A Brand Is a Promise (of Profits)

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I've attended Warren Buffett's annual meeting for Berkshire Hathaway (NYSE: BRK-B  ) shareholders a bunch of times. The first few times, I'd end the weekend with 40 to 60 pages of notes and a very sore wrist. The last few times, though, I've just sat and listened, taking down only a page or two of notes. This year, one of the most intriguing things I heard was this:

"A brand is a promise."

I was struck by how true that simple statement is -- and how useful the concept is for investors to keep in mind. We know that brands have value, but just how does that work? Well, because our familiarity with a brand is tied to a promise we expect from it.

For example, think of Apple. Its promise is one of innovation. We expect new, cool things from the company. We don't expect the price to always be low, but we do expect satisfaction. This gives the company power. We give it the benefit of the doubt, at least to some degree, when it introduces something new. Other companies have also been hailed for innovation:

  • Toyota (NYSE: TM  ) has positioned itself as a leader in green cars.
  • Hewlett-Packard (NYSE: HPQ  ) has focused its research and development budget on the most practical applications.
  • (Nasdaq: AMZN  ) has broadened its retail presence to lead in e-books and even cloud computing.
  • IBM (NYSE: IBM  ) has widened its scope by acquiring other companies, while also taking advantage of low-cost outsourcing.

Vroom vroom
Neglecting a brand can hurt, too. For instance, over many years, many Americans came to believe that U.S.-made cars lagged Japanese-made ones in quality. In recent years, Ford (NYSE: F  ) and General Motors have boosted their quality, but the negative perception persists, and it has hurt the companies.

Southwest Airlines (NYSE: LUV  ) has built a powerful brand for itself, too. We associate it with low prices and a sense of humor, for example. (Those investors among us also appreciate that it's been one of history's few profitable airlines.) We often seek out its rates when shopping for tickets. That brand -- and its promise -- attracts customers and serves the company well.

Spend a little time thinking about any brand name, and you'll find that you associate it with this or that. Ben & Jerry's, for example, probably makes you think of high-quality ice cream and support for progressive causes. Whether or not the company is actually delivering on that right now, it's our image of it, the promise we expect it to keep, and the reason many people reach for it over other brands. Companies that realize the value of their brands -- and work to preserve and enhance them -- often make great investments.

Learn more:

Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway and Apple. Apple and are Motley Fool Stock Advisor selections. Berkshire Hathaway is a Motley Fool Inside Value pick. The Fool owns shares of Berkshire Hathaway. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.

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