Cash Flow

Brand and Deliver

Faced with globalization and growing competition, CFOs in Asia are turning to brand management as a way to thrive.
Justin WoodMarch 30, 2004

England football captain David Beckham has probably never heard of BenQ. Nor, in all likelihood, has French midfield star Zinedine Zidane or Spanish striker Raul. But when they and their peers from 16 nations gather in Portugal this summer to compete in the UEFA European Football Championships, the brand name “BenQ” should have stuck firmly in their minds, along with the minds of millions of fans all over the world.

That, at least, is the hope of Eric Yu. As CFO of BenQ (pronounced ben-cue), he signed off on a multimillion-dollar contract last November making his electronics company one of the main sponsors of Euro 2004. “We have big expectations,” enthuses Yu.

What makes the deal interesting is that, up until 2002, Taiwan-based BenQ operated solely as a contract manufacturer, churning out cheap mobile phones, digital cameras, and other electronics on behalf of brand-name clients. Today that’s all changing. For two years now, BenQ has been pursuing a bold new strategy to build its own brand. And as its involvement in European football demonstrates, the NT$109 billion (US$3.3 billion) firm has global aspirations.

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The company isn’t alone. Thanks to falling trade barriers, globalization, and ever more cut-throat competition, companies across Asia are seeing their margins squeezed to the floor. As a result, many are turning to branding, both as a way to survive and as a way to expand into new markets. Of course, Asia has nurtured many famous brands already, and the likes of Singapore Airlines, Toyota, and HSBC need no introduction. But now more than ever in Asia, it seems, brands are seen as essential to a company’s future health.

The logic is simple: for consumers, brands promise consistency and quality and often reinforce a personal sense of self. In return, the loyalty of customers to a particular brand gives companies more secure revenue streams, lets them charge higher prices, and enables them to expand more easily into new lines of business. But, while the benefits of brands are easily grasped, the science of creating and managing brands can be anything but. For CFOs in Asia, the challenge is working out how best to get involved in building and overseeing these intractable intangible assets.

Value Chain Pain

At BenQ, Yu recalls that the decision to build a brand was simple enough. “We felt that the value-add in [contract manufacturing] was getting smaller and smaller,” he says. “When we looked at the big-name brand companies like Sony and Samsung, we saw that they were enjoying very healthy gross margins.”

Benny Lo, an analyst at Primasia Securities in Taipei, puts it more bluntly. “BenQ really had no choice,” he says. With contract manufacturing getting ever more competitive thanks to the influence of China, “building its own brand was the only way for BenQ to survive.”

Not that the company has abandoned its original business, which Yu reckons will grow by 30 percent this year. But the company is focusing most heavily on building its brand, with sales forecast to rise 100 percent during 2004 and accounting for 40 percent of group turnover.

The new strategy has forced a big change in thinking, says Yu. “The way we made money in the past was by saving money, by cutting costs. Now we have to make money by spending money, by investing in our brand.”

From Yu’s perspective, that means micro-managing the company’s allocation of resources by working closely with BenQ’s managers and marketing teams to calculate which segments of the market and which countries are likely to generate the greatest returns. “To build brand awareness takes a lot of cash,” he sighs.

Needless to say, the job doesn’t stop there. Yu pays close attention to the performance of BenQ’s brand-building efforts too. Currently he relies on two key metrics: market share and brand position, which he defines as the average selling price of the company’s own-brand products compared to the average selling price of rival brands in each market. Yu reviews both metrics every quarter to see what progress the brand is making.

At this stage, Yu admits, he isn’t interested in gross margins. “The brand is very young, so our first priority is to create market share and awareness.” Once the brand is three years old, however, Yu plans to switch the focus to profitability, although he declines to reveal his targets. Still, if the venture goes according to plan, the benefits promise to be great.

Lo at Primasia Securities gives an indication of just how great. With mobile phones, he says, contract manufacturers are doing well if their gross margins reach 15 percent, while brand owners enjoy margins of as much as double that.

Build or Buy?

The whole foray into brands at BenQ is an enormous undertaking, and not without its risks. But for other companies looking to follow a similar path, it needn’t be so hard, says Rupert Purser, managing director in Hong Kong for Brand Finance, a consultancy. As he sees it, companies in Asia don’t necessarily need to build their own brands but instead could look at buying ready-made ones.

