Incorporating brand into your investing
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.