A friend of mine in advertising once told me the inspiration oft-quoted by his clients: "Build a brand campaign like Apple's."
This was around the time of the "I'm a Mac" commercial, and other companies were keen to emulate Apple's (Nasdaq: AAPL) incredible success. Ironically, this campaign in no way launched the Apple brand, which had been carefully crafted over 30 years.
In a series of articles, I will take a closer look at how powerful brands are created and analyze the prevalence of brands around the world. Initially, let's evaluate the relationship between great brands and the products or services they represent.
At Apple, products are first priority
A crucial turning point in Apple's history took place in 1997, when Steve Jobs returned to run the company he'd created two decades prior. Asked about his motives, Jobs said he and Apple's DNA were completely intertwined, and the Apple brand had been badly tarnished. Jobs aimed to rebuild that brand through innovative products, propelling Apple beyond the humdrum era of the personal computer.
He's been criticized for his character flaws, but Jobs' devotion to his products stood at the forefront of his leadership talents. The design quality of an iPhone or iMac took priority in rebuilding the Apple brand. As he once stated, "My passion has been to build an enduring company where people were motivated to make great products. Everything else was secondary."
Incredibly, Apple succeeded by creating superior products in every industry it entered. By comparison, Dell (Nasdaq: DELL), Sony, and even Microsoft (Nasdaq: MSFT) saw their brands began to lose their luster as Apple encroached on their terrain. The value of their respective brands, as determined by the branding consultancy firm Interbrand reflects this underlying trend.
Source: Interbrand. Boxes indicate approximate time of product introduction.
Apple's user-friendly products delivered more cachet than Dell's, Sony's, and Microsoft's. As a result, the Apple brand became a major player in the computer, electronics, and software markets. In the meantime, Apple's key competitors watched their brand values stagnate or decline over the past decade.
Coke's recipe for success
Similar to Apple, Coca-Cola's (NYSE: KO) brand contributes to the company's competitive advantage. However, the powerful Coke brand was not created overnight. To become the most valuable brand in the world (according to Interbrand), Coke first concocted a beverage recipe that customers enjoyed immensely.
In 1994, Malcolm Gladwell dissected Coke's soft-drink formula and emphasized the soda's high "amplitude." Sensory experts use the term amplitude to describe "flavors that are well blended and balanced, that 'bloom' in the mouth." Gladwell notes, "You can't isolate the elements of an iconic, high-amplitude flavor like Coca-Cola," and thus consumers' taste buds never tire of the Coke recipe. In the same vein, Warren Buffett described Coke's formula:
There is no taste memory to cola. And that means that you get people around the world that are heavy users, that will drink five a day. ... They'll never do that with other products. So you get this incredible per capita consumption.
Leave it to Gladwell to describe the science behind Coke's recipe, and Buffett to profit from the competitive advantage created by it. Buffett's holding company, Berkshire Hathaway (NYSE: BRK-B), lists Coke as its largest equity investment, and the stock has provided about a 20-fold return including dividends since Berkshire's initial purchase in 1988.
Analysts often attribute Coke's high return on capital to the brand power. However, Coke established a competitive advantage through its unique formula, which was difficult for competitors to replicate. Coke's exceptional product played a key role in building the legendary brand.
Foolish takeaway
As we look at global brands, it is critical to remember that their success is tied to the quality of the underlying product. Over time, customers recognize a premium product and are willing to pay for the brand associated with it.
At Berkshire, Buffett seeks out brands like Coke because they have withstood the test of time and dominate in their particular industry. Over the past few years, Berkshire invested in beaten-down but otherwise strong banking brands like Bank of America and Goldman Sachs. In Buffett's eyes, the bank sell-offs don't make sense, and opportunities abound.
There's one banking stock, however, that eludes even Buffett. Find out about a company too small for Buffett but perfect for the average investor. If you're interested in high returns on capital and a strong dividend payout, read further in our recent report "The Stocks Only the Smartest Investors Are Buying."
