Do strong brands make good investments? Brand Finance certainly think so

 
Elliott Haworth
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When purchasing consumer goods, we’re attracted to brands we know and love.

We buy Coca Cola, rather than an own brand product. We prefer Ray Ban sunglasses, Colgate toothpaste, Apple’s iPhone. And we’re willing to pay a premium for the privilege.

Consumers have an affinity with the real thing, not just through overt awareness – but ongoing trust.

“Name, identity, character and purpose drive a brand’s growth,” says Chris Halton, global strategy director at Jones Knowles Richie. “A strong brand name retains value even when its product may have lost its relevance.”

Through tried and tested experience, we expect these brands to deliver consistently well. But can the same be said for the market performance of the parent companies?

Performance

Adrian Lowcock, investment director at Architas, says yes, but cautiously: “a strong brand means a company has some pricing power, can charge a premium and raise prices to keep a company’s profits ahead of inflation. A good brand is also less vulnerable to a downturn as consumers are slower to give up their chosen brands.”

But what is a brand really worth? John Stuart, one of the twentieth century’s great American business leaders, once said that “if this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks – and I would fare better than you!” Brand value is about more than simply volume or market share. Valuable brands are the ones that bring customers to the company even if the competition is offering comparable products at similar, or even lower, prices.

There are multiple consultancies that claim they can put a precise monetary figure on the value of a brand. One, Brand Finance, uses the so-called royalty-relief approach, which involves determining the value a company would be willing to pay to use its brand as if it did not own it. The method estimates future revenue attributable to a brand and calculates the royalty rate that would be charged for its use.

This week it released its annual Global 500 list of the top 500 brands in the world and their parent companies.

Google (with a brand value of $109bn) and Apple ($107bn) flip places for the top spot, putting the Alphabet-owned search giant in first.

Interestingly only 66 of the top 500 are tech brands, but they constitute half of the top ten, possibly due to the varying longevity of technology, and our preference for a handful of household brands.

UK brands haven’t performed as well as we might hope: out of a total of 30 UK brands that made the list, Vodafone is the highest ranked, in fiftieth place – down from thirtieth last year. There are 58 totally new additions to the list, some of which will be more familiar to international investors. Mostly though, the list consists of companies that are both well-known, trusted and consistent.

Returns

Brand consultancies say such information is useful for marketers, brands and companies when determining their corporate strategy. But a study released in 2015 by Brand Finance suggests it can also be useful for investors.

According to its calculations, companies it has judged to have a high Brand Value (BV) relative to their market capitalisation, or “Enterprise Value” (EV), outperformed the S&P500 by a significant amount between 2007 and 2015. Specifically, the S&P500 rose by a healthy 49 per cent, but had you invested exclusively in firms with a BV/EV ratio above 30 per cent, you would have seen 94 per cent returns over the same period. The figures have not yet been updated for 2016.

Caution

There is, however, good reason to be cautious before investing exclusively in strong brands. “A strong brand means different things,” says Lowcock. “For example Apple products need constantly improving and reinventing and consumers do not buy the products frequently. A good example of strong brands not always lasting is to consider that Nokia and Motorola once dominated the mobile phone industry, which is now dominated by Apple and Samsung.”

Nevertheless,“the market has been favouring the sorts of businesses which own good brands, particularly consumer staples such as toothpaste, coffee or washing powder,” says Lowcock. “Unilever and RELX have been popular businesses in this space as they are well managed and have a suite of strong brands which they have invested in to ensure they continue to grow.”

Elliott Haworth is business features writer at City A.M.

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