In­cor­po­rat­ing brand into your in­vest­ing

Finweek English Edition - - INSIDE - ed­i­to­ BY SIMON BROWN The writer owns shares in Wool­worths and FNB.

Abra nd i s one of t hose mys­te­ri­ous things that is crit­i­cally im­por­tant to a busi­ness, but of­ten hard to re­ally pin down. The busi­ness and mar­ket­ing peo­ple will talk about it in hushed tones as if it was an im­por­tant per­son, but in re­alit y the tones are hushed be­cause brand is, in part, frag­ile and, in part, be­yond one’s con­trol.

A busi­ness that deals with in­di­vid­u­als is con­stantly hav­ing its brand eval­u­ated ev­ery time it in­ter­acts with cus­tomers. This in­ter­ac­tion may in­volve a cus­tomer drawing money f rom an ATM or shop­ping for gro­ceries for tonight’s din­ner, for ex­am­ple. Ev­ery time we i nter­act with a brand we have an ex­pe­ri­ence, and if it’s a good ex­pe­ri­ence then the busi­ness re­in­forces its brand and if it’s bad, well, it starts slip­ping.

So is a busi­ness ac­tu­ally re­ally in con­trol of its brand­ing and should we as in­vestors take brands into con­sid­er­a­tion when shop­ping around for shares?

The mar­ket­ing depart­ment would tell you they to­tally are in con­trol. The re­cent Wool­worths* deal with Phar­rell Wil­liams is all about brand. Woolies has an ex­tremely strong brand, but I would sug­gest mostly with older peo­ple. The brand story was about qual­ity, but the new gen­er­a­tion needs its own brand story and Phar­rell Wil­liams f its into that. For­get all the hype from the CEO about aligned val­ues and the like, this is about get­ting a su­per­star who’ll talk to the next gen­er­a­tion and get them shop­ping at Woolies.

Some brands are more diff icult to de­fine, for ex­am­ple, those in bank­ing. No­body re­ally loves their bank, although FNB* has done a great job po­si­tion­ing it­self as be­ing hip and help­ful in ways that a bank is not nor­mally. At the end of the day, banks’ brand­ing is about be­ing re­li­able and de­pend­able, or, put an­other way, bor­ing.

Coca-Cola, of course, is all about brand­ing – over a cen­tury of it – and when you buy the com­pany you re­ally are just buy­ing the brand.

Some com­pa­nies re­ally don’t have to worry much about brand­ing. A gold min­ing com­pany, for ex­am­ple, never in­ter­acts with con­sumers, sim­ply sell­ing its gold out­put on the open mar­ket to anony­mous buy­ers. In other cases, brand may be im­por­tant, but a lack of choice makes it mean­ing­less. As an ex­treme ex­am­ple, Eskom may have a hor­rid brand right now, but we have no real and vi­able al­ter­na­tive if we want elec­tric­ity.

So what does t his mean for an in­vestor? I have strug­gled with this for a long time. Sure, brands are im­por­tant when you look at con­sumer stocks. But how do you value a brand? How do you know just how strong it is?

One way, of course, is our own per­sonal ex­pe­ri­ence with the brand, but be care­ful not to let a sin­gle ex­pe­ri­ence cloud our view – es­pe­cially i f that ex­pe­ri­ence is not the norm. That, of course, im­plies that we know what the norm is for a par­tic­u­lar brand.

That said, things are cer­tainly eas­ier t hese days t hanks to t he i nter­net. We have con­sumer web­sites where con­sumers can leave com­plaints and praise, we can search so­cial me­dia not only for peo­ple’s ex­pe­ri­ences, but also the com­pany’s re­sponse, and, in large part, the re­sponse is more im­por­tant. Things will go wrong some­times and then it is about how that is dealt with.

So, how do I in­cor­po­rate brand into my in­vest­ing? In truth, very gen­tly. If the over­whelm­ing ev­i­dence sug­gests a weak brand, then I would give strong con­sid­er­a­tion to walk­ing away from an in­vest­ment. On the f l ip side, a very strong brand would add to my in­vest­ment case, but still wouldn’t see me buy­ing a com­pany that I didn’t think suited my in­vest­ment cri­te­ria.

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