Estimation of Tetley's and of private labels' sales volume

Tetleys Sales (£) worldwide in 1999

Tetleys Prices (£/kg) in UK

Drawstring 40
Drawstring 80
Softpack 160
Softpack 240
Softpack 40
Softpack 80
Average retail price
Average wholesale price

Sales volume (kg)

Private label sales worlwide (£)

PL sales in value = 1.07 * Tetley sales in UK and = Tetley sales in US
Private label market share worldwide are 10% lower

Private label prices (£/kg) in UK

Premium 160
Premium 240
Premium 40
Premium 80
Light 80
Value 80
Average retail price
Average wholesale price

Private label volume (kg)

323,198,000

7.6
6.36
5.68
4.77
6.64
6.16
6.20
4.96

65,143,375

290,878,200

3.96
3.84
4.64
4.28
4.32
1.52
3.76
3.01

96,701,529
Case pg. 15

Assumption

Assumption: Retail margin = 20% of retail price

=B3/B14

=B3*.9
Case p. 6 (24.1% ms for PL vs. 22.4% ms for Tetley)
Assumptions
Private label share in other countries where Tetley operates are comparable
but lower than in the large, mature UK market
Assumptions:
Based on Tesco's prices per pound in UK.
Prices in other countries are comparable
Tesco's 4P's (product, promotion, placement) comparable to Tetley's
(hence difference in revenues between Tetley and Tesco entirely due to the brand)

Assumption: Retail margin = 20% of retail price

=B18/B34
Prices in other countries are comparable
Valuation of Tetley brand (annual value)

Gross revenue premium

Sales volume 1999 (kg)
Average price (£/kg)
Total revenues
Gross revenue premium (£)
Assumption: Price and quality differential branded-unbranded is similar to that in UK w

Brand margin valuation

Sales volume 1999 (kg)
Average price (£/kg)
Average cost (£/kg)
Marketing and administrative costs
R&D costs
Total net profits
Net margin premium (£)

Assumptions
COGS for Tetley (% of price)
COGS for private label are 5% less than for Tetley because of economies of scale and lo
For Tetley, the marketing costs are selling and distribution costs + administrative expen
For PL, the marketing costs are half of Tetley's administrative expenses
Brand-building R&D costs are 50% of total R&D costs ( figures case p. 6)
 Tetley Private label
65,143,375 96,701,529
4.96 3.01
323,198,000 290,878,200
32,319,800
lar to that in UK worldwide

Tetley Private label

65,143,375 96,701,529
4.96 3.01
3.5 3.3 =B14*0.95
75,862,000 12,859,000
697,500 -
18,137,514 -44,217,327 =C12*(C13-C14)-C15-C16
62,354,841

71% COGS case pg. 15

ies of scale and lower packaging costs
ministrative expenses
DCF (Interbrand/Futurebrand) method

Net Sales
Operating earnings

Sales Growth at 1%
Average sales/operating earnings

Tangible capital employed

Average sales/tangible capital
Charge for capital (5%)

Intangible earnings
Brand earnings (85%)

Tax rate
Tax paid
Post-tax brand earnings
Discount rate
Discount factor
Discounted cash-flow

Value to year 10
NPV of Perpetuity Value
Brand value (£'000)
Brand value if grow at 5% after second year

Assumptions
Net Sales are expressed in constant year 0 money. Sales grow by 1% for 10 ye
Ratios Sales:Operating earnings and sales:tangible capital are weighted averag
Tangible capital employed includes fixed and working capital at current value =
Intangible earnings = Operating earnings minus charge for capital
Brand earnings are estimated at 85% of intangible earnings (for comparison, it i
UK Corporation tax: 31% until 1999, 30% after
Perpetuity = (1+discount rate)(year 10 post-tax earnings)(1+annual growth)/(dis
Discount rate = risk free rate (5%) + brand premium (.5% minimum, 7% average
 1 2 3 4 5
Year 1999 Year 1 Year 2 Year 3 Year 4 Year 5

323,198 326,430 329,694 332,991 336,321 339,684

18,837 26,413 26,677 26,944 27,213 27,485

1%
12.36

72,988 83,227 84,059 84,900 85,749 86,606

3.92
3,649 4,161 4,203 4,245 4,287 4,330

15,188 22,252 22,474 22,699 22,926 23,155

12,909 18,914 19,103 19,294 19,487 19,682

31% 30% 30% 30% 30% 30%

5,839 7,924 8,003 8,083 8,164 8,246
7,070 10,990 11,100 11,211 11,323 11,436
9%
1.09 1.19 1.30 1.41 1.54
10,083 9,343 8,657 8,021 7,433

73,275 57%
56,413 43% Perpetuit 145,570 =(L19*(1+B20))/B20
129,688
165,723
 6 7 8 9 10
Year 6 Year 7 Year 8 Year 9 Year 10

