln
80%
1,8%
$ 5.5 bln
60%
10%
120%
1,5%
0%
5%
$ 12.0 bln
$ 9.85 bln
5%
5%
$ 5.3 bln
$ 1.10 bln
Volatility of Digital Music Business (σ2)
Growth in V2
Competitive Erosion (δ)
Equity Risk Premium
PV of Investment Cost (Growth)
Expanded Equity Value (All Options)
27
Alternative Brand Strategies in Downturn (Dec 2008)
Option-based brand strategy, brand expansion/extension type involved, associated brand
portfolio strategy style, company value (total and per share) deriving from that strategy
with associated option value creation (or destruction), and related brand risk exposure
STRATEGY
Commit to All Growth Plans
S1
TYPE OF BRAND
EXPANSION/EXTENSION
BRAND
STRATEGY
STYLE
STATIC
PORTFOLIO
BRAND
PORTFOLIO
STRATEGY
No New Offering
(NPV)
VALUE
COMPANY VALUE
SHARE PRICE BRAND RISK EXPOSURE
CREATION/DESTRUCTION (EXPANDED EQUITY VALUE)
- $ 4.55 bln
$ 6.27 bln
$8.45
HIGH
S2
Commit to Expansion Options & Ignore All
Extension Options
-
No New Offering
(NPV)
- $ 3.80 bln
$ 7.02 bln
$9.46
HIGH
S3
Expansion Options Only (Ignore All Extension
Options)
Brand Expansion
No New Offering
$ 0.86 bln
$ 11.68 bln
$15.74
MEDIUM
S4
Expansion Options + Original Warm Lunch
Extension
Horizontal Line Extension
Branded House
$ 0.95 bln
$ 11.77 bln
$15.86
MEDIUM
Keep All (Expansion & Extension) Options
Horizontal Line Extension,
Horizontal Category Extension
Branded House,
Subbrand
$ 1.10 bln
$ 11.92 bln
$16.06
MEDIUM
S6
Expansion Options + Upscale Meals Extension
Horizontal Line Extension, Vertical
Line Extension
Branded House,
Endorsed Brand
$ 2.11 bln
$ 12.93 bln
$17.43
MEDIUM
S7
Horizontal Line Extension, Vertical
Expansion Options + Upscale Coffee & Meals
Line Extension, Vertical Category
Extension
Extension
Branded House,
Endorsed Brand,
House of Brands
$ 2.79 bln
$ 13.61 bln
$18.34
S5
*
DYNAMIC
PORTFOLIO
MEDIUM
28
Alternative Brand Strategies in Downturn (Dec 2008)
Static or Commitment Strategies (S1 & S2)
 S1: If S commits to full “grow-as-usual” brand expansion and extension
portfolio strategy (incl. entertainment), simply scaled-down under worsened
economic conditions (g=2%), company value drops to $6.27B ($8.45/share –
below Po of $9.46), a value destruction of -$4.55B. No new brand offerings.
 S2: If S executes only its scaled-down brand expansion plans (in core
business) but drops all brand extension plans (in entertainment), company
value is preserved ($7.02B), confirming Po of $9.46. This reaffirms current
market valuation by analysts (from standard DCF). Value loss is -$3.80B.
29
S2
Expanded BEV and Risk Exposure for Alternative
Brand Leveraging Strategies (S1 – S7)
PRICE
AS OF DEC 31, 2008
STRATEGY
VALUE
COMPANY VALUE
CREATION/DESTRUCTION (EXPANDED EQUITY VALUE)
SHARE PRICE
BRAND
EXPANSION/EXTENSION
RISK EXPOSURE
S1
Commit to All Growth Plans
- $ 4.55 bln
$ 6.27 bln
$8.45
HIGH
S2
Commit to Expansion Options & Ignore All
Extension Options
- $ 3.80 bln
$ 7.02 bln
$9.46
HIGH
S3
Expansion Options Only (Ignore All Extension
Options)
$ 0.86 bln
$ 11.68 bln
$15.74
MEDIUM
S4
Expansion Options + Original Warm Lunch
Extension
$ 0.95 bln
$ 11.77 bln
$15.86
MEDIUM
(Horizontal Category Extension)
S5
Keep All (Expansion & Extension) Options
$ 1.10 bln
$ 11.92 bln
$16.06
MEDIUM
S6
Expansion Options + Upscale Meals Extension
$ 2.11 bln
$ 12.93 bln
$17.43
MEDIUM
$ 2.79 bln
$ 13.61 bln
$18.34
MEDIUM
(Vertical Line Extension)
S7
Expansion Options + Upscale Coffee & Meals
Extension
(Vertical Line Extension & Subbrand)
31
Alternative Brand Strategies in Downturn (Dec 2008)
Basic Flexible Strategies (S3-S5)
 S3: Value impact is + if brand expansion options accounted for. E-EV of
flexible strategy involving brand expansion options (while dropping all
brand extension plans) is $11.68B, with value gain of $0.86B. Share price
rises to $15.74. Existing branded products expanded with no new offerings
*If this strategy is committed now, it reduces to S2 (= committed NPV of S3)
 S4: If S, besides maintaining all brand expansion options, maintains a line
extension option into warm lunch (following warm breakfast), E-EV rises
to $11.77B (or $15.86). Value gain is $0.95B
 S5*: This is base-case all-growth (all expansion and extension) options
strategy from previous plan, scaled down. Revised equity value is $11.92B.
