Unlocking Brand Value: The Power of Strong Branding

What is a brand?

A brand name, in simple terms, is one that is recognized and remembered by employees, consumers, and the market, either because it’s been around for a long time or is linked to advertising or a celebrity. However, just being recognized doesn’t tell us much about its actual value. The true value of a brand name is in how it influences people’s actions. For customers, it can affect what they buy, increase sales, or allow higher prices for better profits. For investors and lenders, a strong brand can lower financing costs by encouraging equity investors to pay more and lenders to offer better terms, like lower interest rates. 

Brand names can be linked to entire companies, specific products, or even individuals. For instance, Coca-Cola is a globally recognized corporate brand, while each of its beverages—Coca-Cola, Fanta, Sprite, Thums Up, etc.—also maintains its own unique brand identity. On the other hand, HUL (Hindustan Unilever Limited) is not as strong as a corporate brand, but the company owns several powerful product brands like Dove (soap), Axe (deodorant), Boost (health drink), and Close-up (toothpaste), all of which have significant recognition in their respective markets. Additionally, individuals like Virat Kohli and Shreya Ghoshal hold strong personal brand value, which can also benefit the companies or entities they are associated with (like RCB in Virat’s case).

Brand Name Value

A strong brand name can positively impact nearly every aspect of a business. It boosts sales, enables higher pricing (which increases profit margins), and can potentially lower costs and risks. The most significant advantage of a strong brand, however, is its pricing power, allowing a company to charge more for a product or service than competitors with similar offerings. For example, in the screenshot below, I’ve compared the prices of 650 mg paracetamol tablets from different companies. Dolo 650 from Micro Labs is priced at ₹1.91 per tablet, while lesser-known brands offer the same product at a much lower cost. 

If you are wondering how this plays out at the business level, the operating margins of pharmaceutical companies that own the “brand names” are significantly higher than the brand names of companies that make just the generic substitutes.

Brand Name Creation

So that we have now established that brand names do add value, how does a company end up with a valuable brand name? Here are come ingredients that go into developing a valuable brand name:

• Emotional Connection: A strong brand name ties into a human emotion, such as happiness, reliability, or aspiration. If consumers associate the brand with a positive emotion, it creates a lasting, powerful connection.
• Celebrity Endorsement: Aligning a brand with a famous personality can boost its value, as seen with Nike and Michael Jordan or Apple and Lionel Messi. However, this strategy comes with risks, as the company is also exposed to any negative actions of the celebrity.
• Product Differentiation: A brand name grows around a product that stands out from competitors. To build this differentiation, companies may need to sacrifice rapid growth, accept higher costs, or invest more in the brand’s development.

If building a brand name is too costly or doesn’t seem to provide enough value, companies should consider other competitive advantages that might be more suitable for their business.

Competitive advantages offered by brands

This matrix analyzes different types of competitive advantages (“moats”) a company can have, organized by moat width (wide, narrow, no moat) and competitive advantage types (brand name, switching costs, network benefits, cost advantages, legal protection). Competitive advantages protect a company from competitors and help maintain long-term profitability. 

• Companies with wide moats have strong, durable competitive advantages that are hard for competitors to replicate. These companies are often industry leaders with a high degree of market power, which allows them to generate substantial profits for an extended period. They also enjoy superior margins, customer retention, market share, profit margins, and pricing power.
• Companies with narrow moats have advantages, but they are less durable or sustainable. They may maintain a leading position, but their edge over competitors is not as strong or long-lasting. They enjoy  temporary or limited benefits in brand loyalty, customer switching costs, or cost efficiencies.
• No moat companies have little or no sustainable competitive advantage. They face significant competition and are often in industries where it’s hard to differentiate or where competitors can easily replicate any advantage.

Understanding a company’s competitive moat is critical for making investment decisions. Companies with wide moats tend to have sustainable long-term growth and profitability, making them more attractive for long-term investment. Narrow moat companies can be good investments but may need to be monitored for signs of eroding competitive advantage. No moat companies typically face stiff competition and can struggle to generate consistent profits, making them riskier investments.

Conclusion

From an investment strategy standpoint, a strong brand name can be a powerful intangible asset, driving long-term revenue growth, customer loyalty, and pricing power. However, investors should carefully assess the costs and time involved in building a brand relative to the expected returns. Companies with well-established brand names often enjoy more predictable earnings and lower risks, making them attractive investments. For companies in the early stages of brand development, investors should consider whether the brand-building efforts are sustainable and if the company has the differentiation needed to create lasting value. If the costs of brand development outweigh the benefits, it might be wiser to seek companies with other competitive advantages.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.