Do Brands Really Matter?

“For an incumbent to enjoy competitive advantages on the demand side of the market, it must have access to customers that rivals cannot match. Branding, in the traditional sense of a quality image and reputation, by itself is not sufficient to establish this superior access. If an entrant has an equal opportunity to create and maintain a brand, the incumbent has no competitive advantage and no barrier impedes the process of entry.” – Bruce Greenwald in “Competition Demystified: A Radically Simplified Approach to Business Strategy” (2007)

What role does a strong brand name have in the decision to invest in a stock? A brand creates a distinctive identity for a product, helping it be differentiated in a crowded market. However, a brand name is only as strong as the product or service experience it promises and delivers. And yet, a strong brand name by itself neither assures pricing power nor runaway profits.

If you read an investment report of any stock, especially one in a consumer-oriented business, chances are, the analyst’s thesis of buying the stock would include ‘strong brand name’ as a major reason. A strong brand name is usually thought of as a source of competitive advantage. However, in investing, the value or strength of a brand is often misunderstood. A strong brand can be a success factor for a business, but does it really bestow a competitive advantage on its owner?

To answer that question, let us first explore why a brand is important. By helping build a distinct identity, a brand helps a business to differentiate itself, becoming its most effective customer acquisition tool. As a first-time buyer, you are more likely to try a product from a brand you have heard of, compared to some unknown name. A strong brand also drives high switching costs. Once you are comfortable with using one, an element of trust and reliability builds in, and rarely will you experiment with newer ones.

But how does a new entrant create this differentiation that helps turn an ordinary name into a unique brand? Back in the days, brands simply took off from their owners’ names. A Tata truck, a Mahindra tractor, a Godrej lock, an Oberoi hotel, a Hiranandani apartment, a Disney theme park and so on. These names signified trust and reliability, and an assurance that comes with the owner lending his name and aligning his reputation with the brand.

This however seems like a bygone era and now we hardly hear of founders associating themselves with the new businesses they create. In fact, some entrepreneurs seem to come up with completely meaningless names just to score high on the unique quotient, in the hope of differentiating themselves. What does Swiggy really mean? Or Acko for that matter? Then, there is Yulu, the cycle-sharing service and Dunzo the hyperlocal delivery service. Think of Häagen-Dazs. Do you picture ice creams that originated as hand-crafted desserts, made with milk from cows that spend their days lazily munching on fresh grass in some European countryside? Let us pop your bubble. There is nothing European about Häagen-Dazs. And the ice cream is as factory-made in the US as say, Baskin & Robbins. The multi-national giant behind this brand just put together some random words to have a ‘foreign sounding name’ for their fledgling ice cream brand!

First movers usually do not need to take the path of weird names. They have the natural opportunity to go with simple utilitarian names, since there is no competition to differentiate against. There cannot be any confusion about what Makemytrip or Yatra do. Or Bookmyshow, Matrimony.com, Foodhall, Big Basket and so on.

Between the simple idiot-proof names and the meaningless ones are names that although derived from real words, mostly have a meaning only in the founders’ minds. Pepperfry sounds like a step in the recipe for making rasam! Grofers is gopher + grocer – gopher being a common term for an errand boy in the US and grocer because that is what they first started delivering. Do you really need a name that needs an explanation?

A recent trend was finding names that can be ‘verbified’, presumably in an attempt to increase the brand strength. No amount of money can buy you the brand value that comes from your customers saying, ‘Google it’ to indicate using an internet search engine. Or ‘Uber it’ as an act of hailing a cab. While Google, Uber and in the past, names like Xerox went on to become generic brand names on their own, the trend now seems to be to actively look for a name that turns the noun into a verb. That gave us names like Shopify, Storify, Mobify etc. If ‘vebifying’ was not enough, there was also a trend to make the name sound more ‘active’ and convert it to an adverb by adding a ‘ly’ to whatever activity your business is in to. Donately, as can be guessed, is a service for online donations. Feedly is to manage news feeds and other content on the net and Washly, a laundry service.

