Warren Buffett's Risky Branding Decision

Warren Buffett has made billions investing in some of the strongest brands in the world to the point that Berkshire Hathaway (BRK.A 0.36%) is now a household name. While Buffett has been willing to risk money to earn a return, he has made a point to never risk reputation, as that is far harder to recover. Times may have changed; Buffett is now putting Berkshire Hathaway's reputation on the line by using the brand name for some of his consumer-facing businesses.

Buffett and Brands
Warren Buffett first got started investing in brands in 1971 when his business partner Charlie Munger convinced him to buy See's Candy, the dominant west coast chocolate confectioner, for $25 million. This purchase has worked out fabulously well for Buffett. As he detailed in the 2011 letter to shareholders, See's earned Berkshire $83 million in 2011, for a grand total of $1.65 billion since the initial purchase. At the same time, Berkshire has not had to reinvest much capital, if any, in the business and holds the business on its balance sheet at a value of zero, meaning Berkshire's ROIC on the investment is huge.

How was See's able to do this? The power of its brand. As Warren explained in 1988 to a group of students from the University of Florida:

What we did know was that they had share of mind in California. There was something special. Every person in California has something in mind about See's Candy and overwhelmingly it was favorable...If we can get that in the minds of people, we can raise prices.

Buffett learned that the real power of brands is the ability to raise prices. He has taken the insight of the power of brands to heart and has built up major stakes in some of the world's best brands. Berkshire currently has large stakes in 5 of the world's Top 25 Most Valuable Global Brands, as measured by MillWardBrown's BrandZ report.

Source: BRANDZ, Yahoo Finance

Buffett also has experience building brands into household names, most notably with GEICO. Buffett long admired GEICO for its competitive advantages, or what he calls its moat. When Buffett purchased GEICO in 1996, the company was only spending $31 million a year on advertising. Ten years later, Buffett had increased that to $500 million a year, and this past year GEICO spent well over a billion dollars advertising. GEICO advertises so much that its current commercials play on the fact that the company's slogan is so well known.

Buffett and Berkshire Hathaway have also become brands in their own right. Buffett and Berkshire Hathaway's names evoke Midwestern ideals of trust, strength, and dependability when it comes to money. Buffett now is starting to take advantage of the Berkshire Hathaway brand that he has built.

Buffett's newest big bet
Buffet first used the Berkshire Hathaway brand in 2007 to launch a municipal bond insurer, Berkshire Hathaway Assurance, as many companies in the municipal bond insurance industry were going through tough times with the financial crisis, leaving opportunity for a well-capitalized player.

In the past year, Buffett has made multiple more moves to capitalize on the Berkshire Hathaway name for selling to consumers. While none of these are large bets financially in relation to Berkshire's total size, reputationally, these are the largest bets Buffett has ever made.

In April of this year, Buffett's utility companies were renamed from MidAmerican Energy and PacifiCorp to Berkshire Hathaway Energy.

Also this year, Buffett's real-estate brokerage network HomeServices changed its name to Berkshire Hathaway HomeServices. The full-service brokerage network has spent the past year rolling out the new name and now has 34,000 agents and 1,046 offices in 47 states. The company's marketing material includes a great quote from Buffett explaining why they made the change:

When people are making the decision of the magnitude of buying a house, it's the biggest decision a great many families will ever make. They want to know who they're working with, and we think that the Berkshire Hathaway name will be reassuring to many of those people.

One of the other biggest purchasing decisions Americans make is their car. While GEICO won't be changing its name, early in October Buffett announced he was purchasing the 5^th largest auto dealer in the U.S., with 78 dealerships, and that the company would be renamed Berkshire Hathaway Automotive.

Car salespeople and auto dealers  generally have bad reputations, which has enabled companies like CarMax to create trusted brands by operating differently. The Berkshire Hathaway name will be just as reassuring to people buying a car as it is to those buying a house.

Berkshire Hathaway
The big bet on the Berkshire Hathaway brand means there are now over 34,000 real estate agents and 78 car dealerships using the Berkshire Hathaway name. It's taken over 50 years for Buffett to build the Berkshire Hathaway brand to what it is, and Buffett is trying to use that name to give his companies a competitive advantage in their industries. The risk is that there are now so many people who could possibly tarnish that name. Buffett will surely be watching -- as he famously said in 1991, "Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless."