Whether you admit it or not, branding plays a significant role in our purchasing decisions as consumers. There’s even evidence to suggest that the presence of a strong brand name is enough to influence your taste and other perceptions of quality. In your own life, you might also consider a company’s brand strength when evaluating whether or not you want to work for them. Or, you might look at estimating the cultural value of an organization.
With all these influencing factors at play, is it possible or wise to use the quality and appeal of a brand to make your stock investing decisions?
Let’s take a look at some of the objective ways a brand might influence the health of a company:
Powerful brands have high levels of customer awareness. These are household names that come up frequently in the discussion. Even if a consumer doesn’t buy the company’s products regularly, they know the company exists. This is important to note because it instantly makes any new products and services the company offers in the future more valuable. Consumers have some level of familiarity with the brand attached to them. It also eases the burden on the company’s marketing and advertising department. Branding is instrumental in cultivating customer loyalty. Since customer retention is far more cost-efficient than customer acquisition, this is a sticking point for most businesses. Brands like Apple and Harley-Davidson have near-cult-like followings. They are unlikely to be deterred by a single failed product launch or PR scandal. This helps to stabilize the company’s revenue stream. Also, it gives the brand some measure of protection against negative events. You can also look at how a company invests in its brandings, such as the quality of its signage and advertising materials, as a gauge of their priorities. If a company cares about how customers perceive them and want to create a lasting, solid identity for itself, it’s a good sign. If its branding is just a placeholder so it can churn out as many products as possible, it may be a red flag. Reputation is often more important than anything else—even in the early stages of a company’s development—so it’s worth investing in. The history of a brand is another factor to take into consideration. Generally (though there are exceptions), the older a brand is, the more likely it is to continue into the future—so long as it keeps up with modern trends. For example, Coca-Cola has been around since 1886; can you imagine what a world without Coke would even look like? That doesn’t mean new brands are inherently more likely to fail—on the contrary, they may have a higher potential for fast growth—but it may be an important factor for your decision if you care about stability. Looking ahead, the relative strength of a brand can assure you of the company’s tolerance of unforeseen events and changes. For example, let’s say a new regulation forces the company to stop making their signature product, so the company pivots to a new market—such as from energy drinks to other soft drinks, or from ATVs to motorcycles. A strong brand would help the company survive the transition since it would prevent them from having to build a new brand, or a new customer base, from scratch. Branding, if upheld internally, can also improve employee retention. For example, if a company has made a name for itself by encouraging transparency and creativity, employees who favor those values will be more motivated to work there—and stay there. This kind of internal consistency breeds more openly collaborative workplaces and ultimately drives more productivity. It’s no coincidence why companies with high turnover—especially in the upper rungs of management—tend to also have branding trouble. A company’s brand should also tell you something about its mission, its core values, its ethics, and its philosophy. There’s no one “correct” company philosophy, but depending on what the brand offers, you may find yourself favoring the company more or less as a stock pick. For example, you might select an energy company that favors renewable resources and sustainable business practices over one that doesn’t.
Of course, there are several important factors that branding can’t tell you anything about, such as:
A brand may be strong, but if the underlying product of that brand isn’t strong, the market will inevitably reject it. For example, Chipotle, despite having a strong loyal customer base, has seen abysmal sales for the past few years because of a perceived drop in the quality of its products. Even a strong brand can be run into the ground by bad leadership or poor management decisions. For example, General Electric (a brand nearly everyone can recognize) saw a drop in its stock price of nearly half over the past year or so, in part because of some bad high-level strategic decisions. Just because a company claims to be ethical, doesn’t mean it is. A brand may talk about how much it values transparency and environmental sustainability, but if its practices don’t fall in line with those standards, the market may quickly turn on it. No brand, no matter how long it’s been established or how loyal its customers are, is safe from the threat of a new competitor. All it takes is one innovative startup to dethrone a giant and disrupt the market. Brand reputation is qualitative. Revenue and profitability are quantitative. On some level, it doesn’t matter how reputable your brand is if you aren’t pulling in decent revenue. And even revenue can’t tell you how profitable a company is. You’ll want to factor in revenue and profitability when evaluating your stock picks—even if you’re a big fan of the brand. Think about how the company plans to grow over the next several months, years, or decades (depending on the scale of your investment). Big, established brands are reliable and sustainable, but they don’t always offer a lucrative growth curve. Depending on your investment strategy, you may favor a company with a faster, more eager pace for growth. How much debt is the company holding? Some major brands are secretly accumulating massive amounts of debt as they attempt to continue operations in a market that’s increasingly challenging for them. One peek at their debt ratios could quickly ruin the otherwise positive image you have of the brand.
Ultimately, the power of a brand should factor into your stock picking decisions, though it shouldn’t be your sole determining factor. Things get even dicier because the true health and power of a brand is hard to objectively measure; rather than relying on numerical figures, you’ll be essentially trusting your gut on this variable. Still, if you’re on the fence about a company’s fundamentals and aren’t sure whether to invest or not, their brand may help you make a final decision.