343,081 346,512 349,977 353,477 357,012

27,760 28,038 28,318 28,601 28,887

87,472 88,347 89,231 90,123 91,024

4,374 4,417 4,462 4,506 4,551

23,387 23,620 23,857 24,095 24,336

19,879 20,077 20,278 20,481 20,686

30% 30% 30% 30% 30%

8,328 8,411 8,495 8,580 8,666
11,551 11,666 11,783 11,901 12,020

1.68 1.83 1.99 2.17 2.37

6,887 6,382 5,913 5,479 5,077
DCF (Interbrand/Futurebrand) valuation method

Net Sales
Operating earnings

Sales Growth 1% first year, 5% later

Average sales/operating earnings

Tangible capital employed

Average sales/tangible capital
Charge for capital (5%)

Intangible earnings
Brand earnings (85%)

Tax rate
Tax paid
Post-tax brand earnings
Discount rate
Discount factor
Discounted cash-flow

Value to year 10
NPV of Perpetuity Value
Brand value (£'000)
Assumptions
Net Sales are expressed in constant year 0 money
Sales grow by 1% for 10 years and then stay flat
Ratio Sales: Operating earnings is weighted average of past 3 years (with 50/33/12 we
Ratio Sales: Tangible Capital is weighted average of past 3 years (with 50/33/12 weigh
Tangible capital employed includes fixed and working capital at current value = here as
Intangible earnings = Operating earnings minus charge for capital
Brand earnings are estiamted at 85% of intangible earnings (for comparison, it is 85% o
UK Corporation tax: 31% until 1999, 30% after
Perpetuity = (1+discount rate)(year 10 value)(1+annual growth)/(discount rate-growth
Discount rate = risk free rate (5%) + brand premium (.5% minimum, 7% average), 9% he
 1 2 3 4
Year 1999 Year 1 Year 2 Year 3 Year 4

323,198 326,430 342,751 359,889 377,884

18,837 26,413 27,734 29,120 30,576

1% 5%
12.36

72,988 83,227 87,388 91,758 96,346

3.92
3,649 4,161 4,369 4,588 4,817

15,188 22,252 23,364 24,532 25,759

12,909 18,914 19,859 20,852 21,895

31% 30% 30% 30% 30%

5,839 7,924 8,320 8,736 9,173
7,070 10,990 11,539 12,116 12,722
9%
1.09 1.19 1.30 1.41
10,083 9,713 9,356 9,013

85,704 52%
80,019 48% Perpetuity 206,482 =(L19*(1+B20))/B20
165,723
 5 6 7 8 9 10
Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

396,778 416,617 437,447 459,320 482,286 506,400

32,105 33,710 35,396 37,166 39,024 40,975

101,163 106,221 111,532 117,109 122,964 129,112

5,058 5,311 5,577 5,855 6,148 6,456

27,047 28,399 29,819 31,310 32,876 34,519

22,990 24,139 25,346 26,614 27,944 29,341

30% 30% 30% 30% 30% 30%

9,632 10,113 10,619 11,150 11,707 12,293
13,358 14,026 14,728 15,464 16,237 17,049

1.54 1.68 1.83 1.99 2.17 2.37

8,682 8,363 8,056 7,761 7,476 7,202
Wholesale price estimations (From case
Ex. 8, p.17)

Tetleys Prices (£/kg) in UK

Drawstring 40 7.6
Drawstring 80 6.36
Softpack 160 5.68
Softpack 240 4.77
Softpack 40 6.64
Softpack 80 6.16
Average retail price 6.20

Average wholesale price (£/kg) (asume

retail margin 20%) 4.96

Assumptions
Prices in other countries are comparable
Retail margin = 20% of retail price
Tesco's prices per pound in UK are
representative of worldwide prices.
Price and quality differential between Tetley
and private label are similar to that in UK
worldwide
No weighting according to sales

Brand valuation using the Product-Market

method
Gross revenue premium Tetley
Sales volume 1999 (tons) 65,138
Average wholesale price (£/kg) (as above) 4.96
Total revenues (£'000) 323,198

Gross revenue premium in 1999 (£'000) 32,384

Brand Margin Valuation

Tetley
Sales volume 1999 (kg) 65,138
Average wholesale price (£/kg) 4.96
Average cost (£/kg) 3.51
Marketing and administrative costs 75,862
Total net profits 18,835
taxes 5,651
Net margin premium in 1999 (£'000) 20,411

Lifetime brand value (£'000)

226,566
Discount rate 11%
Growth rate 1%
Time horizon (years) Infinite

Value under different scenarios 167,665

Discount rate 15%
Growth rate 1%
Time horizon (years) Infinite

Sources and assumptions

Private Label (PL) sales in value = 1.07 (case
p. 5)* Tetley sales in UK but 70% of sales of
Tetley elsewhere (case p. 5)

UK represents 54% of Tetley sales (case p.

