KFA fiasco puts a question mark on brand valuation
Accounting firm Grant Thornton valued brand Kingfisher Airlines (KFA) at Rs 4,100 crore in 2008. With 32 per cent-plus market share then, KFA was the undisputed leader. Its owner, Vijay Mallya, pampered flyers with in-flight entertainment and exotic food, which cost crores. The airline made losses all through except in 2010/11, when it made a smallprofit. Worse, Mallya bought loss-making Air Deccan. KFA went bust in 2012. So, what went wrong?
Branding gurus say Mallya took rules that had worked for him in the FMCG sector and applied them to his airline. This misfired. In FMCG, growing by spending heavily on advertising and acquiring market share through acquisitions is the norm. Mallya, however, acquired bankruptcy when he bought Air Deccan.
KFA had borrowed over Rs 9,000 crore from banks. Creditors are trying to recover some money by selling the brand. It is, obviously, extinct, and doesn't have takers, despite the fact that the trademarks 'King of Good Times' and 'Fly Kingfisher' could have fitted into the branding strategy of any existing or start-up airline. "The controversy surrounding Kingfisher may have damaged the brand, so no airline has come forward," says Aaron Keller, Managing Principal of US-based brand consultancy Capsule. The creditors have taken Grant Thornton to court, questioning the basis on which it assigned the brand such a value.
The episode has put a question mark on the working of brand valuation companies which, say experts, must update their models according to fast-changing market realities. Banks, too, have to learn.
The first lesson is for banks such as SBI that gave the airline loans on the basis of its brand value. "The banks should have asked on what basis is the trademark value sustainable and how would the business have to fare to make it as valuable as claimed," says Unni Krishnan, former global strategy director of brand valuation company Brand Finance Plc and founder of a purpose-led business design advisory, LongWealth GmbH. Also, banks should have kept monitoring the brand's value. "There can be a deterioration in financials, impacting the brand. In such a case, banks should ask for more collateral," he says.
But the biggest question is about brand valuation methodologies. Why is it that valuers only consider market share and mindshare? Why don't they consider costs that brands incur for creating that perception? When KFA was valued, it wasn't making profits. Shouldn't this have been considered? And should brand valuation be an annual feature?
Brand specialists agree that ascribing a valuation based on market share and mindshare no longer holds good. This is because a host of brands, in spite of consistently scoring well on these two parameters, are going bankrupt. The likes of Kodak and Nokia, undisputed leaders till a few years ago, don't exist today. They were perceived as highly trustworthy, but collapsed.
"The biggest limitation of the process today is that it is just an accounting approach. It is independent of sustainable wealth creation, which is preposterous," says Unni Krishnan.
"Financial performance plays a crucial role in our methodology. We attribute brand value to fi nancials, the role of the brand, and brand strength"
Mallya stretched this by spending advertising dollars to the brim. "We told him that the way he was building the brand was not connected with business and commercial sustainability. We showed him unpleasant things like potential bankruptcy. Obviously, these were things he didn't want in the report," recalls the head of a brand valuation firm who advised Mallya in 2008.
The traditional paradigm, says Vikram Malhotra, marketing professional and founder of Abundantia Entertainment, factors in only a stable environment. "Most valuers don't factor in disruption, and that's why a lot of valuations are flawed." So, while Nokia had the largest market share in mobile handsets, and kept appearing among the top names on brand valuation lists, most valuers didn't factor in the fact that it was not future-ready. It had, after all, missed the smartphone bus.
In an era where consumer preferences evolve by the minute, using perceptions to measure brand value is dangerous, says Keller of Capsule. "New methods are needed to better understand the value of brands in a volatile marketplace. Methods that integrate advanced thinking from marketing and finance using in-depth customer analytics need to be explored," he says.
In the case of KFA, the valuation company considered the market share that was generated in a short time, preference of the brand over the nearest competitor, and ability to command premium over competition. What they didnt consider was impact in the event of discounting and the ability of the brand to consistently command premium. It didnt consider cost. It was like looking at the income side of the P&L and not the expenses side. That, says the CEO of a leading accounting firm, is the biggest mistake that most valuation companies commit. There are other methodologies also, such as real transactions, impairment tests, financial institution checks, taxation checks, but most valuation companies, he says, dont use them.
The traditional paradigm of merely taking into account mindshare and market share, says Angshuman Bhattacharya, Managing Director, Alvarez and Marsel India, works well only in businesses on an "as is where is basis".
"If the future potential is an extension of the past, these methods hold. However, if the business associated with the brand undergoes a disruption, the brand needs to get valued on a future cash flow basis. Also, valuation is a function of the underlying profile of buyers and the synergies that can be created."
"The traditional paradigm factors in only a stable environment. Most valuers don't factor in disruption, and that's why a lot of valuations are flawed"
Ashish Mishra, Managing Director, Interbrand India, says financial performance plays a crucial role in its methodology. Interbrand, he says, attributes brand value to three components - financial performance, the role of the brand, and brand strength. "We have continuously evolved our metrics around brand strength factors that include internal and external facets," he says.
Customer Engagement
While industry stalwarts agree that brand valuation methodologies must evolve, a recent Harvard Business Review article says more weight is nowadays being given to customer relationships.
Capsule's Keller says customer relationship values will drive the future. He cites the example of Instagram, sold to Facebook for $1 billion. "It bought Instagram not because it had revenue (it had none) but because of its relationship with a large audience. Focusing on relationships, we believe, will stabilise brand value estimates."
In today's volatile environment, the strength of customer relations is a strong factor for building a brand, says Raghu Vishwanath, Managing Director of brand valuation company Vertebrand.
"A business may have dominant market share but its brand value may be low due to sub-optimal mindshare or strength of stakeholder relationship. That is why investors are betting on customer relationships," he says.
Modern-day brand building, says marketing guru Peshwa Acharya, founder of www.thinkasconsumer.com, has to stand on three parameters - number of customers you engage with, quality of those customers and, finally, ability of the brand to extend into businesses that are profitable.
The future is likely to be about the quality of customers instead of just spending marketing dollars. @ajitashashidhar
