I discovered an interesting conversation occurring over at the Applying Value Investing Principles in Indian Context blog. The discussion concerned brands and their relationship to franchises (i.e., profitable businesses).
I often look for a strong brand when determining if a company has a wide moat. The discussion I just read lead me to a question. When do strong brands not lead to a franchise?
Strong brands can often give companies strong sustainable competitive advantages. A business with a strong brand is often also a franchise, but there are many examples when this is not the case.
Here are a few of my observations of when a strong brand does not lead to a franchise/wide moat:
- Brand names are not important with commodity items. No one really cares what brand of electricity, coal, airlines, or sugar they are buying. You just buy the cheapest one.
- Industries with too many brands and too much capacity often don’t lead to strong franchises. Here you can probably think of automobile brands, bicycles, and appliances.
- Brands of frequently purchased items are more likely to lead to franchises than those of long lasting capital goods. I think the key here is that you are more likely to be brand loyal with low cost items, since it takes too much effort to research alternatives each time you buy them. Long lasting goods are purchased less frequently, often cost a lot, and you are therefore more likely to take the time to carefully consider your options before purchasing.
This is a rather interesting topic that I’ll have to think about a little more. I’d like to build a list of criteria by which to determine whether a brand will lead to profitable business or not. The three items above are just a start.