It would be an oversight if ad guy, Cranky, did not address the effectiveness of his craft - convincing people to buy stuff (or at least consider buying stuff) and its effect on the bottom line, aka earnings. The origin of the word advertising is from Latin, ad vertere, that means "to turn the mind toward". That's a smart way to say "hey look at me over here".
Does advertising work? Does advertising increase long-term sales? Sure, when it's not advertising.
There's a better noun than advertising - branding. Branding or brand building is the sum of everything a company stands for in the consumers' eyes and collective heart. Ads are a small part of the mix in most cases. The successful companies are loved by the consumers for what they are, what they offer, how they act, what they say, and how they say it.
The desired response (goal) of building a strong brand is to encourage consumers to pay more for your product (pricing power), compared to a similar product. Or, to choose your product over another product that is essentially the same, or possibly even choose your product over a superior product. And of course, consumers will also buy your product when they are convinced that your product is actually superior.
At the apex of brand love, people seek out your product. People can't wait for you to make a new product. These consumers (your brand ambassadors) are your active sales force. They tell others how great the product is. When there's brand love, brand ambassadors feel good about using the product. The product can be a badge of honour, of coolness, of success.
Sounds like I'm talking about Apple (AAPL), right? Well guess who is at the top of the list for most loved brands in America? Yup, Apple.
Apple is the branding heavyweight champion in North America. Those who love Apple can't wait for the iPhone 5, the iPhone 6, the iPhone7, the next iPad, minipad and whatever else Apple is about to launch in grand Applesque fashion. Apple is the ultimate combination of product offering and the communications that support it. They are working in concert.
Steve Jobs (RIP) was just not just the Thomas Edison of his time, he was a marketing genius. And he was marketing centric. He was always about managing the Apple brand. When Steve Jobs was booted out of Apple in 1985 they didn't just lose their lead product developer, they lost their chief marketing officer.
The building of the Apple brand was a project that was decades in the making. It always had its brand ambassadors through the good times and the bad times.
But this is not an article (just) about Apple. This article is about the effect on company earnings and stock performance when companies build successful brands. The results are quite compelling, and telling.
From Interbrand.com, here's the list of the top 10 international brands that an investor can purchase on the NYSE: Coca Cola (KO), Apple, IBM (IBM), Google (GOOG), Toyota (TM), McDonald's (MCD), GE (GE), Disney (DIS), Intel (INTC) and Microsoft (MSFT).
And with special thanks to the incredible and amazing portfolio builder function on low-risk-investing.com (you simply type in your tickers to create portfolios) here are their combined Brandtastic results from January 2007.
Performance Details, Jan 2007 to Oct 2012
Portfolio Total Return: 101% vs S&P 500 total return of 12.5%
|Symbol||Name||Annual Return||Volatility||Avg Correl||Period||Price Change|
|KO||Coca-Cola Company||10.8%||17.3%||0.61||12/31/06 - 10/31/12||$20.38 to $37.18|
|AAPL||Apple Inc.||39.7%||35.9%||0.58||12/31/06 - 10/31/12||$84.09 to $592.61|
|GOOG||Google Inc.||6.9%||34.1%||0.61||12/31/06 - 10/31/12||$460.48 to $680.3|
|MSFT||Microsoft Corpora||1.3%||26.5%||0.59||12/31/06 - 10/31/12||$26.23 to $28.31|
|MCD||McDonald's Corp||15.6%||15.4%||0.46||12/31/06 - 10/31/12||$37.27 to $86.8|
|INTC||Intel Corporation||4.1%||26.9%||0.66||12/31/06 - 10/31/12||$16.93 to $21.41|
|TM||Toyota Motor Corp||-8.4%||23.1%||-0.02||12/31/06 - 10/31/12||$129.26 to $77.47|
|DIS||Walt Disney||7.8%||25.1%||0.65||12/31/06 - 10/31/12||$31.68 to $49.12|
|IBM||International Business||14.6%||19.1%||0.57||12/31/06 - 10/31/12||$87.6 to $193.68|
|GE||General Electric||-5.8%||35.3%||0.17||12/31/06 - 10/31/12||$29.88 to $21.06|
Congratulations to all of my ad friends, marketing types and coworkers. You are now officially underpaid.
Apparently persuading consumers to pay more for your product, or to continually choose your product over your competitors' products on a consistent basis is actually good for the bottom line, and in the long run, your stock price. Who knew?
But not so fast.
Of course, these are the top brands of 2012, and the chart looks back, at their journey to the top. There is brand survivor bias here - OK mostly that's Apple. And a component of brand measurement, in addition to the emotional and more esoteric brand variables (the ability to stand out from the crowd and cultivate loyalty) includes earnings and the ability to reach financial targets.
So let's remove Brand Survivor Bias and look at the top brands from Interbrand list for the years 2006 through 2012.
For 2006, our Brandtastic Portfolio had a return of 21.6% vs the S&P500 at 15.8%.
In 2007 we find one change, Toyota parks itself into the top ten while AT&T does not get the call.
We now have Coca Cola, Microsoft, IBM, McDonald's, Toyota, Disney, GE, in addition to Nokia, Intel, and Citi Group.
For 2007%, brands deliver 16.3% total return vs 5.2% for the S&P500.
In 2008 the Top Brands were the same except for bye bye Citi (thank goodness) and hello Hewlett Packard (HPQ) - OK, maybe not so good? Brands were minus 33% vs minus 37% for the S&P 500.
