Stephen D. Simpson, CFA,On Monday June 6, 2011, 10:19 am EDT
Like quality management, brands are valuable to a company, but nobody is quite sure how to value them in cold, hard dollars. To that end, investors may want to consider the work done by London advertising giantWPPand its assessment of the most valuable brands in the world. As valuable brands often lead to above-average returns on capital and superior long-term stock market performance, the value of a company's brand is no trivial detail.
A Few Surprises at the Top of the List?One of the highlights of WPP's latest report on brand value was thatApplehas taken the top spot, surmountingGoogle. Honestly, it seems a bit of a surprise that it took Apple this long to ascend to the top spot, as the iPod, iPhone and iPad, as well as Apple's retail stores, have been grabbing headlines and cover stories in business and tech media for some time now. Be that as it may, WPP assessed Apple's brand value at $153 billion, clearly putting Google and its $111 billion in the rear-view mirror. Perhaps even more surprising was that WPP's estimate of Apple's brand value jumped 84 per cent from the prior year.
It was also interesting to see that the number three, four and five spots went toIBM,McDonaldsandMicrosoft, respectively.Coca-Colais number six, whileDisneyappears nowhere in the top 10. Other anomalies includeWells Fargoappearing higher on the list (16) thanVisa(20),American Express(40) orMasterCard(60).
Luxury goods companies, which really are all about image and brand value, also fared worse than many might assume.Louis Vuittonappears just outside of the top 25 (and ahead of Toyota), whileMercedescloses out the top 50; other names, likePorscheandHermes, are further down the list.
Not Just About the Western WorldOne thing that jumps out from the list is the growing significance of brands whose companies are based in emerging markets. About 20 of the names on the list are from BRIC countries, with companies likeChina Mobile,ICBC,SberbankandPetrobrasmaking the cut. Though there are relatively few emerging market brands that are popular with American consumers (SamsungandLG, for instance), it may not be long before companies likeHTC,BimboorBYDbecome recognizable to many people.
What Does a Good Brand Mean?Some may wonder how a brand could possibly be worth tens of billions of dollars. After all, aren't they simply the byproduct of repetitive (if clever) marketing tricks designed to exploit a gullible populace?
In point of fact, brands hold value because they can be good proxies for quality and credibility — people who may know little about cars still seem to realize that Mercedes makes good vehicles, and likewise people who go through the doors of a McDonalds know exactly what they are getting. Over time, people process consistent positive experiences with a brand and develop loyalty to it — loyalty that can often withstand price hikes or momentary lapses in quality or customer service.
Brands also seem to work a particular (if not peculiar) magic on some people and worm their way into their self-identity. Consider the "I'm a Mac" ads and how they traffic on identifying Apple customers as cool; it's a theme that Apple works very hard to weave throughout their stores and their product design. A lot of people like to think they're cool, Apple's products say you're cool if you use Apple, so there's psychological reinforcement to being a loyal Mac customer. The same is true of many other brands — owners of Porsches and Harleys may try to argue convincingly about the mechanical advantages of the machines, but the real appeal goes well past the nuts and bolts.
Good Brands Don't Try to Be All Things to All PeopleIt is also interesting to see how brands do not have to be especially all-encompassing to be successful. Apple does not try to appeal to all consumers, and Apple's marketing staff is probably aware that there are people who violently dislike Apple and take pride in buying anything but Apple. Likewise, Wal-Mart is no doubt aware that there are customers who would rather go without than be seen shopping in a "value-priced" retailer, but there are millions more who simply want to make their paycheck go as far as possible and appreciate the no-frills, low-cost approach.
Brands MatterEven if investors wish to take issue with the particulars of how WPP estimates brand value, the fact remains that brandsdohave value. There is not nearly enough difference in taste betweenCoca-ColaandPepsito explain the discrepancy in valuation, and many of the companies with leading brands post significantly higher returns on capital (as well as more consistent results) than their industry peers. With every year those positive differences in returns accumulate and over time the companies with valuable brands generally produce meaningfully better market returns.
None of this means that investors need to ignore or avoid companies that do not or cannot build a brand around their business. What it means, though, is that investors cannot and should not just limit their analysis to trailing sales, book value and other easily quantifiable fundamentals. There may well be a lot of fuzziness in the valuation of intangible assets, but there is little doubt that a prestigious brand is often all that stands between two otherwise indistinguishable goods and between a super stock and a run-of-the-mill investment.