The combined value of all scaled-down brand leveraging options (PVGO)
is $1.10B (vs. 9.85B). The additional category extension options in
entertainment (over S4) do not generate any significant increase in share
price ($16.06 vs. $15.86 under S4)
 *If this strategy is committed now, it reduces to S1 (= committed NPV of S5*)
32
S5*
Alternative Brand Strategies in Downturn (Dec 2008)
Upscale Flexible Strategies (S6-S7)
 S6: This strategy eliminates brand extension plans (skips entertainment) but
enhances food items (upscale meals). In counter-response to McDonald’s and
Dunkin’ Donuts’ new premium coffee and breakfast items, Starbucks can stage
horizontal extension of its warm breakfast line with warm lunch and follow-on
upscale quality meals (a compound option). E-EV is improved ($12.93B). Value
creation doubles ($2.11B vs. 1.10B), with P at $17.43.
 S7: This “vertical” strategy additionally entails upscale coffee extension also,
launching a separate new luxury brand for coffee-related products (e.g.,
STARbeans) via acquiring smaller, elite players. Super-premium coffee might
overcome the saturation concern. This upscale coffee & meals strategy is most
value enhancing (PVGO=$2.79B), resulting in E-EV of $13.61B ($18.34).
34
Upscale Coffee & Meals Extension Strategy (S7)
S7
Sensitivity of E-EV to  (S5*) and Sales
Expanded Enterprise Value
90.000
80.000
70.000
STRONG BRAND
(Starbucks)
6.0x
4.0x
WEAK BRAND
(hypothetical)
60.000
50.000
40.000
30.000
20.000
10.000
1.3x
0
6.600 7.600 8.600 9.663 10.600 11.600 12.600
BASE CASE
Sales
EV/Sales Multiples for Comparable Unbranded
(Private) and Branded Firms in Specialty Coffee
June 2007
UNBRANDED (PRIVATE) LABELS
December 2008
July 2012
EV/Sales
Caribou Coffee
0.6
0.1
0.7
Peet's Coffee & Tea
1.6
1.1
2.0
Green Mountain Coffee Roasters (1)
2.5
2.1
1.1
Average EV/Sales
1.6
1.1
1.2
3.2
3.4
3.7
COMPARABLE BRANDED FIRM
McDonald's
EV/Sales (actual)
(based on market data)
2.8
0.9
EV/Sales*
Starbucks
(Brand Options Value)
3.9 *
1.4 *
3.1
Industry Characteristic Curve for Branded Firms
(Food & Beverages, 2009)
Brand Option Value Score
100%
90%
McDONALD'S
DANONE
80%
CARLSBERG
STARBUCKS
NESTLE'
70%
PEPSI
COCA-COLA
SARA LEE
KELLOGG
60%
50%
40%
30%
20%
10%
0%
0%
5%
10%
15%
20%
Market Uncertainty
25%
30%
35%
5
Risk Analysis of Brand Leveraging Strategies
 In choosing among brand leveraging strategies, management must
also consider the resulting business risk exposure
 A brand equity management tool should provide guidance on how to
manage growth (expansion and extension) as well as assessing
embedded risks. An options portfolio perspective allows assessing the
risk of expanding, extending or abandoning a brand
 We can estimate brand equity risk exposure or delta [the sensitivity
of brand leveraging options portfolio value (  E ) to changes in the
underlying company base value ( V )] over a specified period as:
 BE 
E (t1 )  E (t 2 )
V (t1 )  V (t 2 )
39
Risk Analysis of Brand Leveraging Strategies
A risk exposure analysis of above 7 brand leveraging strategies
(S1-S7) was performed to assess their embedded option sensitivity
to small changes in parent brand building activities. None of the
brand strategies in Dec. 31, 2008 is in the low risk category.
Implementation of any of these strategies would expose the
company to high or medium brand equity risk:
 Static/commitment strategies (S1, S2) are highly vulnerable to how
brand development varies according to changing business conditions.
These static strategies are value destructive and highly risky under
current economic downturn circumstances.
 Flexible strategies (S3 - S7) involve lower (medium) risk, being less
sensitive to changing business conditions and are + value creating.
40
Brand Equity Risk Map for
1.2
S2
45°
1
Brand Equity Risk (δBE )
 A brand equity risk map for
Starbucks’ alternative brand
strategies (S1-S7) plots brand
equity risk ( BE) against change
in company base value (  V ).
The slope of each line
measures the degree of brand
option sensitivity to small
changes in base equity value
HIGH RISK REGION
0.8
MEDIUM RISK
REGION
0.6
S7
0.4
0.2
 Above the 45° line are the
more
risky
“static”
(commitment) strategies (high
risk region), while below this
line
are
flexible
brand
strategies with lower brand
equity risk exposure (medium
and low risk region)
S5
LOW RISK REGION
0
0
0.2
0.4
0.6
0.8
1
1.2
Δ V (Underlying Company Base Value)
S1
S2
S3
S4
S5
S6
S7
 BE
BRAND EXPANSION/EXTENSION RISK
 BE  0.75
HIGH
0.5   BE  0.75
MEDIUM
 BE  0.5
LOW
41
6
Conclusions
 We developed a framework that values brand development and
leveraging as a multi-stage growth options portfolio (of brand
expansion and extension options)
 A real options analysis of brand equity provides guidance on how to
value and manage brands strategically
 Viewing brand as a platform for exploiting brand expansion or extension
options necessitates a dynamic view of brand equity mgt;
if management can actively/flexibly manage its brand depending on
future contingent circumstances, it can enhance brand equity worth and
lead to better brand management
 A real options analysis of the brand strategy decision process can be a
useful tool for assessing and comparing brand-related opportunities and
risks and for valuing and managing strong brand companies
42