The retail industry has become increasingly competitive. It's no longer enough to have the greatest location, best-looking stores, and friendliest staff. To maximize sales nowadays, a retailer must provide the lowest price, lest omniscient smartphone-carrying customers take their business to lower-cost rivals like Amazon.com.
However, there is one exception to this: With a strong enough brand, a company can effectively write its own rules. And a company that writes its own rules is much more likely to produce better returns for shareholders than one that cannot. It's for this reason that I've decided to identify the 10 American retailers with the most valuable brands, according to a study by Interbrand, the world's largest brand consulting company.
The benefits of a strong brand
The benefits of a strong brand cannot be overstated. First of all, a strong brand maximizes customer loyalty. What do you see when you drive by an Apple store on the day that a new iPhone or iPad goes on sale? You see a long line which had formed in the wee hours of the morning, if not the night before.
To the economist, this behavior seems irrational. Why waste time standing in line for the new iPad when you could, say, spend your time productively and get the very same model the very next day?
The answer, of course, is that certain consumers are extremely loyal to the Apple brand and want to get their hands on its newest products regardless of time or cost. Known as "macheads," customers like these are the envy of all consumer-facing companies.
Secondly, a strong brand accords pricing power. Why do shoppers pay more for Coke or Pepsi over store-brand soda? Or Cheetos cheese puffs over Kroger's cheese puffs?
Is it because the former products taste better or cost more to produce than the latter? Not likely. The reason is that the associated brands have cultivated a bevy of loyal followers. And the value of that loyalty accounts for the price differential.
Again, to the economist, this behavior appears irrational. Yet to the investor, it's inordinately profitable. If you're going to invest in a retail company -- or any company, for that matter -- it's always important to keep brand power in mind.
The 10 most valuable retail brands
Every year Interbrand ranks the world's most valuable brands. There are three key aspects that contribute to its assessment: the financial performance of the branded products or services, the role of brand in the purchase decision process, and brand strength. After factoring all of these things in, it arrives at an estimate of a specific brand's value.
Using this method, Interbrand concluded that the following 10 companies have the most valuable brands in the retail industry.
Brand Value (millions)
Market Cap (billions)
1-Year Stock Returns
The Home Depot (NYS: HD)
CVS Caremark (NYS: CVS)
Best Buy (NYS: BBY)
Walgreen (NYS: WAG)
Sam's Club (Wal-Mart)
Sources: Interbrand's Best Retail Brands 2012 and Yahoo! Finance.
Given the power of these brands, it's likely that you're familiar with most, if not all, of the underlying companies. To highlight a few...
Virtually every American is familiar with the orange signs that emblazon the exterior of Home Depot locations, as the massive retailer commands the largest piece of the home improvement pie in the United States. While the company took a hit during the financial crisis -- its net income was sawed in half -- the company's shares have made a significant recovery in the intervening time period. Over the last year alone, its stock is up an impressive 41%.
If you didn't already know how important health care is in America, than the fact that two pharmacies made the above list should serve as a tangible reminder. Unlike most retailers, which struggled over the last few years, both CVS and Walgreen have recorded healthy revenue and profit growth all along. Between 2007 and 2011, CVS' revenue grew a mind-boggling $30 billion, or 40% percent, and Walgreen's grew by 34% to jump from $54 billion to $72 billion.
And despite Best Buy's recent travails, signaled by its dismal stock performance of late, it still dominates consumers' minds when it comes to the electronics industry. According to Interbrand, it remains top of mind by 65% over competitors and claims more than 20% of the consumer electronics market -- not bad when you consider that it competes against the online behemoth Amazon.com, which trades for a ridiculous 140 times earnings.
Foolish bottom line
Although there is no panacea when it comes to investing metrics, the power of a company's brand should factor into an investor's decision whether to invest in the company or not. And it's for this reason that our analysts recently released a free report about three American companies set to dominate the world. To access this report while it's still available, click here now.
At the time thisarticle was published Fool contributor John Maxfield does not have a financial stake in any of the companies mentioned above. The Motley Fool owns shares of Best Buy and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of The Home Depot and Amazon.com. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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