Financial Information and Brand Value

Reflections, Challenges and Limitations

Yves-Alain Ach, Sandra Rmadi-Saïd

• Publisher: Wiley-ISTE
• Year: 2020
• ISBN:
  9781119804192
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

The brand is the companys most important asset. In their financial statements, companies are faced with a lack of accounting recognition for the brands they have created, and value recognition for the brands they have acquired. This book studies the nature, characteristics and determinants of brand information published in companies annual and financial reports. It presents case studies on the methods of evaluating and developing brands, and analyzes annual reports published by listed companies, whose brands appear in international rankings. It reflects on the inadequacy of information and disclosed data to demonstrate the value of brands and the need to ensure that more reliable and relevant financial information is available to investors. Financial Information and Brand Value goes beyond the simple application of conceptual frameworks in order for the reader to master the practices related to brand valuation.

1
The Brand as a Source of Value Creation

The purpose of this first chapter is to define the concept of a brand and to describe its fundamental features. This chapter also deals with the value companies’ use of brands. We define the brand according to an economic perspective and also describe its evolution through the centuries; we will also establish the link between the market and the brand. We will see whether the use of brands creates value and whether the mechanics developed by economic theory are sufficient to ensure brand use. Brands have a limited lifespan, and we will assess whether the means of preserving brands are sufficient to ensure the maintenance of brand ownership.

1.1. The historical, legal and economic character of the concept of a brand

Before studying the contemporary nature of the concept of a brand, it is useful to consider the origin of brands. The brand is a perennial tool for trade. Whatever the reasons for the use of a brand, it has always been used to indicate an origin and a source. In the Middle Ages, craftsmen “marked” or “branded” their products in order to identify their production. It is therefore a simple transition from “branding” to “brand” (or, in the French, “marquage” or “marking” to “marque”), and thus legislators were able to take into account the property associated with brands.

The first laws that clarified brand ownership appeared in the 18th Century. Thus, these laws highlighted the rights of individuals and companies in terms of industrial property. The first nation to understand this need and recognize this right was the United States, enacting a law in 1790. It was quickly followed by France, which followed suit on January 7, 1791, enacting a law signed by King Louis XVI. The use of a brand attached to the product by entrepreneurs was clear. Entrepreneurs, for their part, very quickly understood that the brand could give them an advantage, which today would be described as “competitive”.

Brand use indirectly accompanied industrial development, as entrepreneurs indirectly felt the need to develop by being recognized by their brand. This evolution leads us to understand that, contemporarily, the brand allows companies to develop by creating value.

Farjaudon (2007) distinguishes two categories of brand value, weak brands and strong brands. Awareness of brand value makes it possible to dissociate the category the brand belongs to from the brand itself. The strong/weak association is defined in relation to the market shares that can be conquered by the brand. The strategy implemented by the manager in charge of brand development will depend on this categorization. Thus, it has been shown that when the brand is strong, the consumer becomes more important than the distributor in terms of the attention paid by the managers. The attention is then directed towards marketing, but not only that. Indeed, in the case of strong brands, which are recorded as assets on balance sheets, the shareholder becomes an essential player.

In this book, we will focus on brands accounted for by all types of companies. Brands are not just a name on the product; the nature of strength is a central point in determining their value to both the consumer and the shareholder. The measurement of brand awareness, the mental evocations associated with it, the perceived quality and the ability to build loyalty are the four most commonly accepted criteria for defining brand strength (Aaker 1994). This approach is based on an understanding of consumer behavior and suggests that creating a strong brand requires creating a strong emotional bond with the consumer, building consumer loyalty and promoting the distribution of products through a distinctive sign capable of winning them over. However, when certain brands become too strong, they become synonymous with the goods adjacent to them. Thus, for example, “Google” for search engines, “Caddie” for shopping carts and “Kleenex” for paper tissues. In short, whether they are strong or weak, it is necessary to understand how brands appear and how they evolve.

