A strong brand means you should be able to command a premium price for your product or service. People pay more for Coke and Pepsi a billion times a day rather than buy a private label cola or the distant third cola, Royal Crown.
And a brand doesn’t have to be the highest quality to exert market place dominance. A hamburger at McDonalds costs the same or a bit less than at other competitors, but they sell frillions each year, along with mountains of fries, and an ocean of Coke products.
Leading brands can also use their position to stay on top. They are typically more profitable and therefore have more money to invest in new products, new ideas. They can weather a downturn in the economy and often do quite well by adapting their products and marketing to what their customers want. In the most recent downturn, McDonalds and Walmart performed quite well. Starbucks struggled, but was already hurting before the downturn, and yet has emerged as a leaner, but still healthy brand.
The bottom line is the bottom line: strong brands have value that matters to their customers, and therefore to the investors who buy their stock. This is why brands are important. It’s the subjective value, especially over a long period of time that makes a brand worth more than just the value of the machinery, the real estate and the employee equity, though all are valuable elements and important to the business process.
Each year, Interbrand, a brand-consulting firm, which is the Coke or McDonalds of their industry, publishes its “Top 100 Global Brands” report, which is a detailed valuation of the world’s top 100 brands. They describe their methodology in this way, “Interbrand’s method looks at the ongoing investment and management of the brand as a business asset. This means that our method takes into account all of the many ways in which a brand touches and benefits its organization – from attracting and retaining talent to delivering on customer expectation.” Their formula requires that at least 33% of revenues come from outside the brand’s home country, that there is substantial public data available, and that the brand be well known beyond its immediate customer base. Some other industries are excluded such as airlines and media companies because of industry or market factors that may skew the analysis.
Their top ten brands for the 2010 list published last September are as follows, starting with the top brand: Coke (valued at about $70 billion), IBM, Microsoft, Google, GE, McDonalds, Intel, Nokia, Disney, HP. Certainly all monster brands, but to get an idea of how well the Interbrand list predicts success, let’s look a the list from 2006 and check the performance of those brands in the stock market. The list is remarkably the same: Coke, Microsoft, IBM, GE, Intel, Nokia, Toyota, Disney, McDonalds, Mercedes. In 2006, HP and Google have replaced Toyota and Mercedes, but the two carmakers are just barely out of the running at 11 and 12 on the 2010 list.
What about the bottom line? A check of the top ten brands’ stock prices from 2006 to today (using data from February 25, 2006 and 2011) shows an overall increase in value of 27%, excluding dividends. Not too shabby compared to the Dow, which increased 12%, or the S&P 500 that grew just 3%. It even beats the Nasdaq performance of 22% over that time by a substantial margin.
The biggest winners, McDonalds and IBM, were up 111% and 103%, respectively. Compare that to Wendys, down more that 60%, or CISCO Systems, down about 10%.
It wasn’t all roses; GE, Nokia, and Toyota all lost value over the last five years, and Microsoft broke even, proving, at least in part, the unpredictability of the economy. But if these top ten brands as measured by Interbrand were a mutual fund, the performance would have beaten the market and pleased many investors.
So the Interbrand list shows that it can be a reasonably accurate predictor of brand strength and financial performance. Which is what a good brand is supposed to be doing for its owners. With a good brand, the whole is definitely greater than the sum of the parts.
Now what’s the darn password to my E*TRADE account?