The Credit Suisse Research Institute recently released a research report titled "Great Brands of Tomorrow." It's an in-depth look at how a company's brand can be one of the few true competitive advantages remaining in modern industry. The research is based on Credit Suisse's proprietary framework and analyzes brand case studies over the last century. The framework uses two filters to determine how and when to invest in brand stocks: 1) identifying the industry and company specific conditions necessary for brand success; and 2) understanding the brand lifecycle and key entry and exit points from a shareholder perspective.
"We believe a strong brand is one of the most powerful and sustainable advantages a company can have, but one that is often ignored by the financial markets," said Omar Saad, director at Credit Suisse. "We believe brand stocks will continue to outperform the market, and our proprietary framework analyzes brand lifecycles to determine how and when to invest in brands for optimal returns."
Key Findings From "Great Brands of Tomorrow." • Stronger brands consistently generate better long-term growth and returns for shareholders.
Companies that invest at least 2% of sales revenue on marketing outperform the S&P 500 by more than 4% annually. The top one-fifth of strongly branded companies outperform the market by 17%.
• Some industries are more brand friendly than others.
Brands are relevant in many industries beyond traditional consumer sectors, but some are more "brand-friendly" than others.The research indicates that brand power is strongest in industries that have the closest proximity to the consumer (i.e fewer stages between brand and consumer) where there is ample room for differentiation among competitors, and where reputation plays a key role in customer purchasing decisions.
• Most brands follow a sustained arc with five distinct stages.
The 5 stages highlighted in the research include: Emerge, Hit the Wall, Transform / Proliferate, Dominate, and Reinvent. Investing in companies that are transforming from a niche player into a powerful brand, that can be expanded across new markets, offers extremely attractive returns and it is the phase in the brand's lifecycle that generates the greatest value creation for a company.
• Tough financial times are often the most opportunistic backdrops for great brand companies.
As weaker competitors scale back and new entrants delay riskier plans, strongly branded companies emerge out of a weakened economy and outperform the market by as much as 18% within the first six quarters of recovery. According to the Credit Suisse Research Institute, brand stocks are already beginning to outperform their markets by 7% since March 2009.
In addition to its report, which identifies brands and their relationship to the market, Credit Suisse released a list of 27 brands that it believes will significantly outperform the market over the next 3-5 years as they build and leverage brand equity to grow in size, scale and profitability. The 27 Top Brands include: Alibaba.com, Almarai, Amazon, Apple, BIM, Capitec, China Merchants Bank, Commercial Aircraft Corporation of China, Enfamil, Facebook, Hyundai Motor, Indian Hotels, Julius Baer, Li Ning, Mahindra & Mahindra, MercadoLibre, Mercedes-Benz, Polo Ralph Lauren, Sonova Holding, Swatch, Tiffany & Co., Tingyi, Trader Joe's, Tsingtao Brewery, Under Armour, Uniglo, and Yakult Honsha.
It's time for strategically savvy CEOs and CFOs to start viewing their brands as appreciating assets and for investors to evaluate stock picks based on genuine brand advantage.