What is a brand? According to Investopedia it is an “…intangible marketing or business concept that helps people identify a company, product, or individual.”. A Wikipedia entry defines a brand as “…a name, term, design, symbol, or any other feature that distinguishes one seller’s good or service from those of other sellers.”
So, a brand is a visual, audio, perhaps even tactile cue that tells a consumer that they are dealing with one company’s product over another’s. But, the advertising and marketing department of any big company would likely argue that brands are more than a mere signpost. A brand is marketed to appeal to consumers’ aspirations and nurturing instincts. Societal status, so we are told, can be communicated by buying a brand. Owning branded goods can even make us fitter, happier and healthier, according to some adverts. Sometimes, brands appeal to more prosaic ambitions, perhaps frugality, doing the most with the time and money available.
Advertisers and marketers build brands. Brands are attached to products, and those products are elevated above similar offerings in consumers’ estimations if the branding does its job. A rational consumer would ask if a branded product did the job better than another one or at least did it better enough to justify the premium price. But, consumers are not always rational, and as a result, a branded product does not have to be better than an inferior branded or unbranded product to command a premium price.
So, investors will not want to invest in any brand. They want to invest in strong brands. So what is a strong brand? After all, even the local supermarkets’ own branded cereal is still a brand, although typically, it is sold for a discounted price. And there we have it, as said before, strong brands can command price premiums over competitors’ offerings. If the product is no better and costs the same to assemble and distribute, then the price premium will translate into fatter margins. There is another aspect to brand strength that investors find attractive. Strong brands command loyalty and as such, should be relatively insensitive to economic cycles. Sales should hold up during recessions or downturns. A great example is sports teams, like Manchester United.
Attendances might have dropped off a cliff at Old Trafford during the COVID-19 pandemic, but that was not Manchester United’s fault. Looking back over time, and although ticket and shirt sales might dip if the team is performing poorly, during recessions, the cubs revenue has held up surprisingly well. Football supporters are incredibly loyal to their teams, and Manchester United’s brand is strong because of all those intangible things that make people identify with a sports team.
As stated previously, High gross margins are another tell of a strong brand. Take the gross margins of a consumer goods company suspected of having strong brands, and compare it to its industry average. If that company’s gross margins are significantly higher over time, then it’s a strong brand.
Forbes has a more rigorous approach to finding its top brands, here is what they do:
our first step in valuing the brands was to determine revenue and earnings before interest and taxes for each one. We then averaged earnings before interest and taxes (EBIT) over the past three years and subtracted from earnings a charge of 8% of the brand’s capital employed, figuring a generic brand should be able to earn at least 8% on this capital. (Forbes also applied the corporate tax rate in the parent company’s home country to that net earnings figure.)
Next, we allocated a percentage of those earnings to the brand based on the role brands play in each industry. To this net brand earnings number, we applied the average price-to-earnings multiple over the past three years to arrive at the final brand value. For privately held outfits, we applied earnings multiples for comparable public companies.
Forbes – The Worlds Most Valuable Brands 2020
After applying their process, Forbes produced the following top ten consumer brands in the world for 2020.
| Brand | Brand Value | Brand Revenue | Industry |
| Apple | $241.2bn | $260.2bn | Technology |
| $207.5bn | $145.6bn | Technology | |
| Microsoft | $162.9bn | $125.8bn | Technology |
| Amazon | $135.4bn | $260.5bn | Technology |
| $70.3bn | $49.7bn | Technology | |
| Coco-Cola | $64.4bn | $25.2bn | Beverages |
| Disney | $61.3bn | $38.7bn | Leisure |
| Samsung | $50.4bn | $209.5bn | Technology |
| Louis Vuitton | $47.2bn | $15.05bn | Luxury Goods |
| McDonald’s | $46.1bn | $100.2bn | Restaurants |
The “old world” of food, drink, and luxury items are still hanging on, but technology companies dominate the list. Nick Train and other fund managers are partial to backing brands. As an investment strategy, backing strong brands sounds just fine: pricing power, fatter margins, and stable revenues during downturns are some of the draws. And as further proof, funds, like the Nick Train managed Lindsell Train UK fund, have performed well in the long run.
Changing Brands
The Lindsell Train UK Equity Fund has outperformed its benchmark, the FTSE All-Share, since its inception, rising by 396% compared to 143%. Whatever stock-picking process Nick Train subscribes to, it has delivered exceptional performance in the long term. So, what is Nick Train’s investment philosophy?
First, Nick Train builds the portfolio around predominantly big companies: 90% of the 30 or so stocks are FTSE 100 Index members. Second portfolio stocks have to have “…strong franchises, strong intellectual property or strong brands, all with potential for strong profitability and secular growth.”. Finally, the portfolio has a low turnover consistent with high conviction and a long time horizon.
Nick Train is probably;y most commonly associated with his backing of the likes of Fevertree and Burberry. These are the sorts of companies that own beloved and trusted consumer brands. But there appears to be a change afoot in his fund. Notice that companies have to have strong intellectual property or strong brands. That seems like a departure from the paradigm of owning beloved and trusted consumer brands companies that have traditionally served the fund so well.
Taking a look at the fund’s holdings in January 2022, I see that 34% of the stocks are consumer brand stocks. some 40% have been selected to be digital winners. From the monthly report for January 2022, the word “brand” gets nine mentions, but so does the word digital. It would seem that Nick Train is not as committed to owning brands as he once was. Is this wise? Yes, I think so.
Call time on Brands
Brands are not dead yet. But I can see a world where things are not quite as rosy for them as they once were. Consider the changes in the way we shop. Brands communicate status. When no one can see your shopping trolley, will you opt for cheaper options when there is no fear of judgement, be it silent or communicated? When goods are not picked up and handled before purchase, does the quality of packaging matter? Online shopping makes competition on price more intense. All of those things that seemed to make it worth the extra pence or pounds to go for the brand over supermarkets’ private label seem to matter less online. Voice search, via Alexa, for example, will compound this issue.
Brands are also being drawn into political debates. According to YouGov, 35% of Brits would not buy a brand if they viewed it as not supporting their political beliefs. A brand’s stance on wider issues in society is somewhat important to 40% of the same survey respondents. Now, a brand could just stay out of politics. But, silence could be deemed to be support for something or at least apathy. Brands tend to try and attach aspirational values to the consumption of their product. But, doing so through advertising could see them being unintentionally atributed to a political leaning. Given how divisive politics has become, especially in two-party systems, is deemed to be on one side or the other could be very damaging.
Not all brands will face these issues. I do think that consumer goods companies might suffer more than most. Food and beverage companies seem to be the most at risk. These are the types of things that end up in the weekly shop. These would be at the most risk from the online shift, where price comparisons are king. Luxury brands like handbags and shoes that cost an arm and a leg will likely hold up better than most. These are the sorts of things that will command loyalty and perceived status that is resistant to price comparison. Contentious issues like political leanings seem to be of little concern for luxury brands, who are unashamed of being about, well, luxury.
Perhaps Nick Train agrees with this. His fund holdings in Unilever, a consumer goods company, fell from 9.6% in May 2018 to 7.79% by January 2022. Luxury goods company Burberry accounted for 8.73% of the fund’s total holdings in January 2022, up from 7.7% in May 2018. The fund’s biggest holding remained in Diageo on both those dates. People do seem to be quite picking about their choice of tipple.
The Storied Investor 