Brand Names: Important, But Not Key to Investment Decisions

by: Markham Lee

Branding is probably one of the most misunderstood business topics both in terms of its basic definition and function, the problem stems from people viewing brands from the perspective of general consumer awareness as opposed to how that brand is able to influence customer behavior. In the end that's all a brand is: a name given to the set of functional, emotional, positive and negative attributes that comprise the consumer's view of a product, service, company, etc. The strength of a brand isn't so much a function of awareness as it is that brand's ability to cause a consumer to chose Product X over Product Y, even if it means that they have to wait for that product, pay a premium for it, etc, etc.

For instance Circuit City (NYSE:CC) is as well known a brand as Best Buy (NYSE:BBY) yet CC is flirting with oblivion while BBY thrives. The reason for is that the Circuit City brand isn't resonating with customers in a way that is causing them to spend their money with CC over their other alternatives. Another example is my college track team that had many athletes refusing to wear the free sneakers provided by the school's athletic sponsor and electing to purchase Nike (NYSE:NKE) products with their own money; and/or the fact that many of my high school teammates asked the schools recruiting us who their athletic sponsor was in hopes that it was Nike or Adidas (OTCQX:ADDYY). In short these athletes were saying: "We have so little faith in that brand that we wouldn't use their products even if you gave them to us for free" .

I bring this topic up due to recent rumblings about the auto industry, namely the possibility of foreign car makers buying American brands (in order to appear American to consumers), partnerships between automakers, rebadging, tie-ups, etc, etc. While one can articulate a business case for any of these potential moves, the nature of the brands involved determine the potential for success more than any other single factor. American companies looking to turn things around need to address their branding issues more than anything else; there is a reason Toyota (NYSE:TM) created the Lexus brand for their luxury cars instead of just selling them as pricey Toyotas. If you don't establish "brand credibility" in the minds of the consumer it will be difficult to sell your product let alone get people to try it, even if you're selling a superior product or a product produced by the very competitor the consumers prefer.

E.g. What would be the point of a company like Nissan purchasing say Mercury from Ford (NYSE:F) or Plymouth from Chrysler (DCX) in order to sell their cars under an "American Brand", when it's a brand that the marketplace has more or less rejected in favor of companies like Nissan (OTCPK:NSANY)?

Finally, what does this mean for investors?

It means it's probably not wise to make an investment decision based on a company's brand being well known, because it's not especially valuable to have a well known brand if it doesn't spur consumers to choose that brand over the competition. It also means that a company doesn't truly have a brand if there is nothing about it that drives consumers to make it their ideal choice, you have a strong brand when consumers chose the competition only when they have no other options and feel as if they were forced to choose something inferior. 

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article.