“Building a brand can be very hit and miss,” he notes. “It takes a lot of time and money and there’s no guarantee of success.” It’s for that reason, observes Purser, that a growing number of Asian firms are choosing to buy already established household names.

Take Zindart, a Hong Kong-based contract manufacturer of die-cast toys. In 1999, it bought Corgi Classics, a line of scale model cars cherished by collectors. Another Hong Kong company, Shriro, which distributes and markets other companies’ brands, bought Sweden’s Hasselblad brand of camera equipment in 2003. Many other companies have made similar moves, all aiming to cash in on the benefits of owning well-known names.

From Purser’s perspective, CFOs have an obvious role to play in such deals in terms of calculating how much to pay for potential brand acquisitions. But, he adds, working out how much a brand is worth is never easy. “It’s more of an art than a science,” he cautions.

That said, a handful of techniques do exist. For example, companies can try to calculate a valuation by adding up the costs of re-creating an equivalent asset, or else by combing through stockmarket data to find the value of comparable brands. Alternatively, CFOs can look to valuations based on “royalty relief”, a method based on the idea that if the brand had to be licensed from a third party the company would have to pay a royalty charge to use it. The trouble is that royalty charges are rarely disclosed, nor are the terms of royalty contracts, so the information needed to do such valuations is frequently lacking.

Perhaps the most widely used method of valuing brands is to apply a discounted cash flow model. Such techniques add up the future earnings that can be attributed specifically to the brand in question and then discount them back to the present. That means, for example, stripping out any earnings that would flow through to the company no matter what brand it owned. As for the discount rate, this is determined by assessing the riskiness of the brand’s earnings by looking at things such as the strength of the relationship with customers and how competitive the market is.

Andy Milligan, managing director in Singapore for consultancy Interbrand, acknowledges that valuing brands can be tricky and subjective, but still sees merit in the exercise — and not just in acquisitions. He believes that finance chiefs should value their brands regularly, as often as every year or two. After all, he points out, “the growing gap between the market value and the book value of many companies shows that brands are becoming more and more important assets.”

What’s in a Name?

Peter Lee couldn’t agree more. As CFO of Osim International, a Singapore-based healthy lifestyle brand most famous for its range of massage chairs, Lee hired Interbrand to conduct a valuation of Osim in March 2003. “We commissioned the study to help us get a better understanding of our brand,” explains Lee. “It’s our most important asset.” He’s not kidding, for along with a growing pile of patents and trademarks, the Osim brand is one of the few assets the S$287 million-a-year (US$171 million) firm does own.

The company is based around a rapidly expanding chain of shops across Asia, each dedicated to one of Osim’s four product areas: health, which includes the massage chairs; hygiene, concentrating on items such as water purifiers; nutrition, selling vitamins and diet supplements; and fitness, which includes a range of gym equipment for the home. The shops only sell Osim products, and all are identical, no matter whether in Kuala Lumpur or Shanghai.

However, despite selling a vast range of own-brand products, Osim doesn’t own, nor operate, a single factory — all its manufacturing is outsourced. Nor does Osim own any of its shops; all are leased. In fact, in 2003 Osim even sold off its headquarters building in a sale and leaseback deal for 12 years. The company is truly asset-light, apart that is, from its brand, and hence the desire to know how much it’s worth.

Interbrand’s study looked only at Osim’s two biggest business lines — health and hygiene — and valued the brand at S$203 million. Put simply, that represents the value of Osim’s relationship with its customers. It also demonstrates how much could be lost should the relationship turn sour, which is why Lee and his fellow managers at Osim work tirelessly to keep the brand in good health.

Every year, for example, Osim devotes exactly 10 percent of its revenue to marketing spend. “It’s a figure we came up with from trial and error over the years that we feel will sustain and grow our brand,” explains Lee. Nonetheless, he warns: “Branding is a very disciplined process. It’s no good spending millions of dollars on a marketing campaign if the other aspects of the brand aren’t supporting that spend.”