Search the 2009 list and pun intended we find Google at No 7. HP moves to the sidelines. Here's our 2009 list. Coca Cola, Microsoft, IBM, McDonald's, Toyota, Disney, GE, Nokia, Intel, Google. Brands deliver a 36% return vs 26% for the S&P500.
In 2010, HP's back in, baby. Toyota has problems with some brakes and skids off the list. Here's 2010 - Coca Cola, Microsoft, IBM, McDonald's, Hewlett Packard, Disney, GE, Nokia, Intel, Google. Brands 10.6% vs 15% for the S&P500. Tech heavyweights, Microsoft, HP and Nokia take some losses and weigh down the Brand portfolio for the year.
For 2011, ahhh, there's our little friend called Apple, nice of you to join us. Nokia gets the call on its cell phone (it's not really embracing this smartphone thing) and is told to have a seat on the bench.
Here's the Top Brand List for 2011: (in order) Coca Cola, IBM, Microsoft, Google, GE, McDonald's, Intel, Apple Disney and Hewlett Packard. Brands 5% vs 1.3% for the S&P500.
And in 2012 we find Toyota's back in (the brakes were fixed) and HP's out. Brands underperform slightly, 13% vs 14.3% for the S&P500.
From 2007 to present the Brandtastic Portfolio delivered a 69% total return. During that same period the S&P500 delivered a 30% total return. Brands still cleaned up against 'the market'.
Everybody loves Apple.
And let's take a look at the rise of Apple on the brand scale. It certainly wasn't number one or two in 2002. It has always had its loyal supporters but it was still a challenger brand in 2002. And while it's true that Apple did not dominate until the last few years, it did show up on Interbrand's list in 2002 at No 49 (one year after introducing the ipod, and revolutionizing the music industry). By 2006 Apple came in at 39, moving to 33 in 2007, No 20 in 2008 list, then moving up to No 17 in 2009. Perhaps, like Dividend Growth Investing, it's a great idea to keep a watch on the companies that are quickly moving up the list. Those companies and brands with the most momentum are generating increased revenue along with increased brand love. That's a powerful combination.
Millward Brown, which conducts ratings and research on brands also publishes Brand lists and also keeps an eye on the rising brand stars. Those companies that are perhaps in the "puppy love" stage with consumers.
Here's their year over year snapshot of the brands that experienced the biggest move up the brand scale from 2011 to 2012: Home Depot (HD), Visa (V), Facebook (FB), Starbucks (SBUX), MasterCard (MA), Nike (NKE), Rolex, Hugo Boss (HUGPF.PK), Ralph Lauren (RL) and Estee Lauder (EL) Clinique Brand. Taking a look at Estee Lauder, we find a 192% return over the last 5 years. Ralph Lauren, up just 100% or so. Chart all of those companies together, and you'll get a very nice surprise.
Conversely, keep an even closer eye on those whose brand strength is falling precipitously. If consumers are falling out of love with your company, that could be a dangerous thing. There's not a lot of love for Citigroup these days.
To tell you the truth, when I started to write this article, I knew in my heart that strong branding works well in every sense. I knew the many stories of sales success due to strong branding and strong brands. I've contributed to a success story or two.
I had the pleasure of working as the creative director on the most loved company in Canada, Tim Hortons (THI) started by a former hockey player, Tim Horton, of course. Tim Hortons is coffee and donut shop that added a lunch menu, and a host of other products. The love and pride that Canadians have for their "Timmy's" is off the charts. I've read most of the love letters that Canadian consumers have sent to Tim Hortons' head office. They are loyal to the core. In surveys on what makes Canada, Canada, most Canucks say hockey, healthcare and Tim Hortons. I kid you not. I did not hesitate for a second when Wendy's (WEN) spun off Tim Hortons. I bought the company very near the IPO price in 2006. I have a near double when including dividends. And I expect those dividends to increase by 300% or more over the next 15-20 years.
McDonald's is the number one quick serve (fast food) restaurant in every country on the planet (where they have made even half an effort). Except for one country, Canada, where that honour goes to one of the most loved brands, Tim Hortons. Perhaps it's not surprising that in Canada, Ronald McDonald gets roughed up by a hockey player.
This is my first look at the power of brands and portfolio construction. I will certainly monitor the current portfolio of Top Brands, and we'll check in on trends and the Brandtastic Portfolio performance. And moving forward, many theorize that Brands and Branding will play an even more important roll moving forward - thanks to social media and the empowerment of the consumer. Check out a book called the "Consumer Republic" - penned by former GWP partner and founder Bruce Philp.
I thought brands would win, but I had no idea that strong brands would beat the S&P 500 by such a wide margin. The S&P 500 got KO'd by Coke and its SuperBrand friends. Brands win.
And so can investors.
Even if you are not convinced enough to go out and create your own Brandtastic Portfolio, or even add in some brand superstars to your current mix of companies, perhaps it's time to use Brand Strength and momentum as an analytical tool on par with earnings, revenues and cash flow. Brand Strength or weakness is the canary in the earnings coal mine.
Consumers are rational and emotional. Customers buy stuff from people they like. To ignore what people think of your companies, is a missed opportunity. Go shopping for a few brands, you just might love the results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.Please note that Dale Roberts aka cranky, the crankywriter, the scaredy cat investor, is not a licenced investment advisor, and the above opinions should only be factored in to an investor's overall opinion forming process. Consult a licenced investment advisor before making any investment decisions.Please note that Dale Roberts may have exposure to companies listed in this article, through the holding of ETFs.