Big Brands: Investing in a Name

As investors, we’re constantly on the lookout for companies with a competitive edge. But how can a good brand set a business apart?

Picture the scene.

You’ve just spent a long day traveling and you now find yourself far from home. You’re tired, you’re hungry, and all you want is a bite to eat. There are plenty of restaurants around for you to choose from, but you don’t really want to risk trying something new right now.

And then you see it.

Like a gift from the gods, you spot a beacon of familiarity shining bright amongst the unknown. A symbol that all cultures and languages can understand.

The Golden Arches – McDonald’s.

Food. Finally.

Forgive the hyperbole, but I’m sure you catch my drift. Whatever your personal feelings towards McDonald’s are (I’m more of a Burger King man myself), we all have a particular fast-food chain that we return to time and time again.

This loyalty isn’t just limited to cuisine though. In fact, a lot of the actions we take as consumers are dictated by a lot more than the products we’re purchasing. Whether we’re aware of it or not, we’re all guilty of buying into brands.

Big Brands

Humans are creatures of habit. This means that once we find something we like, we tend to stick with it.

Companies love this.

Branding is one of the most powerful marketing tools for businesses across the world. It can be hard to get right, but once a company manages to capitalize on the mind-share of its consumers, it tends to keep a solid hold.

Think about it.

Maybe you swear by your iPhone and would never, ever consider an Android. Starbucks might not be your first choice of coffee when you’re at home, but when you’re 300 miles away, at least you know exactly what you’re going to get with a Grande Flat White.

Your last two Fords never let you down, so why risk changing to a new model now?

We’ve spoken in the past about economic moats, and brand happens to be one of the more powerful versions of a moat. Once a company makes a strong connection with a consumer, that bond is very hard to break – even by the consumer themselves.

A strong brand is undoubtedly one of the most effective weapons in a company’s arsenal, and there are a few surprising reasons why:

Fear of the Unknown

Steve McKee once conducted a five-year study called ‘When Growth Stalls’. In this study, he examined the reasons why some companies plateau after a few years of positive growth. But one of his key arguments was actually extremely interesting, not just for entrepreneurs, but for anyone with an interest in consumer psychology.

When you’re trying to process something new, your prefrontal cortex works very hard. This causes you to end up feeling very tired and frustrated under an onslaught of new information. So in the end, we just give up and stick with what we know.

Or course, there are other – less craniological – reasons for our aversion to change too.

We can sometimes fear that we’ll end up losing something we currently value. So even if an innovative new product arrives on the scene that can make our lives instantly better, we still fear the loss of some small quirk of our old product.

Or what if you can’t use this new device as easily? Maybe it’s harder to get parts for this car than your last one? Do I really want to go through the process of signing up for another subscription?

Change can seem like more hassle than it’s worth. So, once a consumer forges a positive relationship with a company, it’ll take something quite significant to break it.

Brand Identification

The University of Southern California identified some of the psychological factors behind developing brand loyalty in a consumer. This study mentions five main dimensions in the creation of a strong brand, all of which work together to connect the consumer to a company on a subconscious level.

These factors can be quite subtle, but if done properly, will work together to make the consumer feel as though they are part of a company rather than just another revenue stream.

Starbucks built its brand not just around coffee, but also humanitarianism. Even the small matter of a green company logo lends to the image of a Fair Trade company focused on corporate social responsibility. In this way, consumers feel as though they’re part of Starbucks’ overall mission every time they buy a coffee.

Or sportswear brands like Nike and Under Armour. These companies spend billions of dollars every year to sponsor top athletes who wear their products. So even if you absolutely suck at basketball, you can still go out on the court with the same sneakers as Steph Curry and play just that little bit better… or so you think.

Legacy

Apple is a stand out company in terms of branding. And the key to this brand?

Design.

Apple takes design very seriously (check this out if you don’t believe me), and its products carry a very distinctive design that lets consumers recognize its products from a distance. I’m pretty sure we could all pick a Macbook out of a laptop-lineup pretty quickly.

This clean, simplistic design symbolizes the cutting edge technology the company believes their products to embody. But it also creates a showroom of similarly designed products that all compliment each other in both appearance and functionality.

If you own and use an iPhone, you might be more tempted to buy an Apple Watch. Not only will they link up, but they’ll look great together. Of course, you may as well get Apple TV then, which can be controlled by both devices. And then…. I think you see where I’m going with this.

Why does branding matter to investors?

A brand is an important consideration for investors as it gives us clues about the most important thing a company needs for survival – customers.

B2C companies (those that sell to consumers rather than other businesses) need to have a strong brand if they want to control a profitable portion of the market against their competitors. Other factors like a low-price point and quality products are also important, but they won’t turn a one-time buyer into a loyal customer.

In his book The Little Book That Builds Wealth, Pat Dorsey explains that a strong brand can even inspire consumers to spend more than they usually would.

Shoppers are willing to pay a lot more for a necklace that comes in a blue-branded Tiffany’s box than one that comes from another jeweler. Even if both products are essentially the same, Tiffany’s can command a higher price because of the associated high-class brand.

But if you’re still not convinced of the power of branding, let me leave you with this gem.

We covered a story in our weekly Five on Friday email a few months back about a girl who unfortunately fell victim to Chipotle’s E.coli outbreak in 2015.

In addition to seeking about $40,000 in hospital bills from the company however, the 19-year old claimant also wanted Chipotle to throw a few vouchers for free burritos into the mix. The lawyer claims that his client’s love of Chipotle’s food never wavered throughout her illness, and so she naturally requested complimentary burritos as part of her settlement.

That’s a brand that money just can’t buy.

 

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Rubicoin operates a full disclosure policy. Rubicoin staff currently hold long positions in Apple, Ford, Starbucks, Nike, Under Armour, Tiffany & Co. and Chipotle Mexican Grill.

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