If you consider yourself to be a long-term investor, you should be particularly interested in looking for companies with strong brands. While strong brands don’t guarantee an investment will be a winner, they do give a company a leg-up on its competition.
There are at least six reasons why strong brands matter when it comes to investing in a company:
1. A Loyal Customer Base
Brand names maintain a certain amount of customer loyalty (that’s the whole reason they become name brands in the first place).
There may be a dozen brands of cola on the market, but there’s only one Coca-Cola. Since many cola drinkers have a decided preference for Coca-Cola, the company has a built-in market for its product.
When a product becomes a strong brand it tends to forge it’s own position in the market. Though it’s product may be one of many it stands out above the rest, it can even be seen as unique. Consumers can only buy Coke from the Coca-Cola company — no one else has it.
2. Well-Established Reputation
Strong brands create intangible benefits for a company that goes way beyond the brand itself. If the company has one or more strong and well recognized brands, it has much greater ability to roll out new products.
The public has come to recognize the company’s excellence with Product A, so they’re willing to try Product B when it comes out, because there is less resistance — they’ve already built up a good reputation. The company may even spend less for marketing than a much lower profile organization will.
If the company develops several strong product brands, the company can become a brand itself. That will multiply all the effects of having a single strong brand and the company will become trusted by the market for its excellence.
3. Staying Power
From a financial standpoint, the consumer loyalty generated by brand trust creates a certain amount of stability in a company. While flavor-of-the-month companies come and go, companies with strong brands continue to operate for decades.
This can be especially important during recessions when customers become somewhat resistant to new product lines. Though they may resist new products, they will continue to be loyal to the ones they know and trust. This gives companies with strong brands a built-in advantage during economic downturns and for the very long-term.
For example; Coca-Cola has been around for well over 100 years. In that time they’ve survived and thrived through two world wars, the Great Depression, the energy crisis and at least a dozen recessions.
That’s what strong branding can do for a company, and those are the kinds of companies you want to invest in — the ones with staying power.
4. Positive Cash Flow
Strong brands create product lines that have long shelf lives and provide a company with an established cash flow. Not only will the cash flow keep the company healthy, it will also give it the financial ability to test new products in the market.
And even if one or more of those new products fail, the company will continue in business because of its core brands.
5. Strength Beyond Finances
While it is not always possible to put an exact dollar figure on the value of a strong brand, it can nonetheless give a company strength beyond finances.
For example; it will be much easier for a company with strong brands to raise money, either through the issuance of new stock or debt securities.
Investors — just like consumers — will have a lot more confidence in a company that represents products or services that fall under the household name category. People tend to trust what they know — like a strong brand — and avoid what they don’t.
6. Proof of a Company’s Marketing Savvy
If a company has strong brands, it becomes a strong indicator of the company’s marketing ability. After all, if the company figured out how to turn their product into a strong brand, they can duplicate it with other product lines as well.
In addition, the company’s success with its strong brands will lower consumer resistance, which increases the chance of success of a new product line.
This is more than an intangible factor. As mentioned under #2 above, the company’s brand recognition will likely enable them to introduce new products at a far lower cost than unknown competitors can. This can be worth many millions of dollars to the company’s bottom line, and is a win for investors.
Why Investing in Strong Brands Matters
There are thousands of new product and service ideas being rolled out every year. Many of them are excellent products and services that never succeed. The reason they don’t, is often because of inadequate marketing.
Companies with strong brands simply have something close to an insurmountable advantage when it comes to marketing new products. As an investor, those are advantages that you can take to the bank.
Do you look for strong brands in the companies that you invest in?