Some companies stumble upon their brand, and some work hard to develop one. Regardless of how a brand image is generated, most executives recognize that such a differentiator results in higher prices for products, as well as traction with loyal customers. Within the dynamics of branding there are many factors that make a brand lasting and effective. The purpose of this article is to focus on the following four factors that can make or break a brand, and how they impact both positively and negatively four companies:
1. Generational Relevance or Indifference
2. Global Growth or Limitations
3. Age of Technology
4. Media Expansion
Generational Relevance. Just because we perceive a product to have extra value because of its brand does not insure that future generations will prefer that product. GM (GM) recognized this dynamic of branding with an ad reaching out for a younger generation: "This is not your father's Buick."
Yesterday I was having my morning coffee and checking the previous night's scores on ESPN's Sportscenter . It dawned on me that, at this exact hour as a preschooler, I was glued to our little black-and-white TV and pledging allegiance to the Mickey Mouse Club. Ironically, The Walt Disney Company (DIS) produced both these programs nearly 60 years apart. I then asked myself if my grandchildren will have the same "feel good" attitude towards Disney products as I do.
Disney has a good strategy for building loyal consumers. As an analyst, I wondered why DIS was still hanging on to Disneyland after all these decades... now I know. The animation and theme parks are subtle tools for permanently instilling the WOW factor into impressionable souls. Exhausted and delighted kids walk out of those big gates like zombies for Disney. The Disney brand on even a bad movie is likely to draw at the box office simply because the concept of fun and wholesome entertainment is spelled D-I-S-N-E-Y.
Disney has further developed their brand globally by planting theme parks in foreign lands to mesmerize new generations around the world. There is little doubt that the Disney brand will be lasting into the foreseeable future. To determine how completely this is priced into the stock price bears some fundamental analysis.
Yahoo analysts predict revenue growth for DIS of 4 - 5% and income growth of 12 - 25% this year. The powerful brand gives some confidence that future years will be equally solid, so the forward EPS of 13.8 seems pretty reasonable. The price of the stock is about two times sales and book value, which qualifies as good value considering steady growth prospects. The levered free cash flow is about $2.28 per share so the smallish dividend of $.60 per share has room to grow. I would classify The Walt Disney Company as a reasonable long-term investment.
Global Limitations. In addition to conquering the generation gap, we have also seen how DIS has managed to become globally relevant. Now we will look at a well-known company that might struggle with that goal.
Whole Foods Market (WFM) was the first store chain to capitalize on the trend toward all-natural foods and personal products. They successfully have developed a loyal following of environmentally sensitive customers and natural health enthusiasts. Buying from Whole Foods is tantamount to making a statement in support of earth-friendliness, wholesome eating, animal awareness and other causes. It also offers the feel-good luxury of buying unique products from exotic places. Being the first-to-market and cannibalizing the competition has placed WFM at the lead of what is becoming a competitive business.
WFM has 300+ stores and predicts that the US market will allow for a total of 1000 stores, so their brand has not saturated the market. However they do not have a monopoly on this business, and there are several very good alternatives springing up in their best territories. Even traditional retailers like Kroger (KR) are taking aim at their clientele with organic and natural foods and gourmet selections. During Valentine's Day, Kroger advertised that they were the number one florist in the US, eating into another profit center of Whole Foods. Kroger also operates its own dairies and food processing facilities so they can control the organic food supply at better prices.
The growth horizon for WFM appears to be limited in the medium-term without meaningful global expansion. Emerging market consumers have been buying natural foods economically for a long time in local farmers' markets. The WFM marketing studies appear to validate this as expansion plans are limited to US, Canada and the UK. The global limitation of their brand makes us pause when considering WFM as a long-term holding, but we need to see how much growth is factored into their stock price.
WFM is expected to grow revenues at about a 15% pace in 2012 and income at an average of 20% per Yahoo analysts consensus. That is very good near-term growth, and 2013 expectations are about 12% in revenue increases and 15% income growth. The 2012 forward PE for WFM is a whopping 35, and even if we project out to 2013 the PE is 30. Clearly the growth expectations of WFM are aggressive, especially given that conventional grocery stocks generally have conservative PE ratios.
The market capital to revenue number is under two, which is good, but the price to book value is over 4.5. The cash flow is about $1.50 per share to support a dinky $.56 dividend. Although not a perfect comparison, Kroger has 2012 double-digit consensus growth in both revenue and income. The Kroger PE of 12 and dividend yield of 2% look more promising to a value investor. However, it should be noted that WFM is a momentum stock near its 52-week high, and KR has been mostly dead money in the last few years. With limited global expansion, I doubt that the WFM brand is powerful enough to hold off the competition, who can prevent it from growing into its current valuation.