The many examples cited above are fairly successful names and that is why the brands have become known, or popular. But many other brands with unique names have not been as successful. It is therefore obvious that having any kind of name – simple, descriptive, or quirky – has nothing to do with how the business eventually performs. A name that cuts through the clutter can bring in a curious customer for the first time, but the customer will come back only if the product experience is unmatched.

For example, Da Milano might pique the interest of a customer who thinks she is buying an Italian brand. But if she loves their leather bags, chances are she will be a repeat customer even after knowing the brand is as Indian as herself. Similarly, La Opala dinnerware has to sell something more than a Spanish-sounding name. Monte Carlo needs to offer great pullovers and not just a name that is French Riviera-ish. If you are not a regular at Starbucks, it is quite a task to decide what to order there – particularly which serving size. The smallest is appropriately called ‘Short’. But the immediate next size skips ‘Medium’ and is directly called ‘Tall’. The size larger than ‘Tall’ is called ‘Grande’ (not, umm…‘Taller’), which conjures up images of a super-sized cup, probably the largest on offer. But no! There is an even larger one called ‘Venti’ (unsurprisingly, not ‘Tallest’).

Understandably, Starbucks has pitched itself as America’s answer to Italian coffee-houses (although visitors to coffee houses in Italy might struggle to see the link) and these confusing serving sizes are probably a part of the experience. But the core of this experience, which brings in repeat customers, is the coffee and the friendly vibe (ok, and maybe the free wi-fi too). What matters to the success of a business therefore is, whether the brand lives up to the product or service experience it promises. Naming a brand can be part of a strategic plan, but nurturing it is all about flawless execution.

Which brings us back to the question raised earlier – if a business does manage to build a successful brand, does it bestow any competitive advantages on its owner? A strong brand does not necessarily mean an unassailable market position – either in terms of market share or in terms of profitability. Several firms in India have historically built exceptionally strong brands but have found it hard to demonstrate the presence of pricing power in the face of fierce competition. Hindustan Unilever Ltd. and Colgate Palmolive India Ltd. are two such examples from India’s FMCG sector.

Unilever has retained 50% market share in soaps and detergents, with its portfolio of widely known brands like Lifebuoy, Lux, Dove and Surf. Colgate has retained more than 50% market share in oral care (toothpastes and toothbrushes) for several decades. Despite possessing extremely strong brand recall, their market share dominance has come at the cost of profitability in the face of fierce competition. Time and again, these firms have faced price-wars from competitors like Patanjali (five years ago for Colgate), Nirma (more than twenty years ago for Unilever), P&G, Dabur, etc. In each such price war, Hindustan Unilever and Colgate reduce their product prices price to match the lower levels offered by competition. Hence, whilst their market share dominance is retained through such price wars, their profitability is compromised. As a result, over the past 10 years (FY10-20), Hindustan Unilever has compounded profits at only 12% CAGR and Colgate has compounded profits at only 6% CAGR.

Airtel is one of the most recognised brands in telecom services in India. Yet, it has struggled with pressures on tariffs every time a new firm gets a licence and starts services. Kingfisher Airlines did a great job of branding – combining the best of the founder’s personality and the association with an existing powerful brand. It even got the product experience right. But could not command any pricing power in a competitive and price-sensitive market. In fact, airlines around the world struggle with the same problem – the brand name or strength has nothing much to do with how much money the business makes.

True pricing power therefore comes from a host of competitive advantages other than just the brand name. What it takes is a business model that is difficult to replicate, which in turn helps leveraging the value of a brand in creating value for the business. So, when the next time someone makes an investment recommendation based on how strong a brand is, it would be worthwhile to dig deeper. For a more detailed discussion on the subject of pricing power and competitive advantages, do read some of our related content:

“Unusual Billionaires” Flip the Competitive Paradigm
Inside the Mind Of the Indian Monopolist
CCPs avoid price hikes to strengthen pricing power

Disclosure: La Opala is a part of some portfolios managed or advised by Marcellus.

Salil Desai and Rakshit Ranjan are part of the investment team at Marcellus Investment Managers