What’s a brand worth? It’s a simple question, with an Econ 101 answer. Like all assets, a brand is worth exactly what someone is willing to pay for it on any given day. Most of the time, that payment happens on a micro-level. $1.99 for a six-pack of Coke, which is more than the store brand by 60 cents, or $4.95 for a latte at Starbucks, which is $4.95 more than the free coffee in the breakroom at work.
But, sometimes, that day arrives to buy the whole brand, as it did recently with the coffee company Keurig, which entered into an agreement in December to be purchased by a private equity firm, JAB, for $13.9 billion. That’s a lot of cash for a company best-known for its single-serve coffee makers. And the numbers are even more staggering when you realize that the purchase amount was a 78 percent premium to its stock price, and it came in a year where Keurig’s sales were reported to be down by 45 percent.
That formula sounds more like Investment Banking 400-something, but I’m willing to assume that JAB knows what it’s doing. It does own several other coffee brands, including Peet’s Coffee & Tea, Caribou Coffee, and Stumptown Coffee Roasters. About 80 percent of Keurig’s revenue comes from its single-serve K-cups and, with this acquisition, JAB will control about 20 percent of the world’s coffee business, according to an estimate in Yahoo Finance.
So, how much did JAB pay just for the brand of Keurig? Certainly the company has other assets, although its patent on the K-cup expired in 2012. People trust the name and their main coffee brand, Green Mountain. And they have some huge growth potential with single-serve soda technology in the works. But, somewhere in that $13.9 billion, is a chunk for the brand name. I’m going to guess $3 to $5 billion. If anyone wants to argue with me about it, by all means, buy me a cup of coffee and bring it on.
There are rare occasions, though, where nothing but the brand name is sold and then it is quite simple to establish the value of the brand. About three years ago, I received a call from an attorney in Ohio who was looking for some way to value a brand name that he wished to sell. Some years earlier, his client, an owner of four sandwich shops, had created and trademarked the term “Subtember” and now wanted to sell it to Subway, which had recently made quite a splash with its “Februany” promotion. What’s it worth, he wanted to know.
We don’t do formal appraisals, I told him, because brand value is so subjective, but in exchange for knowing the final outcome, I would give him an estimate. That year, Subway’s projected ad spend was around $600 million, or about $50 mil a month, which would be the presumed lifespan of a “Subtember” promotion. But like Februany, the brand name is just a tag; it’s not a specific menu item like Big Mac or Whopper. Finally, Subway hadn’t been looking to buy the trademark, this attorney’s client was trying to sell it. In other words, Subway didn’t need the trademark. All of these elements kept the value of the brand lower. So, I gave him a guesstimate of $50-100,000. Some months transpired and, ultimately, Subway liked the name, but paid at the low end of the range. They used their new acquisition immediately in 2013 and again in 2014, but apparently skipped it in 2015. Februany, however, is still going strong.
There are companies like Interbrand that will put a value on a brand (for a price) for the purposes of selling it or estimating its value to the company that owns it. Interbrand also publishes the top 100 brands list every year, which uses a formula of their design. A key caveat is that their formula estimates the value of the brand to the owner only, in other words, what return they can make from owning the brand as opposed to what they might be able to sell it for. This year, Interbrand ranked Apple as the most valuable brand in the world at $170 billion, with Google second at $120 billion. So, what’s a brand worth? A really good one can be worth billions. Even a simple one, like “Subtember,” can still bring a nice sum of money. And, as Interbrand believes, what it’s worth to the owner, may be the most valuable price of all.
As published in the Central Penn Business Journal, the Reading Eagle and Lehigh Valley Business.