Oct

1

 One thing I have been considering lately from an investor's perspective is the power of consumer brands.

What is the value of a well known brand? My inquiry is motivated by a few different angles, but I think what has most stimulated the question is my study of a a "prestigious" company that has been growing by purchasing OTC medicine-type brands from the major consumer goods and drug companies.

At face value it seems like a great strategy. The shorter term economics look favorable. Yet, when I look in my families medicine cabinet, I notice my wife buys almost exclusively store brands when it comes to things like cold medicine, etc. It only takes choosing the low cost option one time to realize that the store brands (Costco, Walgreens, Roundy's etc) work just as well as the higher cost name brands.

Will the familiarity of an old brand have staying power that can allow for an above average roe over time, or are they wasting assets? How long can reputation last when the underlying reality is not particularly distinguished?

A family relation of mine owns a fashion design/women's retail business. One discovery this person made in the manufacturing process (working with contract manufacturers) is that the big names in mainstream "luxury" goods often have completely average quality or only slightly above average quality in terms of material and construction. The desirability factor is almost 100% psychological - what other people will think, a giffin good type effect. This might seem reasonable with regards to items people use to create their public persona or to establish a sense of status. But what about consumer staples? It seems like a much tougher sell. I know that when I go to Costco, I instinctively grab the store brand and am very rarely disappointed. When presented with two very similar, low risk options, even a 50 cent difference can feel significant at the moment when one must reach for an item off the shelf (or maybe I am particularly cheap?)

So the question is, how to evaluate brands in a competitive, relatively uniform (in terms of quality) market. When are they worth investing in over time (in terms of long-term roe?) I see two big things:

1. Need for reliability/high trust in product (condoms vs. hand soap)

2. Items that signify status (LV logo vs. generic)

To bring things to a specific context, I am presently evaluating if the company Prestige brand's (PBH) strategy of buying "known" but relatively mundane brands will have staying power over time (say next 15-20 years). The short term economics look good, but what about staying power in these competitive markets where stores have an incentive to sell their proprietary brands?

Any thoughts are welcome.

Russ Herrold writes:

 Historically Sears also historically perfected the 'Good, Better, Best' model of offering several lines at varying price points.

That brand has huge value, at least out here in Flyover Country.

Jim Wildman adds: 

Good, Better, Best has been adopted by John Deere as to their lawn equipment as well. 1xx series are cheapos, designed to compete at the low end with the Craftsmen and MTD's. 2xx are better, but still not what one thinks of with a Deere. For those you need the 3xx series, which are what I grew up with as a kid.

Easy to tell the difference once you know where to look as well (pressed metal vs cast pieces, bolted vs welded, etc, etc)


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