What's in a Brand Anyway?
In Interbrand's 2011 list of the Best Global Brands, the same three companies -- Coca-Cola (NYS: KO) , IBM, and Microsoft (NAS: MSFT) -- retained the top three spots in order. But what's the big deal with brands, and why should investors care?
The invisible competitive moat
One of the things investors should look for is what Warren Buffett calls a competitive moat. This is something that keeps competitors at bay from successfully attacking a company's business and can range from expensive capital equipment to technology to a strong brand.
Building a brand is one of the more identifiable, if not fleeting, competitive moats companies try to build to attract and retain customers and should be the goal of any company. A good brand can bring brand loyalty, premium pricing, and long-term profits to investors.
Apple (NAS: AAPL) , which jumped from No. 17 in 2010 to No. 8 last year, might be the best example of a brand commanding loyalty and a margin premium in recent years. Mac owners are known to be fiercely loyal even though a Mac has a lot in common with less expensive PCs. Macs may get less viruses and have a cleaner operating system, but Macs still don't run as many third party programs as PCs do, so the price premium Apple can command for a product that runs fewer programs is very impressive.
But a brand is a fickle thing. We all probably know someone who only buys products from Ford (NYS: F) or General Motors (NYS: GM) . But when companies let their brands go to their heads and don't keep up with innovation and quality, it can be the beginning of their downfall. We saw that at Ford and GM during the 2000s, when GM had to be bailed and both companies lost some of the chrome on their emblems. When a brand starts failing, it's time to run for the exits.
How the mighty have fallen
In contrast to Apple's gains last year, Nokia was one of the list's biggest losers, falling six spots to No. 14. According to Interbrand, the brand alone fell 15% in value to $25.1 billion. Microsoft was the only other company in the top 25 to lose value this year.
Is it any coincidence that Nokia and Microsoft are teaming up in the mobile phone space to update their products in an effort to stay competitive? After getting pummeled by Apple's iPhone and Google's Android operating system, the companies are desperate to get back in the game. The Microsoft and Nokia brands have been enough to keep the companies in the game but not enough to make their products successful against strong competition. So a brand can only take you so far.
Reinventing the brand
A brand might keep a company in the game, but constant reinvention is the only way for a brand to stay on top. That's what makes Coca-Cola's long run as a top brand so remarkable. The company has taken a single soft drink and turned it into a worldwide phenomenon. Whether it's Santa, a polar bear, or Mean Joe Greene drinking Coke, the brand has stayed relevant.
Companies like McDonald's, Disney, and Pepsi are other top brands that have reinvented themselves over and over for years.
A brand is only a starting point
If you're looking for a company with a competitive moat a brand is a great place to start, but it shouldn't be the end of your search. Long lasting brands require products that will stay relevant over the long term and a management team that isn't afraid of reinventing itself.
Motley Fool analysts have identified three companies with strong brands that they think are set to dominate the world. Find out which companies they are in our free report by clicking here. The brands may be around forever, but the free report won't be, so act fast.
At the time this article was published Fool contributor Travis Hoium owns shares of Disney and manages an account that owns shares of Apple and Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of Coca-Cola, Ford, Apple, Google, PepsiCo, IBM, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, PepsiCo, McDonald's, Disney, Google, General Motors, Apple, Coca-Cola, and Ford; creating bull call spread positions in Microsoft and Apple; and creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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