CategoryGeneral thoughts

For those interested in the discussion on brands and how strong, and powerful brands add value to a business, there is an article in fortune which discusses the top ten brands across the globe.

How to Build a Breakaway BrandHow ten companies, making products from drills to waffles, took good brands and made them much, much better.By Al Ehrbar
What do Gerber, Google, and Eggo have in common? They’re all selling familiarity, trust, and quality—those intangible traits summed up by the word “brand.” Right now that word is more important than ever before, because competitors are more instantly reactive and consumers more sophisticated than ever before. The Model T Ford was in production for 18 long years with little change; Sony’s Cyber-shot digital cameras go out of production while the packaging is still crisp. And once upon a time shoppers pretty much believed the hype; these days Internet-powered bargain hunters are armed with accurate pricing and product information—and brutal in their search for value.
In this cutthroat marketplace, which brands have been most successful? To find out, FORTUNE turned to Landor Associates, a brand and design consultant in San Francisco. Landor mined a huge database of brand perceptions called the BrandAsset Valuator, or BAV, to identify ten products that scored the largest increases in brand strength from 2001 to 2004. (Landor is part of WPP Group’s Young & Rubicam division, which owns the BAV.) Landor’s partner, the New York consultancy BrandEconomics, then calculated the pop in economic value each of these breakaway brands gave their parent companies.
Here’s how it works. First, Landor and BrandEconomics asked consumers—9,000 of them—what they thought of 2,500 U.S. brands. Then they looked at brand strength. This is a combination of two properties: differentiation and relevance. Differentiation is the degree to which a brand stands out. Relevance is the degree to which consumers believe a brand meets their needs. That all sounds rather obvious, but what’s surprising is that the two factors don’t necessarily go together. Rolls-Royce has stellar differentiation but hardly any relevance, since few people can pay $300,000 for four wheels. Kleenex is highly relevant but undifferentiated: Most tissues feel alike. The brands that do best are those that deliver on both counts.
In addition, the BAV measures a brand’s stature, which can also be broken down into two components—esteem and knowledge. Esteem is how well regarded the brand is, while knowledge refers to whether the consumer understands it. And once again, those two qualities don’t operate in lockstep. A high-esteem, low-knowledge profile may be a sign of a brand on the rise—the consumer’s curiosity is piqued. A high-knowledge, low-esteem profile, on the other hand, is the consumer’s way of dissing a brand: We know it, and it’s nothing special (think Dodge or Coor’s Lite).
Weakening brands tend to depend more on coupons and discounts; muscular ones can command a premium. How much does that matter? A lot. The intangible value of a company is its market value minus its tangible capital (i.e., property, plant, equipment, and net working capital). A BrandEconomics analysis found that companies with strong, well-regarded brands had an intangible value of 250% of annual sales; companies with listless brands had one of only 70%.
In important ways, though, the value of a brand is incalculable. A rising brand secures more customer loyalty, higher margins, greater pricing flexibility, and new opportunities for growth. And brands on the way up, BrandEconomics research shows, ride through economic downturns with less trauma. “The combination of faster growth with less risk,” says Hayes Roth, vice president for global marketing at Landor, “is business nirvana.” Here’s a look at ten brands that are pretty close to paradise right now.

I had posted my thoughts on the difference between a brand and franchise. Initially my understanding was that they are the same and a strong brand equates to a good franchise (franchise can be defined as a business which earns more than its cost of capital and has a sustainable competitive advantage).

However I have seen cases where the two are not the same ( ex : titan, Mercedes etc, general motor brands etc).

I put out a question asking for comments and got replies from bruce (see below) and from george who has put his thoughts on his website Fat Pitch Financials.