To that end, the firm educates its staff religiously on the “drivers of the brand”, such as what the name Osim stands for — well-being and positive thought — and what sort of health advice to tell customers in the sales process. The company also requires all staff, from the CEO down, to wear the standard Osim beige polo shirt at work. And it regularly conducts brand audits, checking, for example, that all stores have the correct color scheme and layout.

And the Brand Played On…

All admirable stuff, and yet some CFOs question the need to calculate brand value. L Krishna Kumar, CFO of Indian Hotels Company (IHC), a Rs5.7 billion-a-year (US$126 million) business that manages the Taj chain of up-market hotels, is one.

“Brand is very important to us. It helps to drive superior performance,” he says.”But we prefer to look at the value of the overall business rather than the value of the brand on its own.” In any case, adds Krishna Kumar, he could quite easily calculate brand value if he wanted to, by subtracting the replacement cost of IHC’s 65 properties from the firm’s current enterprise value.

Still, that’s not to say that IHC doesn’t pay close attention to its brand. Like hundreds of other companies across Asia, IHC finds itself in a position of increasing competition in its home market. Thanks to India’s economic liberalization, a booming economy, and a recent shortage of quality hotel rooms, the country has seen a surge of investment from the world’s major chains.

So far, Taj Hotels has managed to stave off the onslaught, even increasing its market share to between 25 and 30 percent of the luxury and business segments. Nonetheless, says Krishna Kumar, “with more and more brands operating in the market, it’s vital that we’re clear about what differentiates us.”

For that reason, Taj recently hired Landor Associates, a brand consultancy, to carry out a study of the Taj name. The idea is to articulate a new “brand architecture” for the group, setting out exactly which segments of the market the group is targeting, what sort of service levels to provide, and how to move into new segments such as budget business hotels and spa resorts. The group is also making a push into overseas markets and wants to present a unified brand image to the world.

Krishna Kumar raised US$150 million in December via a convertible bond issue in order to fund the group’s international aspirations as well as a program of renovation at its domestic hotels. The results of the brand study will help to direct how that money is spent.

A Question of Trust

CFOs can get involved in brand strategy and management in many other ways too. A good example comes from Zuji, an internet travel booking portal headquartered in Singapore. The company was set up in 2002 by 16 airlines across Asia, and went live with its service last year. A regional advertising and marketing campaign heralded the launch of Zuji — which means “footprints” in Mandarin — and was designed to convey the handful of characteristics that define the brand, such as ease of use and breadth of choice.

Key among those attributes was the issue of trust. In part, that meant persuading customers that Zuji was no fly-by-night dot-com start-up, explains Wong Kok Kit, CFO of Zuji. Equally, though, “it meant convincing people that they could make online payments with their credit cards without having to worry about security.” Delivering on this aspect of the brand was down to Wong and his finance team, who joined forces with VeriSign, an internet trust service provider, to build the firm’s payments infrastructure.

At first, Zuji had planned to spend 20 percent of its marketing budget building brand awareness, with the remaining 80 percent being spent on tactical advertising, highlighting special deals and cheap promotions. However, within weeks of launching, Wong and his fellow managers quickly realized that they would need to shift that split. While the marketing drive was bringing people to Zuji’s website, customers were using it simply to compare prices rather than actually book hotel rooms and flights.

Wong had upheld his promise to deliver a secure online payment system, but “we found that we hadn’t convinced people to trust us,” he recalls. In response, the company quickly raised its brand-awareness advertising from 20 percent up to 45 percent of spending. It was the right move, and business has been flowing in ever since.

The experience highlights another area where Wong gets involved with branding: measuring the effectiveness of the firm’s marketing. Because Zuji is built around a web portal, it can monitor in real-time how many customers respond to current promotions. Wong keeps a close eye on how many site visits follow from each advertising campaign, and more importantly, how many booking transactions that leads to. The company’s target is a “look-to-book” ratio of 1 percent, a benchmark taken from studies of similar services elsewhere in the world.

“As a finance guy, it’s always tricky knowing how much to spend on marketing,” he says. “But the transparency of Zuji’s website makes the process much easier.”

No doubt BenQ’s Yu is hoping Wong sees a spike in site traffic this summer, when Asian football fans book their flights to the UEFA championships.

Justin Wood is managing editor of CFO Asia, based in Singapore.