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Should you look at investing in brands? - Views on News from Equitymaster
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  • Mar 29, 2011

    Should you look at investing in brands?

    We believe Buffett does.

    As you all know we are big fans of Mr. Warren Buffett. His clear cut style of investing has earned him billions. He looks for businesses that are simple to understand, and looks at picking them up when they are selling at a bargain. Companies which earn high returns on equity while employing little or no debt are extremely attractive to him. Stability in earnings is also a major criterion.

    He focuses on growth in domestic consumption, while choosing which companies to invest in. After all, America is the biggest consumer market in the world. Buffett zeroes in on products that a customer cannot live without. Be it a cold can of Coca Cola on a hot summer day, or using a Gillette razor in the morning. Or using an American Express card while shopping in the mall. These products are engrained into American culture, and they cannot be easily replaced. In other words, they have a strong moat around them. We would also say that these companies have a significant value attached to their brand.

    According to Wikipedia - "A brand is the identity of a specific product, service, or business." Earlier, people believed that a large portion of the value of a company came from 'tangible assets' like plants and machinery, land etc. However people have now understood that the intangibles also have a bearing on the value of a company.

    John Stuart, Chairman of Quaker Oats, famously said "If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you."

    So clearly there is a value attached to brands. If you are in the shopping mall, why do you pick up one packet of biscuits, or noodles versus another? Clearly, the power of a brand helps influence customer choices. After all, the big advertising budgets of FMCG giants have to come to something.

    We will not get into the economics of how to value brands in this article. But, we would like to show you how some of Berkshire Hathaway 's biggest investments have a significant brand value attached.

    Companies Brand value (BV) (US$ bn) MCap (US$ bn) BV as a % of MCap Stake owned (%)
    Wells Fargo 29 168 17.2 6.8
    Coca-Cola 26 150 17.2 8.6
    American Express 16 55 28.3 12.6

    Source: BrandFinance, Global 500 List - 2011, Yahoo Finance, Berkshire Hathaway 2010 report

    As you can see, a large proportion of the market cap of these companies is attributed the brand value. This totals around 28% for American Express. Coca Cola is one of the oldest brands in the world. It has been around for around 125 years, being launched for the first time in 1886. It currently has a value of US$ 26 bn. A large number of the world's biggest brands have been around for more than 60 years. Some brands have also been passed from one company to another, but they still retain the same appeal in customer's minds. Eg. Thumbs Up was sold by Parle to Coke in 1993. But it retains its brand name, logo and its loyal fan following among the Indian market.

    With the exception of Munich Reinsurance, Sanofi Aventis, US Bancorp etc. most of Buffett's investments fall within the list of top 500 Global Brands according to BrandFinance. This even includes his investments in Chinese company BYD and South Korean Posco.

    Buffett has always been against 'tech stocks'. He claims that the technology changes too quickly, and he cannot understand most of it.

    However, some companies have created a formidable brand, which is used extensively across the world. The ones in the list below are leaders in their respective industries, and a significant portion of their shareholder value is derived on the strengths of their brand. Incidentally, three companies occupy significant mindshare, being among the top 5 brands in the world.

    Name Brand value (US$ bn) Market Cap (US$ bn) Brand value as a % of Mcap
    Google 44.3 186.4 24%
    Microsoft 42.8 215.3 20%
    IBM 36.2 197.8 18%
    Source: BrandFinance, Global 500 List - 2011, Yahoo Finance

    According to BrandFinance, below are some of India's top brands. The Tata group easily tops the list, with its many subsidiaries and business ventures. Reliance comes a distant 2nd. The others follow suit. As you can see, most of the companies that top this list are the leaders in their respective sectors.

    Source: BrandFinance, Global 500 List - 2011
    Number indicates global ranking

    Buffett visited India recently. And he made no bones, about his interest in investing in India. We expect to see some Indian companies in his 2011 shareholder's letter. And, since Buffett likes investing in companies which have a strong brand value, we wouldn't be surprised if he invests in a big brand. As we mentioned earlier, he did this for his investments in other overseas countries. However, leading players don't come cheap. And, India is still one of the most expensive emerging markets. So, we have to wait and see how the world's greatest investor plays his cards.



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    Aug 23, 2017 11:24 AM