When picking the best companies for the long term, competitive strength is one of the most important variables to consider. Brand power can be a simple, yet remarkably powerful source of competitive differentiation, and companies with valuable brands tend to deliver above-average returns for investors over the years.
In the following roundtable, our contributors share three investment ideas in companies benefiting from rock-solid brand power.
Tim Green: Costco (COST 0.55%)
Most retailers spend a significant percentage of their revenue on advertising in order to drive customers to their stores. Department stores, for example, may spend anywhere from 5% to 10% of revenue on marketing, and while this buys them brand recognition, brand loyalty is a far more intangible concept. The best retailers with the strongest brands are able to spend the least on advertising, because customers return again and again without the prodding of expensive advertising campaigns.
The best example of a retailer able to garner incredible brand loyalty is warehouse club Costco. Amazingly, Costco has no formal marketing budget at all, eschewing traditional advertising methods altogether. Apart from sending out coupons to members once a month, Costco does very little to actively compel customers to visit its stores. Instead, the value that Costco offers its customers over traditional retailers is enough to keep them coming back.
This brand loyalty that Costco has achieved produces tangible benefits for the company. Instead of having to plow millions of dollars into advertising, Costco can keep its prices low and pay its employees above-average wages. This creates a feedback loop, where low prices and favorable treatment of employees compared to other retailers further enhances the image of the company in the eyes of consumers. Costco's powerful brand gives it a major competitive advantage, one that marketing dollars simply can't buy.
Andres Cardenal: Apple (AAPL 0.11%)
Apple is arguably one of the most distinguished brands in the world. In fact, reputable publications such as Forbes and Interbrand put Apple in the first position in their global brand rankings.
The company has a famously loyal customer base, and brand differentiation allows Apple to charge premium prices for its products and deliver profitability levels well above those of the competition. Most smartphone manufacturers are aggressively competing on price to sustain market share, while at the same time, Apple is experiencing massive sales growth and rising sales prices for its iPhone models.
Apple reported a $99 increase in the average selling price in the iPhone segment during the last quarter, reaching $660 per unit. In theory, this could be a drag on sales volume when operating in such a competitive industry, however, such is not the case. Far from it. iPhone unit sales jumped by a staggering 35% year over year during the quarter.
The recently launched iPhone 6s and iPhone 6s Plus are not disruptively different from previous models, but Apple has already announced that initial demand for these models looks encouragingly strong. According to the company, customer response has been "extremely positive," and sales are on track to set new records for the initial launch weekend. Apple enjoys consistently healthy demand for its products, and brand value is clearly one of the main factors behind the company's success.
Steve Symington: The Walt Disney Company (DIS 1.64%)
Though Disney "only" came in at No. 11 on Forbes' 2015 list of the world's most valuable brands, it was also one of the biggest gainers from last year's list -- the calculated value of its brand climbed 26% year over year.
Of course, there's the core Disney brand, which the company employs not only through its namesake television channels, but also in its theme parks, consumer goods segment, and several movie studios including Walt Disney Studios (of Pirates of the Caribbean fame), Walt Disney Animation Studios (with titles including Frozen and The Lion King), DisneyToon Studios (Planes, Tinker Bell), and DisneyNature (Bears, Monkey Kingdom).
Finally, keep in mind that Disney also owns 100% of ABC Family, an 80% stake in ESPN, and half of A&E Television Networks. In the end, it's arguably impossible to find a company with as impressive -- and yes, powerful -- a brand portfolio as the entertainment juggernaut has built. In addition, Disney isn't afraid to shell out the cash required to bring other world-leading brands under its massive wing.
First, it picked up CGI animation specialist Pixar for $7.4 billion in 2006, followed by the $4 billion purchase of superhero-centric Marvel Entertainment in 2009, and most recently adding Star Wars and Indiana Jones parent Lucasfilm in late 2012 for another $4 billion. And while the widely anticipated first box office fruit of Disney-owned Lucasfilm is slated to hit theaters this December in the form of Star Wars: Episode VII-The Force Awakens, suffice it to say that both Pixar and Marvel have already paid off handsomely for shareholders so far.