Age of Technology. Normally when discussing technological obsolescence we start with a buggy-whip story. In branding, the impression of special technology is as important for marketing purposes as the technology itself. Working my way through college, I was a handyman for a small chain of off-brand gas stations. At the time, Exxon (XOM) was pushing their "put a tiger in your tank" campaign, implying that their gasoline had some extra oomph. The same refinery truck would fill our storage tanks as the Exxon station's across the street. The cars would line up at their station and pull out with a little stuffed tiger tail hanging from their gas cap.
We normally do not think of technology when contemplating tissue paper, unless we have some of those dot-com stock certificates laying around. However, technological advances have been brand boosters in this industry...or at least the impression of special technology.
As a boy my mother would send me to the store for "Scott tissue," because she was a modest woman incapable of uttering the word "toilet." Scott Paper Company products, now part of Kimberly-Clark (KMB), hogged the shelf space. My parents survived the depression, and they did not spend a single cent because of fad or advertising. My mom specified Scott tissue because she was convinced that it was the only company with the resources and technology to assure sanitary paper, and millions of moms in the fifties thought the same.
From the time we sent a man to the moon it became apparent that making sanitary toilet tissue and "Kleenex" was not the monopoly of a few companies with proprietary technology. The disappearance of the perception of "superior technology" freed consumers to buy according to price or other considerations. With the latest depression, people are now looking for bargains, and the best price is on the off-brand version at the "dollar" stores. Orchids Paper Products Company (TIS) has focused on providing these "generic" toilet paper products to discount stores in a 900-mile radius of their Oklahoma facilities. By limiting the market area, they have streamlined the shipping, which is a substantial savings on big boxes of rolls of paper.
I am aware that the "generic" paper product market is the brunt of jokes like "this cheap paper towel is so flimsy the spill actually absorbed it." TIS is working on a line of thicker, higher-tier paper products so they do not miss out completely on that market.
Consensus analysts estimates for 2012 indicate 47% bottom-line growth on 8% top-line growth for TIS, yielding a current PE of 15. It sells at less than two times book and sales, and TIS yields a juicy 4.4% dividend. TIS has risen dramatically in the past few months, and with less than 8MM shares outstanding it is possible some profit-taking would provide a better entry point if the general market takes a breather. Nonetheless, this is a case of taking advantage of the lack of predominant brand technology, and it looks like it is a sensible trend that will continue to grow.
Media Expansion. Some of the best known brands today are iconic because they won the advertising battle when there were only three television networks. One of the biggest battles was the toothpaste war between Proctor and Gamble's (PG) Crest and Colgate Palmolive's (CL) eponymous toothpaste.
With only three television stations in metropolitan markets, these two dominated the airways touting the benefits of their products. There were others that tried to break into the market with short-term success. Pepsodent was relevant for a time in the fifties with its catchy jingle: "You'll wonder where the yellow went, when you brush your teeth with Pepsodent." PG and CL reacted with the addition of flouride to their products, and Pepsodent faded away.
With the advent of cable/satellite television and internet, it is almost impossible to dominate the advertising market. Many specialty products can be introduced on media targeting special interests: sports, women, children, etc. This is good for manufacturers of niche personal products, but not so good for conglomerates of household products, such as Colgate. Without the ability to dominate advertising, the brand alone is not going to withstand the chipping away of market share by smaller companies. The long-term growth prospects for their brands are questionable, although CL will continue to invest in research to devise new twists to counter the competition.
It is in vogue to invest in "blue-chip" dividend-paying, defensive stocks. Colgate Palmolive has always been an institutional favorite given the wide variety of popular consumer brands it produces: over 1000 institutions hold 74% of the stock. Because of the current popularity of this kind of stock, we are concerned that CL may be losing its defensive nature. For us, a defensive stock is one that will not drop so much in a general market correction, and CL has had a good run.
Few invest in a stock because of its value metrics: Price to Earnings, to Sales and to Book value. We are attracted mostly to growth, predicted to be 3.4% for CL in 2012, but we do like to look at these value factors to identify where the safety net is. In the case of CL, the stock price is more than 17 times 2012 earnings, more than 2 times sales and it is a $92 stock with a book value of less than $5. To us, the safety net looks pretty small and far below right now for a defensive investment. You can ignore these factors but it is possible "you'll wonder where your money went."
These branding dynamics are only four of the many that can influence the magic of a good brand. It is profitable in the consumer products sector to be aware of new companies that are building their brands, and we will discuss those in the future.