Top 25 Global Brands – The Returns They Provide For Investors

Anyone who has been following this site knows that I invest in high quality companies that possess a sustainable economic moat. One of the economic moats that I have explored extensively on this site is brands. Companies that possess high quality brands have earnt above average returns for longer than normal periods of time and in the process have created enormous wealth for their owners.

Whilst brands have done well historically, the consumer landscape is changing quickly. Many brands have lost their appeal and only a handful are worth their elevated price today. I have written articles regarding this titled ‘The Death Of Brands – What Investors Need To Know’ and ‘Are Brands Really A Competitive Advantage?

I was reading a report recently from Credit Suisse and it contained a section in the world’s top 25 brands as of 2016. The report lists the top 25 brands in the world from the Interbrand most valuable brands in the worlds list. The brands are analysed using the cash flow return on investment as a metric – by subtracting it from the discount rate gives the true return of a brand. 
Here are the rates of return for different brands. The higher the number the better.

Apple:          22%
Google:        14%
Coca Cola:    13%
  4. Microsoft       13%
  5. Toyota:          2%
IBM:             24%
Samsung:      1%
  8. Amazon:       10%
Mercedes-Benz (Daimler): 6%
General Electric:  8%
BMW:            4%
  12. McDonald’s:  5%
Disney:        11%
  14. Intel:           6%
Facebook:    18%
Cisco:          10%
  17. Oracle:         13%
  18. Nike:            14%
  19. Louis Vuitton (LVMH): 8%
  20. H&M:           12%
Honda:        -0.5%
SAP:             22%
Pepsi:           10%
Procter and Gamble (Gillette): 16%
  25. American Express:  17%

I think you would agree that the above makes for very interesting reading. The main thing of note is that there isn’t a one-to-one relationship between brand strength and economic returns. Put it another way, there is a weak correlation between brand ranking and economic return. Nike in no 18 has a substantially higher cash flow return on investment than Toyota at number 5. Brands that might appear strong on paper are not so in the real world. So do not invest solely on a brand ranking basis!

As an investor, it is best to assess a brand based on the amount of value added. A brand that represents a business benefiting from network effects or that confers horizontal differentiation may increase a customer’s willingness to pay. Facebook, for instance, benefits from the company’s network effects and adds value to the constituents in its ecosystem. The willingness to pay for a brand is high if you are in the habit of using it, have an emotional connection to it, trust it, or believe that it confers social status. And if you invest in companies with this sort of brand, you can make substantial returns as seen by the figures above.

As I have mentioned before, not all brands provide an economic moat for a business. A brand needs to add value and confer pricing power in order to generate above average returns. Apple is a great example of this. It has tremendous pricing power as it can raise prices every year and consumers will still buy its product. It is no wonder the company has a high return on capita. The high returns on capital translates into wealth fro shareholders as seen by Apple’s stock price. On the other hand, the Toyota’s and Honda’s of this world do not have a brand that is as strong as people might think; at least from an investors standpoint. The two company’s have low returns on capital. It is no wonder there stock prices have underperformed over the years.

The takeaway if any is this. Brands are still valuable and can provide tremendous wealth to their owners. But not all brands are created equal. As an investor, you need to pick companies that possess brands which are both valuable and confer pricing power. That way, you will have picked a company with a sustainable competitive advantage.