Like quality management, brands are valuable to a company, but nobody is quite sure how to value them in cold, hard dollars. To that end, investors may want to consider the work done by London advertising giant WPP and its assessment of the most valuable brands in the world. As valuable brands often lead to above-average returns on capital and superior long-term stock market performance, the value of a company's brand is no trivial detail.

TUTORIAL: Investing 101

A Few Surprises at the Top of the List?
One of the highlights of WPP's latest report on brand value was that Apple has taken the top spot, surmounting Google. Honestly, it seems a bit of a surprise that it took Apple this long to ascend to the top spot, as the iPod, iPhone and iPad, and Apple's retail stores have been grabbing headlines and cover stories in business and tech media for some time now. Be that as it may, WPP assessed Apple's brand value at $153 billion, clearly putting Google and its $111 billion in the rear-view mirror. Perhaps even more surprising was that WPP's estimate of Apple's brand value jumped 84% from the prior year. (For more, see Can You Count On Goodwill?)

It was also interesting to see that the number three, four and five spots went to IBM, McDonalds and Microsoft, respectively. Coca-Cola is number six, while Disney appears nowhere in the top 10. Other anomalies include Wells Fargo appearing higher on the list (16) than Visa (20), American Express (40) or MasterCard (60).

Luxury goods companies, which really are all about image and brand value, also fared worse than many might assume. Louis Vuitton appears just outside of the top 25 (and ahead of Toyota), while Mercedes closes out the top 50; other names, like Porsche and Hermes, are further down the list.

Not Just About the Western World
One thing that jumps out from the list is the growing significance of brands whose companies are based in emerging markets. About 20 of the names on the list are from BRIC countries, with companies like China Mobile, ICBC, Sberbank and Petrobras making the cut. Though there are relatively few emerging market brands that are popular with American consumers (Samsung and LG, for instance), it may not be long before companies like HTC, Bimbo or BYD become recognizable to many people. (For more, see Introduction To Asian Financial Markets.)

What Does a Good Brand Mean?
Some may wonder how a brand could possibly be worth tens of billions of dollars. After all, aren't they simply the byproduct of repetitive (if clever) marketing tricks designed to exploit a gullible populace?

In point of fact, brands hold value because they can be good proxies for quality and credibility – people who may know little about cars still seem to realize that Mercedes makes good vehicles, and likewise people who go through the doors of a McDonalds know exactly what they are getting. Over time, people process consistent positive experiences with a brand and develop loyalty to it – loyalty that can often withstand price hikes or momentary lapses in quality or customer service.

Brands also seem to work a particular (if not peculiar) magic on some people and worm their way into their self-identity. Consider the "I'm a Mac" ads and how they traffic on identifying Apple customers as cool; it's a theme that Apple works very hard to weave throughout their stores and their product design. A lot of people like to think they're cool, Apple's products sas you're cool if you use Apple, so there's psychological reinforcement to being a loyal Mac customer. The same is true of many other brands – owners of Porsches and Harleys may try to argue convincingly about the mechanical advantages of the machines, but the real appeal goes well past the nuts and bolts. (In this article we discuss how advertising works to fortify a company's competitive advantage. For more, see Advertising, Crocodiles and Moats.)

Good Brands Don't Try to Be All Things to All People
It is also interesting to see how brands do not have to be especially all-encompassing to be successful. Apple does not try to appeal to all consumers, and Apple's marketing staff is probably aware that there are people who violently dislike Apple and take pride in buying anything but Apple. Likewise, Wal-Mart is no doubt aware that there are customers who would rather go without than be seen shopping in a "value-priced" retailer, but there are millions more who simply want to make their paycheck go as far as possible and appreciate the no-frills, low-cost approach.

Brands Matter
Even if investors wish to take issue with the particulars of how WPP estimates brand value, the fact remains that brands do have value. There is not nearly enough difference in taste between Coca-Cola and Pepsi to explain the discrepancy in valuation, and many of the companies with leading brands post significantly higher returns on capital (as well as more consistent results) than their industry peers. With every year those positive differences in returns accumulate and over time the companies with valuable brands generally produce meaningfully better market returns.

None of this means that investors need to ignore or avoid companies that do not or cannot build a brand around their business. What it means, though, is that investors cannot and should not just limit their analysis to trailing sales, book value and other easily quantifiable fundamentals. There may well be a lot of fuzziness in the valuation of intangible assets, but there is little doubt that a prestigious brand is often all that stands between two otherwise indistinguishable goods and between a super stock and a run-of-the-mill investment. (For related reading, see Intangible Assets Provide Real Value To Stocks.)

Related Articles
  1. Professionals

    Why Advisors Must Create a Mobile Strategy NOW

    Mobile devices will replace laptops and desktops. Financial advisors must deal with this revolution to ensure their marketing strategies are up to speed.
  2. Entrepreneurship

    Why Every Small Business Needs A Website

    The reality of living in the twenty-first century is that customers find business information and product offerings predominantly on websites, and small businesses without an online presence ...
  3. Entrepreneurship

    5 Ways to Make Money on Twitter

    Find out how people are making money online on Twitter, and get some ideas that can turn Twitter into a source of revenue for you or for your small business.
  4. Investing

    Ad Blockers Could Spell A Boom For Publishers  

    In a free content world, largely subsidized by advertising, ad blockers can eat into publishing revenues. But, publishers can still stand to gain.
  5. Insurance

    Best Ways to Find Life Insurance Leads

    Learn about some of the most effective ways life insurance agents find leads. Understand the pros and cons of company leads, third-party leads and networking.
  6. Investing

    How is Programmatic Advertising Changing Media?

    Understand what programmatic advertising is as well as the technology that drives it. Learn about the top four ways programmatic advertising is changing media.
  7. Professionals

    Tips on How Advisors Can Tap a Niche

    Most advisors know that marketing is key, but knowing how to market to the right audience is not always evident. Here are some tips.
  8. Economics

    What are the Four Ps?

    The four Ps of the marketing mix are product, price, place and promotion.
  9. Professionals

    How to Create a Professional Brand on Facebook

    Facebook isn't going away, which means you can't ignore it. Because of it's size, it can be a great venue to build a professional brand and get noticed.
  10. Investing News

    Brazil’s Sovereign Debt Downgraded by S&P

    Standard & Poor’s Ratings Services downgraded Brazil’s sovereign debt from their hard earned investment grade in 2008 (BBB-) to BB+ (junk grade), dealing a major blow to the existing government’s ...
  1. Is a financial advisor allowed to pay a referral fee?

    A financial advisor is allowed to pay a referral fee to a third party for soliciting clients. However, the Securities and ... Read Full Answer >>
  2. How does a long tail become profitable?

    A long tail becomes profitable because the costs to produce, market and distribute a product or service in a niche are low, ... Read Full Answer >>
  3. How do companies with a large product portfolio use BCG Analysis?

    BCG analysis is used to evaluate an organization's product portfolio in sales planning and marketing. It is specifically ... Read Full Answer >>
  4. What are the similarities between product differentiation and product positioning?

    Product differentiation and product positioning are important elements in a marketing plan, and most marketing strategies ... Read Full Answer >>
  5. Why is product differentiation important in today's financial climate?

    Product differentiation is essential in today's financial climate. It allows the seller to contrast its own product with ... Read Full Answer >>
  6. What are the major categories of financial risk for a company?

    There are many ways to categorize a company's financial risks. One possible perspective is provided by separating financial ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!