6), so PL sales worldwide are: Tetley sales
(£323.2; case Ex. 6, p. 14)*(1.07*.54+.7*.46).
COGS for Tetley is 70.7% (228.5/323.2) of
wholesale price (see Ex. 6 case p. 14).
COGS for private label are 15% less than for
Tetley because of lower packaging costs and
economies of scale.
For Tetley, the marketing costs are selling
and distribution costs + administrative
expenses (case Ex. 6, p. 14)
For PL, the marketing costs are half of
Tetley's administrative expenses

Assuming no change, lifetime brand value = Σ

(Net annual margin premium)*[(1+r)/(1+d)]^t
Where r is the annual growth rate and d is
discount rate of future earnings
General formula, brand value = (Net annual
margin premium)*(1-q)^n/(1-q)
Where n is the life of the brand and q =
(1+r)/(1+d)
Assuming infinite life, simplified formula for
brand value = (Net annual margin
premium)*(1+d)/(d-r)
Private label prices (£/kg) in UK

Premium 160 3.96

Premium 240 3.84
Premium 40 4.64
Premium 80 4.28
Light 80 4.32
Value 80 1.52
Average retail price 3.76

Average wholesale price 3.01

Private label
96,680
3.01
290,814

Private label
96,680
3.01
2.98
12,859
-10,324
(3,097)

195,609 251,740 283,208

15% 11% 11%
3% 2% 3%
Infinite Infinite Infinite
278,105 317,834 370,807 212,205 302,969
9% 9% 9% 9% 9%
1% 2% 3% 3% 3%
Infinite Infinite Infinite 15 30
Brand valuation using the Financial (Interbrand) method

Year 1999

Net Sales 323,198

Operating earnings 24,991

Sales Growth 3%
Average sales/operating earnings of past 3 years 9.52

Tangible capital employed 61,337

Average sales/tangible capital of past 3 years 6.48
Tangible capital rate of return 11%
Charge for capital 6,747

Intangible earnings 18,244

Brand contribution index 80%
Brand earnings 14,595

Tax paid 7,497

Post-tax brand earnings 7,098

Discount factor
Discounted cash-flow 7,824

NPV to year 10 93,210

NPV of Perpetuity Value 59,597
Brand value (£'000) 152,807
Value under different scenarios 152,005
Growth rate years 1 to 10 1%
Charge for capital 8%
Brand contribution index 80%
NPV to year 10 93,210
Value at year 10 16,695
Discount rate 11%
Growth rate at perpetuity 1%
Time horizon (years) Infinite

Assumptions
Net Sales are expressed in constant year 0 money. Sales grow by 3% for 10 years and th
Ratios Sales:Operating earnings and sales:tangible capital are average of past 3 years a
Tangible capital employed includes fixed and working capital at current value = here as
Tangible capital charge is the (opportunity) rate of return that would be achieved on ta
For consumer packaged good, risk premium = 3%, risk-free rate = 5%, return on tangibl
Brand contribution index is 80% (Beer is at 85%)
UK Corporation tax is 30%.
To compute perpetuity, see that Brand value = (post-tax brand earnings)*[(1+sales gro
Using the formula on the sum to infinity of a geometric series with annual growth = (1+
Perpetuity = (year 10 post-tax earnings)*(1+discount rate)/(discount rate - growth rate
Discount rate = risk free rate (5%) + brand premium (.5% minimum, 7% average, 4% he
 1 2 3 4 5
Year 1 Year 2 Year 3 Year 4 Year 5

332,894 342,881 353,167 363,762 374,675

34,983 36,032 37,113 38,226 39,373

51,386 52,927 54,515 56,151 57,835

5,652 5,822 5,997 6,177 6,362

29,330 30,210 31,116 32,050 33,011

23,464 24,168 24,893 25,640 26,409

10,495 10,810 11,134 11,468 11,812

12,969 13,358 13,759 14,172 14,597

1.11 1.23 1.37 1.52 1.69

11,684 10,842 10,061 9,336 8,663

61% Perpetuity 187,835

39% Discount rate 11%
Growth rate at perpetuity 1%
Time horizon (years) Infinite
 151,542 111,452 104,434 221,517 131,556
3% 3% 3% 3% 3%
10% 8% 8% 8% 8%
80% 65% 80% 80% 80%
66,615 48,992 76,062 76,062 76,062
12,063 8,872 13,774 13,774 13,774
9% 9% 15% 9% 9%
3% 3% 3% 5% 3%
Infinite Infinite Infinite Infinite 15

w by 3% for 10 years and then grow at GDP growth rate (3% to 5%).
e average of past 3 years and stay constant
l at current value = here assumed to be total assets
at would be achieved on tangible assets
ate = 5%, return on tangible assets = 8%

nd earnings)*[(1+sales growth)/(1+discount rate)]^t

s with annual growth = (1+sales growth/1+discount rate),
discount rate - growth rate)
nimum, 7% average, 4% here because Tetley has low volatility)
 6 7 8 9 10
Year 6 Year 7 Year 8 Year 9 Year 10

385,915 397,493 409,418 421,700 434,351

40,554 41,771 43,024 44,315 45,644

59,570 61,357 63,198 65,094 67,047

6,553 6,749 6,952 7,160 7,375

34,002 35,022 36,072 37,155 38,269

27,201 28,017 28,858 29,724 30,615

12,166 12,531 12,907 13,294 13,693

15,035 15,486 15,951 16,429 16,922

1.87 2.08 2.30 2.56 2.84

8,038 7,459 6,921 6,423 5,960
155,292
3%
8%
80%
76,062
13,774
9%
3%
30