$100 Billion Warren Buffett Doesn't Want

"If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done." -- Warren Buffett

As investors, we're used to losing ourselves in numbers -- in companies' price-to-earnings (P/E) ratios, their returns on equity (ROE), and their growth rates and profit margins. That's good -- those are important measures of financial and operational health.

But equally important to a big-picture view are less quantitative factors: the quality of management, the health of the customer base, industry headwinds or tailwinds, regulatory oversight, and whatever sustainable competitive advantages a company has.

Today, I'd like to focus on one of the biggest -- and most recognizable -- competitive advantages a company can enjoy: brand power.

Chris Davis, of the Clipper Fund, said of Harley-Davidson (NYSE: HOG  ) : "It's the only brand in the world that people tattoo on their body. ... It is an incredibly powerful brand that way."

Brand power also gives Coca-Cola its global soft-drink leadership. And it's why we associate Disney (NYSE: DIS  ) with lovable characters, high-quality animation, and children's movies.

Indeed, the Disney brand is almost Pavlovian, evoking childhood memories like none other. The brand has power. Once Disney has a hit, it can leverage its brand across many platforms -- TV, movies, merchandising -- and then create sequels or spinoffs for those TV shows and movies.

Brands are power
The dollar value of brands is hard to quantify, but it's undeniably there, often allowing companies to charge more for their products.

Think about it. Coca-Cola sells a similar sugar-water cola to generic store brands all over the world -- but consumers trust the taste and consistency of Coke's product. Similarly, if you're looking to buy a computer, you'll likely pay more for a brand name you know and trust, rather than opt for a cheaper model with an unknown label. Brands are tough to value, but they can attract a lot more money to a company's coffers.

Each year, brand research firm Interbrand puts out a list of the world's top brands and attempts to estimate brand values. Below I've provided some of Interbrand's top brands from the 2008 survey; as an interesting exercise, note what portion of the firms' market capitalization each value represents. (They're not piddly!)

Company

Brand Value

Recent Market Cap

Brand % of Market Cap

IBM (NYSE: IBM  )

$59 billion

$137 billion

43%

General Electric (NYSE: GE  )

$53 billion

$134 billion

40%

Toyota (NYSE: TM  )

$34 billion

$125 billion

27%

Intel (Nasdaq: INTC  )

$31 billion

$88 billion

35%

McDonald's (NYSE: MCD  )

$31 billion

$59 billion

53%

Disney

$29 billion

$41 billion

70%

Source: Interbrand.com.

This exercise notwithstanding, I wouldn't spend too much time trying to assess the actual dollar value of a particular brand. As business professor Aswath Damodaran has explained, "To me, valuing brand name, for the most part, seems to be a cosmetic exercise. It is not as if Coca-Cola would ever be able to sell its brand name and stay a viable company."

Brands in Fooldom
Stock watchers here at The Motley Fool pay close attention to brands. Indeed, co-founding brothers David and Tom Gardner have recommended many brand-heavy enterprises in our Motley Fool Stock Advisor service, which they launched more than seven years ago. It's outperformed the S&P 500 by 41 percentage points, on average, over that time. 

In a recent issue of Stock Advisor, David had this to say about the importance of brands: "When a brand is all that stands between a premium product and a mere commodity, it must be aggressively protected." Krispy Kreme's failure to do so earned it a sell recommendation from David. The company had a strong brand, associated with fresh, warm doughnuts, but it had begun expanding its distribution channels by offering cold doughnuts in supermarkets and elsewhere -- which undermined the brand and what it stood for.

What to do
So as you're researching stocks, pay close attention to the brand. Spend a little time thinking about the brand a company has, and the power and value behind those brands.

If a company's brand is strong, it can amass the power to maintain or raise prices. Brands can enjoy emotional strength, too. If customers are really devoted to it, making it a "cult brand" -- witness the folks who tattoo themselves with Harley-Davidson logos! -- their devotion can support a business for years and years. These diehards also make excellent sources of free word-of-mouth advertising for their favorite brands.

When all those factors work in combination, you have a brand like Coca-Cola -- one so strong that even Warren Buffett wouldn't want to take the other side of a $100 billion challenge.

Want to find more companies with brands too strong for even Buffett to challenge? You'll gain free access to all of Tom and David Gardner's Motley Fool Stock Advisor recommendations when you try the service free for 30 days.

Already a Stock Advisor subscriber? Log in at the top of this page.

Longtime Fool contributor Selena Maranjian owns shares of General Electric and McDonald's. Disney is a Motley Fool Stock Advisor and Motley Fool Inside Value pick. Intel and Coca-Cola are also Inside Value picks. The Fool has written put options on Intel. The Motley Fool is Fools writing for Fools.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 01, 2009, at 3:48 AM, doggylover wrote:

    I know you can buy cheaper stuff that is the same but it just doesn't taste or do the same thing as brand name products so I have to agree with this article and say brand name does have power over us, especially coca cola. I liked this article a lot. Thank You

  • Report this Comment On May 01, 2009, at 1:04 PM, catoismymotor wrote:

    Selena,

    Great article. 120 years of mass marketing can have an effect. From what I have read about St. Warren he would rather buy $100 billion worth of KO than try to recreate the brand.

    Cato

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