Competitive strength is one of the most important aspects to consider when making investing decisions, and brand differentiation can be a key source of competitive strength. With this in mind, companies such as Apple (AAPL -2.19%), Disney (DIS -0.93%), and Costco (COST -1.78%) are particularly strong candidates for investors looking to profit from the power of brands over the long term.
The most valuable brand in the world
According to consulting company Interbrand, Apple is the most valuable brand in the world, with an estimated value of $107.3 billion as of 2015. Customers are remarkably loyal to the brand, and Apple is famous for its halo effect, meaning customers who own an Apple product are quite likely to stay within the Apple ecosystem over the long term. Those who own an iPhone tend to buy another iPhone when updating their smartphone, and they are also likely to choose Apple products when looking for a tablet or a smartwatch.
Image source: Apple
Apple's products and services are consistently rated above the competition in areas such as customer experience, engagement, and security. This allows the company to charge premium prices for products with the iconic Apple logo, generating superior profit margins for investors. According to data from Morningstar, Apple generates an operating margin in the area of 29.4% of revenue, substantially above the industry average of 21.7%.
Growth in the smartphone industry is slowing down across the world, and Apple is facing remarkably challenging year-over-year comparisons thanks to booming iPhone 6 sales in 2015. In this context, the company reported a 13% decline in revenue last quarter.
Nevertheless, chances are that revenue growth will improve in the middle term. According to Apple CEO Tim Cook, a recent survey among U.S. smartphone purchasers indicated a 95% iPhone loyalty rate, the highest level ever measured for any smartphone. As long as customers remain in love with Apple's products and brand image, this should result in strong cash flows for investors in Apple stock over the years ahead.
A magic business
Disney is the undisputed king in the entertainment industry on a global scale. The company owns enormously valuable brands such as Disney itself, ESPN, Pixar, and Marvel, among others. In addition, it has the intellectual rights to many of the most valuable fictional characters and franchises in the world. Disney is an intergenerational company that has built strong emotional ties with consumers in different generations, and it would be almost impossible for competitors to replicate those strengths in the middle term.
Image source: Disney.
The company has a fairly unique business model, as Disney enjoys the ability to monetize its assets via multiple platforms. For example, a massively successful movie such as Frozen or Star Wars: The Force Awakens sets the stage for more opportunities in areas such as toys and merchandising, home entertainment, live shows, and entertainment parks attractions.
Many consumers are moving away from cable TV and toward online streaming alternatives, and this is putting some pressure on Disney's networks division. On the other hand, segments such as movie studios and parks continue to fire on all cylinders, and overall financial performance remains quite healthy.
Disney produced almost $13 billion in revenue during the quarter ended on April 2, which is a 4% increase versus the same quarter last year. Free cash flow grew 12%, and adjusted earnings per share jumped by 11%, marking the 11th consecutive quarter of double-digit growth in adjusted earnings per share from the House of Mouse.
One of a kind
The discount retail industry has always been aggressively competitive, and things are getting even harder for companies in the business because of growing competitive pressure from online retailers over the last several years. However, Costco is no average retailer by any means.
The company is the pioneer in the warehouse retail business model. Costco makes most of its profits from membership fees, not margins on its products prices. This allows Costco to sell its goods for razor-thin profit margins, sometimes even taking a loss on a particular item. Needless to say, cost leadership is a key source of competitive strength among discount retailers.
Costco is remarkably disciplined when it comes to cost savings, particularly in areas such as marketing and advertising, where many competitors typically spend considerable resources. However, Costco pays higher salaries than the competition, and it offers better benefits and opportunities for professional development. A well-motivated workforce keeps operations running smoothly, and it provides a superior customer experience.
Customers really like the company's value proposition; Costco has ranked at the top of its industry in the American Customer Satisfaction Survey in every year from 1999 to 2015. Membership renewal rates are consistently high: 90% of members in the U.S. and Canada renewed their memberships last quarter, while the global renewal rate was 88%.
Currency headwinds and gasoline price deflation are hurting revenue, but the business is remarkably strong when leaving external considerations aside. Comparable sales excluding the impact from currency fluctuations and gasoline price volatility grew 5% during the 39-week period ended on May 29. In times when most retailers are delivering disappointing performance, Costco keeps generating consistent sales growth, and this speaks volumes about the company's underlying strengths.