I am listing a few criteria which came to my mind after I got the comments from bruce and george

So here goes
A strong brand would equate to profitable franchise if price is not the key differentiator or is not key factor in the purchase decision. I can think of the following cases

• Low value purchase v/s high value purchase (borrowed from george’s post on his website). I cannot think of anyone putting as much effort in buying a cola v/s buying a car. As a result a strong brand can charge more for a product
• A complex purchase decision requiring substantial information to asess the true price of a product. For ex: high end electronic products – A bose system ?
• Emotional association with the product – Disney products / Barbie dolls – try giving a child a regular lower price but equally good doll and you will understand what I mean
• Social proof / Association tendency – High prestige product which confer a social status on the owner . Ex : tiffany’s

Ofcourse the above are not sufficient for a strong brand to be a profitable franchise. Cost structures and other factors would also be important for the business to be a profitable franchise.

Now why go through all this in trying to distinguish between a franchise and good business (with or without a brand). If I remember correctly, warren buffett in his annual report has written about newspapers as very strong franchise with a kind of a toll bridge business model. Later with internet and other media, he commented that newspapers were still good businesses, but not bullet proof franchise. In the same section he also did a rough valuation exercise of a good franchise v/s good business and showed how strong franchises are worth more than good businesses.


Please share your thoughts on the above topic.

Comments :
Bruce said…
Here’s my abstract opinion (there are a LOT of ways of looking at this one question). A brand/franchise/whatever is something which signals a contract with the customer. It’s a popular solution to the prisoner’s dilemma problem that plagues all economic transactions to some extent. Game theory deals with this subject very well.A vendor spends a great deal of time and money developing an easily recognizable public image that is protected by law (from having other vendors use the same image). That image slowly becomes a reputation, but it also signals a commitment from the vendor not to cheat the customer quickly and then run away. The average consumer must keep track of a very large and growing number of brands and franchises. They don’t want to have to do the enormous work to validate a vendor every time they want to make an economic purchase. A brand/franchise allows them to make quick decisions, often in unknown places. So in a sense, a brand/franchise becomes a contract between the buyer and the vendor. The cost in establishing the brand (and also the value in not destroying it) is a fuzzy guarantee placed into the public by the vendor.When you have a comodity product or service, that brand becomes less important. Someone stands by the side of the road with a rock that you want to buy. They have no brand, but all you want is a rock which is easily verified during the purchase. Anyone spending lots of money to establish a brand is at a cost disadvantage to someone who just gathers rocks and stands at the side of the road. For that reason, comodity markets are won by whoever has the lowest cost. If the market demands 10,000 rocks, then you essentially line up the vendors from lowest cost to highest cost. You start with the lowest cost and work your way up until you buy 10,000 rocks (well, it’s more complicated than that due to the supply/demand curve). The market price essentially becomes the highest cost rock among the 10,000.So call it a brand or franchise or whatever, it’s really a sort of contract. It’s very important that the law upholds the property rights of the brand or everything breaks down. In fact, it’s always important for property rights to be upheld for economic activity to be efficient and effective. India has come a long way over the years and I suspect it will become a very major economic superpower so long as it continues on the path of free markets and property rights.
7:02 PM
Bruce said…
What makes a strong brand? Well, one view is covered very well in The 22 Immutable Laws of Marketing. But a better answer is to look at your own behavior and where you rely on brand. Buffett made some comments about Coca Cola that make a lot of sense. One type of very good brand is small, repeat purchases that are almost habit.When you look at what a brand is all about (a contract), then you can ask yourself when is that contract valuable from the vendor’s perspective. One good thing is lots of confusion and doubt in the minds of customers. Another is a long delay before the customer finds out whether what they bought was good quality vs poor quality.
9:47 AM
George said…
This is a very interesting topic. I posted my comments about it over at my blog, Fat Pitch Financials. It would be nice to put together a set of criteria by which to gage how likely a brand will lead to a franchise.
8:04 PM