We will follow this evolution in this first chapter, which aims to define the different foundations of the “brand” concept. We emphasize that the brand is a complex concept whose materiality is composite and that, once created, it acquires an economic role. However, it is also not easy to create, it requires imagination, and this gestation leads to the acquisition of a right that must be legally protected. On the basis of these observations, we will examine the fundamental characteristics of the brand and the possible links between the historical, economic and legal character that the brand encompasses.

1.1.1. The brand’s historical character

The brand and branding, depending on the period, did not serve the same purpose. We have already pointed out that as far back as Antiquity, potters used to mark their pottery in order to allow a better identification of the pots coming out of their workshop. The basis of this marking was not intended for commercial purposes, but was used to prevent theft of the pots made and stored around the factory. This phenomenon has been perpetuated through the ages. The branding of animals is one of its extensions. In the Middle Ages, brands found another function. Corporations, in turn, used them. There was, on the one hand, the artisan’s individual brand and, on the other hand, the collective brand of the corporation. One was used to individualize the work, the other to delimit the corporation’s territory. The corporation could thus sanction the craftsman who jeopardized their reputation. In the end, the craftsman’s mark was guaranteed by his corporation. The brand had no defined use; it could “reach customers or identify products to protect against theft” (Pollaud-Dulian 2010, p. 721), provided that corporate brands guaranteed a certain quality and the fact that a brand belonging to a corporation had to ensure its own protection and respectability. In addition to this principle, royal decrees already punished counterfeiting.

The revolution of 1789 in France challenged the practices established by corporations, trades and foremen and completely abolished them. Article 44 of the texts enacted on March 2 and 17, 1791 (the Le Chapelier Act) established the principle of freedom, “any person shall be free to engage in such trade or to exercise such profession, art or trade as he shall see fit, but he shall first be required to obtain a patent.” Thus, the first principle of “annuity” was established. The consequence of this principle was the end of the distinctive signs attached to corporations and all individual brands of craftsmen. The acts of competition that followed this period of anarchy caused abuses that led craftsmen and industrialists to demand the implementation of laws that could regulate this situation. The search for equality among citizens led the legislator of the time to enact a law putting an end to acts of unfair competition; the law of 22 Germinal year XI (April 12, 1803), in article 16, went too far by providing for a “hellish” penalty for offenders. Burst and Chavanne (1993, p. 455) compare this position to situations found in sociology and consider that “[…] it is a law of judicial sociology, where the law provides for penalties that are manifestly too severe and disproportionate to the gravity of the offence prosecuted, judges do not apply it in practice.” The replacement of an organized and hierarchical economic system by a system based on freedoms and equality was the real detonator of the use of brands as a commercial instrument. The 18th Century saw the birth of the brand as we know it today.

The Industrial Revolution facilitated a new development for brands. It should be remembered that the term Industrial Revolution refers to three major changes in economic life. These three major changes were highlighted by John Stuart Mill (1965) (originally published in 1848), Karl Marx (1904) (originally published 1867) and Arnold Toynbee (1884). These concern the agricultural revolution, the demographic revolution and, finally, the manufacturing revolution. The latter evokes, in particular, the creation of the steam engine, textile machines and blast furnaces. This period of change led to a fragmentation of tasks, an increase in working time, in the pace of work and in productivity gains. Lévy-Leboyer (1968), in an article on economic growth in the 19th Century, concludes that “the French economy was dominated by the growth of industry, which eventually led to the development of all activities […], industry accounted for a quarter of total output from 1810 to 1840, a third in the intermediate period between 1850 and 1880, and half between 1890 and 1910” (Lévy-Leboyer 1968, p. 800). As the Industrial Revolution allowed for higher production than before, industrialists were faced with the problem of the flow of manufactured goods. They had to think of ways to make it easier for them to sell consumer goods. For them, brands were one of these ways.

