Is a good brand enough for a great return?

A brand is a great thing for a company to have but a competitive advantage it is not. Investors need to understand that difference.

Once brands were nothing more than a mark burned onto the backsides of livestock. Today, they’re revered assets, a kind of golden key to future profits and long term competitive advantage. Or are they?

Brands can be confusing to many investors. The Sydney Morning Herald and The Age mastheads, for example, have some value but who can say how much? And by how much did the value of VW’s brand fall when it became known that it was fiddling its diesel emission stats? No wonder some investors ignore the value of brands entirely while others overstate it.

While it’s a common belief that a brand is a source of competitive advantage - something that makes a company more profitable over time than its competitors - there’s a counter-argument: when you haven’t got a genuine competitive advantage you have to create a brand in the hope of securing something close to it.

Take, for example, the car manufacturing industry. Names like Toyota, Ford and General Motors are well known global brands. Despite this, they’re no more profitable than the rest of the industry (chart 1*). This is in contrast to a company like The Walt Disney Company (NYSE:DIS), winner of this year’s Brand Finance’s Most Powerful Brand award.

Disney’s brand endures as it continuously lives up to its promise of quality family entertainment. The art of storytelling through cinema is embedded in its DNA. Disney attracts creative talent and has a technological advantage that others simply cannot match, allowing it to market its products like no other. Disney is, not surprisingly, far more profitable than the average entertainment business (chart 2*). Its brand, however, is only a small part of its success.

Still the ‘real thing’?

Disney’s brand isn’t in the same league as Coca Cola (NYSE:KO), with a mission to ‘refresh the world’. The company has been successful due to its enormous scale of operations that allow it to supply almost every country in the world. It’s also successfully signed up venues and events around the world into exclusive supplier agreements.

But against the rise of health conscious consumers neither a competitive advantage nor a strong brand offer adequate defence. Investors that believe brands are a source of long standing business supremacy can find plenty of examples where it’s not, if they look hard enough. Nokia, Blackberry, Kodak, Dick Smith anyone?

Brands that do endure and deliver exceptional returns to their investors are more than marketing puff. These brands genuinely deliver on their products’ promises. Apple might have an incredibly valuable brand but the source of that value is in the products themselves, not just in the way they’re marketed. A brand reputation is built from customer experience. TV advertising might enforce those values but it cannot create them from thin air.

If a competitive advantage is the moat around a castle, then a brand is the castle’s walls. For some companies, this combination is just too much for even the most well-resourced competitors to overcome. These are the businesses investors should seek out. But brand power alone? It isn’t enough.

*Charts use z-scores to rank companies by comparing company ratios to the industry average. For example, a score above 0 indicates how many standard deviations a company is above the average.

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