I have put this question to myself and have come up with two main reasons

1. My blog is more like an online dairy. I try to put my thoughts on a regular basis. I try to read what I have posted in the past and try to see what I was thinking then and how has my thinking changed. Typically if something works out, I tend to think that it was my foresight (given time I will be become the new warren buffett !!) and luck had nothing to do with it. My blog ensures that when I look at my posts, I would be able to ‘recall’ what I was thinking and see if I can improve/ change it. At the same time if something does not work out, my earlier posts may prevent me from attributing my failure to bad luck.
2. The second reason is to learn from others. Bruce, value architects and a few other visitors have commented or written personally to me in the past. It is good to have a different opinion or to get some inputs from others as it makes me rethink my assumptions or helps me in resolving some of my doubts.

I don’t think this blog is going to make me money directly (although it would not hurt), but hopefully would make me a better investor.

And what the heck ! , I am having fun putting my thoughts out and getting feedback/ suggestions/ clarifications from other. For me that is good enough.

Found this good article (below) on wallstraits.com. I have wondered several times the same point – ‘if the stock tips are so good and reliable’ then why are they being given out for free or for a fee. Put it another way, all these experts on the TV channels and websites who claim to know where the market is going ..why are they letting others onto it or selling this advice for a fee. Can these ‘experts’ not getting rich by following their own advise? Replace the work expert with  broker and this paradox is even more jarring !

It is ironic that two approaches to stock market investing that would be widely accepted in the prosperous second half of the twentieth century—Graham and Dodd’s “value” investing and T. Rowe Price’s “growth” investing—were spawned within a few years of each other during the depressed 1930s. Neither Graham and Dodd nor Price anticipated the long boom that would finally get under way in the 1940s. But the analytical approaches they developed, even though profoundly colored by the searing experience of the Great Depression, proved to be very durable, providing systematic methodologies for investing that would be successfully employed under very different conditions in the future.
At the same time Benjamin Graham and David Dodd were writing Security Analysis (1934), another student of the market, Alfred Cowles, was collecting data in an effort to answer a basic question that intrigued him. Seeking sound investment advice, Cowles had become confused by the bewildering array of investment newsletters published in the 1920s. He finally decided in 1928 to conduct a test in which he would monitor 24 of the most widely circulated publications to determine which was actually the best. The results of his efforts proved quite disappointing; none of the services correctly anticipated the 1929 crash or the subsequent bear market, and most of the advice offered proved to be quite poor.
It was then Cowles asked the question that he would spend years attempting to answer: Can anyone really consistently predict stock prices? Using his inherited wealth to fund research on the subject, Cowles assembled a great deal of data and eventually reached a tentative answer to his question. Summed up in three words, the answer was “It is doubtful.”
Cowles found that only slightly more than a third of the investment newsletters he monitored had performed well and that he could not prove definitely that the results of even the best of them were attributable to anything other than luck. He also took on the proponents of the Dow theory, exhaustively examining the predictions of William Hamilton, the Wall Street Journal editor who succeeded Charles Dow. For more than 25 years, Hamilton had been publishing market prognostications based on Dow’s ideas. Hamilton died in 1929, shortly after issuing, only days before the crash, his most famous prediction: that the bull market of the 1920s had come to an end. He received a great deal of posthumous credit for his timely market call from observers who forgot that he had made similar calls in 1927 and, twice, in 1928. Cowles did not overlook the previous faux pas; his analysis concluded that although a Hamilton portfolio would have grown by a factor of 19 during Hamilton’s years as editor of the Journal (1903-1929), an investor who simply bought into the market and held his stocks over that same period would have done twice as well.
Cowles, although not a trained academic expert, compiled an impressive array of information that would be used decades later by scholars seeking to examine the same questions that had interested him. (Much of the data used in this book to compute price-earnings ratios and dividend rates for the nineteenth and early twentieth centuries comes from Cowles’s work.) Cowles founded the Cowles Center for Economic Research in Colorado Springs; the facility was moved to the University of Chicago in 1939 and would over time support the work of many Nobel Prize-winning economists. But in the 1930s, Cowles’s insights were understandably unpopular with professional investment advisors, most of whom preferred to ignore his conclusions.
What must have been most galling was a simple point Cowles often made that was never answered effectively by the investment advice practitioners. As Cowles put it, “Market advice for a fee is a paradox. Anybody who really knew just wouldn’t share his knowledge. Why should he? In five years, he could be the richest man in the world. Why pass the word on?”
In spite of the conclusions he reached, Cowles never doubted that investors would keep buying newsletters. As he put it, “Even if I did my negative surveys every five years, or others continued them when I’m gone, it wouldn’t matter. People are still going to subscribe to these services. They want to believe that somebody really knows. A world in which nobody really knows can be frightening.”  
Sage@wallstraits.com
Credits: This article is primarily extracted from B Mark Smith’s market history book, Toward Rational Exuberance, 2001.