This intellectual reflection, in fact, had an ideological foundation that was described by one of the masters of the doctrine of free trade, in his treatise on political economy, Jean-Baptiste Say. In the first book of his treatise on economics, he explains that producers must find what in terms of trade are called “outcomes” (Say 1972, p. 87) (originally published in 1803), means of exchanging the products they have created for those they need. Jean-Baptiste Say puts producers and consumers at the center of his economic description, while considering that the consumer is, depending on the situation, the beneficiary of modernization or the one who loses, if he is subject to a monopoly or to taxes that would raise the price of the product. Indeed, in Chapter X of his treatise on political economy, concerning the different ways in which taxes are based and on which classes of taxpayers they are levied, Jean-Baptiste Say notes that “the government requires a commodity to bear a particular mark, for which it makes a charge, as in the case of the assay-mark of silver, and stamp on newspapers” (Say 1972, p. 244). This is where the essential principles of liberal theory come into play. In the operation of the overall system, the entrepreneur is at the center of the system, since, on the one hand, they receive impetus from the market and, on the other hand, they choose the optimal combination by putting the various factors together. This simply means that the entrepreneur, by distributing profits, pensions and salaries, the amount of which is equal to what they have produced, generates purchasing power.

Liberal capitalism has allowed the remarkable rise of Western societies; in the clarity of its proof, the “liberal” model has long masked imperfections in the real functioning of economic systems, such as the domination of monopolistic firms. But the pressure of facts and social necessities has forged the appearance of a mixed system, in which the action of the State has become increasingly significant. Concretely, all products are not equal; they can be differentiated. The product differentiation strategy aims to introduce a distinction between the products manufactured and sold by the firm and the products of its competitors. Branding helps to highlight this differentiation and the relative advantages, perceived as unique by consumers. The brand makes it possible to distinguish products; this distinction is important in the specification of a product and makes it possible to determine its added value. In this vein, Kapferer and Thoenig (1989) point out that the brand makes it possible to globalize all the information related to the differences between products. The brand indicates the differences between suppliers. Thus, the consumer buys the product according to the specific characteristics conveyed by the brand and pays the corresponding price, which allows the company offering the product to make an additional profit. The usefulness of the product for the consumer is thus defined. Brand value depends on the consumer’s interest in the elements of difference and specificities conveyed by the brand that lead to the purchasing act.

1.1.2. The brand’s legal character

The first text that applied to the protection of brands was so harsh that the law was hardly applied at all. Indeed, this text provided for heavy penalties against counterfeiters (Title IV of the law of 22 Germinal year XI (April 12, 1803)). The following text (the law of July 28, 1824) followed the same path and proposed criminal sanctions for any use and affixing of another person’s trade name to products. The repeal of this text was obviously proposed. The law of June 23, 1857 was the first modern text, or at least the text which is at the origin of modern brand law. It laid the foundations for the major principles attached to brands and defined the property rights at the first act of using a brand.

During the 19th Century, the law followed the logical mechanism developed by economic theory by enacting a law intended to ensure the protection of the trade name when it was affixed to products. But this was not enough, since the protection of a name could not be assimilated to the protection of a brand. This was all the more true since economic necessities and trade exchanges prompted the enactment of a brand law to supplement the trade name law.

The idea was, as Burst and Chavanne (1993, p. 456) pointed out, to ensure that “brand ownership is acquired by first use”, although analysis of this principle revealed that it was particularly unfair.

Legislators also reconsidered their position on this subject and, during the 20th Century and the development of advertising, felt the need to enact a new law. The law of December 31, 1964 provides that the rights attached to a brand are acquired exclusively by registration in the context of a bran...

Table of contents

• Cover
• Table of Contents
• Title page
• Copyright
• Introduction
• 1 The Brand as a Source of Value Creation
• 2 Brand Development
• 3 Value Review and the Acquisition of the GUCCI Brand
• 4 Analysis of the Practices of Thirty-Seven International Companies
• 5 Determinants of Brand Disclosure
• Conclusion
• Glossary
• References
• Index
• End User License Agreement