Why You Should Look For Powerful Brands To Hold In Your Portfolio

Louis Vuitton… Coca-Cola… ESPN… Rolex… Mercedes Benz… Frito Lay.

What do they have in common? They are all among the world’s most valuable brands.

Each year, Forbes publishes a list of the top 100 corporate brands, ranked by a proprietary algorithm. Consulting and valuation agency Interbrand maintains a similar list using a slightly different methodology.

Both agree that the world’s most esteemed brand is Apple. The only question is how much it’s worth. One group says $241 billion, and the other says $482 billion. To be clear, that’s the intrinsic value of Apple’s name, not its annual sales or market cap.

Source: Interbrand

Clearly, the concept of brand power carries a lot of weight.

Why Brand Power Matters

Brand building is an expensive endeavor. According to sources, Coca-Cola (NYSE: KO) spent roughly $4 billion on advertising last year. It will likely do the same again this year. But it’s hard to argue with the results. Each day, 1.9 billion servings of Coca-Cola products are enjoyed worldwide. And consumers are willing to pay a premium price relative to other carbonated sodas.

Strong brands have pricing power and can pass along rising costs more readily without hurting demand and denting volume. That’s an important attribute in this inflationary environment. Faced with rising costs for sugar, aluminum cans, and other raw materials, Coke was able to push through a 12% average price hike last year — protecting its margins.

We see the same thing in the breakfast aisle. Kellogg (NYSE: K) gets top-dollar for top-shelf cereals such as Frosted Flakes, Froot Loops, and Rice Krispies. I just hopped over to Wal-Mart.com and found a 16-ounce box of Raisin Bran for $3.98 versus $2.62 for Great Value Raisin Bran.

Let’s be honest. This is a commoditized product. There just isn’t much difference between the category leader and the private-label competitor. Both contain the same basic ingredients. Yet one commands a 50% higher price.

That’s branding. It has worked out pretty well for Kellogg shareholders. The company hasn’t missed a quarterly dividend payment since 1925 – almost a century. And payments have risen for 18 straight years.

Established brands convey specific imagery and connotation. Names like Gucci, Armani, and Prada are synonymous with style and sophistication. Lexus and BMW attract drivers who value performance and prestige. And what woman wouldn’t want to see a Tiffany’s jewelry box under the Christmas tree?

But it’s not always about luxury and wealth.

John Deere green says reliability and workmanship. And the Hilton (NYSE: HLT) logo on an interstate exit sign means that a clean and comfortable night’s sleep is just ahead. Incidentally, the latter took in $2 billion in licensing and franchise fees last year from the Hilton name (along with Doubletree and Waldorf Astoria).

It takes 20 years to build a reputation and five minutes to ruin it.
— Warren Buffett

According to Interbrand, the average company in the Top 100 list has been in existence for 110 years. Considering businesses die every day, that suggests that durable brands are the key to longevity. The collective brand equity of those franchises rose 16% last year, topping the $3 trillion mark for the first time.

Brand Value Isn’t Foolproof (Or Forever)

But that doesn’t mean brands are immutable. Even the most sterling reputation can be tarnished. We’re seeing that with Bud Light as we speak.

For those who don’t follow the news (and aren’t on social media), Anheuser-Busch (NYSE: BUD) is taking some heat after making a commemorative can of Bud Light featuring a transgender social media influencer. This particular design wasn’t marketed to the public, but that distinction mattered little to customers who saw it as an overtly political statement.

From blue-collar factory workers to well-known celebrities, the backlash has been fierce. Across the heartland, bars and restaurants are reporting a noticeable drop in Bud Light package and draft sales. Mild in some cases, but severe in others.

Say what you will about quality, but there is no denying the effectiveness of Anheuser Busch’s marketing. It has built an iconic brand recognized around the globe. The company hauled in $57 billion in sales last year, with the heaviest share from Bud Light.

There’s nothing particularly special about the malt, yeast, and hops in those familiar blue cans. But marketing and branding have built generations of fiercely loyal customers and earned the title “America’s best-selling beer.” But in the span of two weeks, The King of Beer has been demoted to court jester. Bud Light is now the topic of endless internet memes and fodder for late-night comics. But shareholders aren’t laughing. Neither are distribution partners.

Without getting too political, this ordeal could have been avoided. But instead of sales, AB’s Vice President of marketing was more interested a personal agenda to reshape Bud Light’s cultural identity, which she deemed “out of touch” with the times.

What does that say about Joe Six-Pack? Do you think anyone relaxing after work wants their next pint served with a lecture on “inclusivity”?

There’s nothing wrong with an honest appeal to new demographics, but not at the expense of your core clientele. Before this happened, Budweiser ranked as the world’s 21st most valuable brand. With a value of $29 billion, it sat just below Walmart and a couple spots above Marlboro. That lofty perch took a lot of Superbowl commercials. Today? Who knows. Whether the damage is permanent remains to be seen. These boycotts have a way of losing steam.

In any case, there is an important lesson here. In our increasingly fractured society, with many groups advocating for Environmental, Social, and Governance (ESG) causes above all else, it has become very difficult for some companies to stay above the fray. AB wasn’t the first to get ensnared, and it certainly won’t be the last. Consumers are increasingly taking a stand and aligning with businesses that they feel reflect their values. Add that to the long list of variables that investors must weigh.

Still, the healthier the brand, the more resistant to this contagion.

Closing Thoughts

I’ve said many times that the surest path to long-term investment success is to identify businesses with competitive advantages that build a protective moat and keep competitors at bay. That often manifests in superior returns on invested capital (RoIC), the key to shareholder value creation.

Well, moats take many forms, but they often start with an entrusted brand that engenders customer loyalty. It’s no accident that my High-Yield Investing portfolio is filled with great brands — some of which have been around longer than I have.

My advice: make sure you do the same with your own portfolio.

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