Have been thinking of how higher petrol prices would affect indian industry. My opinion is that companies like FMCG / IT services / Telecom should not effected much , either due to their inherent pricing ability or because fuel costs are low for them and affect them only indirectly.

The above event should impact oil companies postively ( hopefully they will not go bankrupt). Commodity businesses may get impacted badly if the demand falters and the costs go up. Metals/ Cement / Steel etc could get impacted negatively.

Cant think of the impact on retail / Media and other such industries. They would have some second or third order impact ( less disposable income leading to lower demand ? ) …

I think the bigger impact could be on inflation and interest rates. I would stay away from fixed income funds for some time atleast. Also individuals with variable rate loans could be impacted. Will it impact the housing market …not really sure about it

Came across this blog from darren. He seems to have made 100000 usd via blogging in the last 1 year. Seems to be an interesting business model. Can this become a full time source of income ? i dont think so ( and darren suggests the same).

But i think blogs can be become a powerful tool for small time entreprenuers and a creative outlet for a lot of people. In addition a lot of companies can use blogs for internal and external communication (with customers ). Microsoft seems to be doing so.

We may see some companies use blogs in addition to their website to get closer to their customer (experience marketing ?)

It would interesting to see how this medium develop. But it would be safe to say a handful will achieve prominence ( the ones which will pass the tipping point ??) , whereas the rest would remain a labor of love (or pain if you are in it for the money only )

there is an interesting post i read on mark cuban’s blog on a similar topic – podcasting

A new article on india and china. interesting to read

http://www.businessweek.com/magazine/content/05_34/b3948401.htm

some excerpts

Even more exhilarating is the pace of innovation, as tech hubs like Bangalore spawn companies producing their own chip designs, software, and pharmaceuticals. “I find Bangalore to be one of the most exciting places in the world,” says Dan Scheinman, Cisco Systems Inc.’s senior vice-president for corporate development. “It is Silicon Valley in 1999.” Beyond Bangalore, Indian companies are showing a flair for producing high-quality goods and services at ridiculously low prices, from $50 air flights and crystal-clear 2 cents-a-minute cell-phone service to $2,200 cars and cardiac operations by top surgeons at a fraction of U.S. costs. Some analysts see the beginnings of hypercompetitive multinationals. “Once they learn to sell at Indian prices with world quality, they can compete anywhere,” predicts University of Michigan management guru C.K. Prahalad. Adds A. T. Kearney high-tech consultant John Ciacchella: “I don’t think U.S. companies realize India is building next-generation service companies.”

Barring cataclysm, within three decades India should have vaulted over Germany as the world’s third-biggest economy. By mid-century, China should have overtaken the U.S. as No. 1. By then, China and India could account for half of global output. Indeed, the troika of China, India, and the U.S. — the only industrialized nation with significant population growth — by most projections will dwarf every other economy.

China also is hugely wasteful. Its 9.5% growth rate in 2004 is less impressive when you consider that $850 billion — half of GDP — was plowed into already-glutted sectors like crude steel, vehicles, and office buildings. Its factories burn fuel five times less efficiently than in the West, and more than 20% of bank loans are bad. Two-thirds of China’s 13,000 listed companies don’t earn back their true cost of capital, estimates Beijing National Accounting Institute President Chen Xiaoyue. “We build the roads and industrial parks, but we sacrifice a lot,” Chen says.India, by contrast, has had to develop with scarcity. It gets scant foreign investment, and has no room to waste fuel and materials like China. India also has Western legal institutions, a modern stock market, and private banks and corporations. As a result, it is far more capital-efficient. A BusinessWeek analysis of Standard & Poor’s (MHP ) Compustat data on 346 top listed companies in both nations shows Indian corporations have achieved higher returns on equity and invested capital in the past five years in industries from autos to food products. The average Indian company posted a 16.7% return on capital in 2004, vs. 12.8% in China.

The burning question is whether India can replicate China’s mass manufacturing achievement. India’s info-tech services industry, successful as it is, employs fewer than 1 million people. But 200 million Indians subsist on $1 a day or less. Export manufacturing is one of India’s best hopes of generating millions of new jobs.India has sophisticated manufacturing knowhow. Tata Steel is among the world’s most-efficient producers. The country boasts several top precision auto parts companies, such as Bharat Forge Ltd. The world’s biggest supplier of chassis parts to major auto makers, it employs 1,200 engineers at its heavily automated Pune plant. India’s forte is small-batch production of high-value goods requiring lots of engineering, such as power generators for Cummins Inc. (CMI ) and core components for General Electric Co. (GE ) CAT scanners.

LN mittal has been in limelight for quite some. He is now in limelight for being the third richest person in the world. everyone seems to be focussing on his networth. I am more interested in how he got there

i have read about him in the past and read about him in an article in the economic times. His key skill is in identifying bankrupt , beaten down steel plants / companies . He is able to value this company correctly and acquire it at that price ( in may cases the owner or goverment is desperate to offload it ). He then proceeds to turn it around and make it profitable.

By applying this strategy across the globe in various situations, LN mittal has been able to build an empire , cut cost and initiate consolidation in this industry.

The following comes to mind on seeing this happen

– A company in the commodity industry can have a sustainable competetive advantages from two sources – superior management and enduring low cost position ( which is also dependent on a superior management )

– Consolidation in a commodity industry improves the profitability of the top firms as it gives them better pricing power.

– mittal steel it seems also is vertically integrated in ore and coke ( two key raw materials ). So with horizontal consolidation, he is also vertically consolidating. This gives him better pricing power.

– He is expanding into new geography and trying to closer to demand ( China / India etc ). This will give him flexibility in the future to manage demand fluctuations. Other companies across the world are restricted to some geography and so if the demand drops in that region , they are in deep trouble.

What is happening also highlights another point of the importance of a good management for commodity industry. Bad managements in the steel industry have run their companies aground and have been in red for quite some time. Recent demand surge and firm prices have given them a lease of life ( and they are promptly started increasing capacity ). Lets see how they manage the next downturn.

LN mittal’s story has been a live case study for me see how a superior management can make a difference even in a commodity industry ( and that too as bad as steel ). vice versa a commodity industry cannot tolerate bad management ( a franchise company like FMCG can for some time )

That he is an indian is beside the point. The sad part is we are happy that an ‘indian’ has made it !! sad because , he could not have achieved it in india …he had to leave the country to achieve his ambitions. Hopefully in the future we will not force such people to look outside the country and would provide the atmosphere within the country

As an investor one of the key elements to analyse in a company is the durability of its competitive advantage. A durable competitive advantage enables a company to earn excess returns over its cost of capital. There are several examples in the indian industry like levers, Proctor and gamble , asian paints etc with strong and durable competitive advantages



One of the key elements of the sustainable competitive advantage is strong , well know brands. The examples above clearly reflect that. Companies with strong brand are able to withstand competition better and provide investors with superior returns. But how durable are brands these days ? Can we as investors be confident that consumers would be faithful to their brands and would pay that extra for their special brand.



Brands like surf, colgate, cadbury etc are well know brands for last 25 years. However these brands are struggling in terms of growth and retaining the existing customers and being relevant to the new ones. A lot of articles and studies do point to rampant brand switching among consumers . Have the consumers become unfaithful or these brands lost their relevance. I would assume partly both. Who gets excited with a new brand of toothpaste or soap. But mobiles / cars are a different matter. These product categories get a lot of consumer interest (brand loyalty is a different issue).



In the international markets, brand loyalty is at an all time low. Nokia is one of the most admired and liked brands. In 2003 i think they missed out on the trend of clam shell mobile phones and paid heavily for it ( they lost market share). I dont have tell what happened to the stock price. The new reality which marketers have to live with is this : What have i done for my consumer today ? Is my brand still relevant to my consumer



What does all this mean for an investor ? Very simply – Higher ad expenses, shorter relevance of existing brands, lower success rates of new brands. All this translates into one conclusion – The excess returns enjoyed by companies due to their dominant brands would reduce. They would still be good businesses (much better than commodity business). however investor will pay less for such businesses ( Lower PE’s).



The above has already happened for a lot of consumer companies. Several do not enjoy their historical PE’s. analysts keep fretting about monsoon and kharif crops and what not ? They have not been able to explain why Mobiles companies, car companies do well whereas FMCG companies continue to have poor growth rates. It would be critical for an investor to answer the above question before investing in a company. Try challenging the convential wisdom …the conclusions could be interesting

I work in the IT industry and keep travelling to US and other countries.



There is lot one can learn as an investor during one’s visit to these countries. Some of them are like



1. Power of brands / ideas

2. Intensity of competition

3. Pace of change

4. Level of innovation and impact on value creation

5. Consumer orientation towards ‘value for their money’ ( not limited to indians alone )

6. Trend in various industries like telecom , retail, Entertainment which could play out later in india Let me share what has been my observations till date.



1. Power of brands / ideas – The first thing that strikes you is the presence of brands in almost all sectors of business – industrial, consumer etc. Now one may say , that we have brands in india too ..so whats the difference ..well branded goods occupy a much larger share of the market than india where the unbranded / unorganised sector is equally prominent in several categories. So what does this signify – a) as an economy develops the share of branded goods increases as competition forces out the generic products b) powerful brands create a strong competitive advantage in most industries and high profit margins.



2. Intensity of competiton – What the developed countries like US are able to do is ensure that there level playing field, good infrastructure and open competition. This benefits the consumer but not an investor as high profit margins are rarely sustainable . So think about our current market favorities like auto component, IT, Pharma . If you think that their profit margins (and high return on captial ) is garunteed , then better think again. Not only is competition high , but the goverment does not interfere in closure of companies. So the inefficient die and the efficient survive. That is good for the society and also for an investor .An in-efficient competitor on subsidy can be really bad for the other companies



3. Pace of change – You literally see the business landscape change . In india the same is happening but in select industries . In the US it is pervasive. Is it good for an investor. Difficult to say , but generally too much competition and change is not good.



4.Innovation – Look at google . need i say more. In india telecom is a good example. What ITC is doing is a good example too. FMCG industry claims too be innovative , but their innovation are limited to buy one get one free schemes. So low innovation , low returns.



5.consumer orientation – This is same all over the world. People over the world want value for money. So if a company wants to make money they have to define and deliver value to the consumer. so watch out companies which work on cost plus pricing 6. Trends – This is very intresting. A lot of trends in US occur in india with time lag. For ex : growth of discount retailers, movement of the consumer to VOIP telephony ( this could impact the cellular industry ), trends in music retailing etc. The list is endless and a subject for another day.



i will come back again with more details on the points i have listed above.