Limits To The Power of Branding?

Posted by Davy on August 6th, 2009 in Worth Reading (links to articles, etc.)
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Value investors are very familiar with Warren Buffett’s fondness for strong brands (American Express, Coke, See’s Candies, etc). Today’s Wall Street Journal carries an article that suggests Americans’ financial troubles may loosen premium brands’ hold on their consumers.

P&G Turns To ‘Basic’ To Fight Downturn

Proctor and Gamble (PG) practically invented consumer branding — for them to concede to the extent of releasing a watered-down, cheaper version of their flagship product, Tide laundry detergent, may portend a shift in American consumption patterns. Or perhaps Americans will resume our spendthrift ways once the economy recovers. Stay tuned.

2 Responses to “Limits To The Power of Branding?”

  1. HelicalZz Says:
    August 7th, 2009 at 6:01 am

    Davy,

    A partial concession. So yes, the ability of a strong brand to command a premium price is affected, but P&G is still relying on brand visibility to separate its products from the herd.

    Zz

  2. Davy Bui Says:
    August 11th, 2009 at 8:06 am

    Hi Zz,

    I’m reminded of Walter Schloss’ comment about how Warren Buffett really understood businesses but Schloss didn’t so he couldn’t do what Warren does.

    Also, Bruce Greenwald does an interesting job of dissecting Mercedes Benz’s brand — which has pretty high recognition and commands a premium price but didn’t generate profitability.

    Anyway, I don’t have any basis to judge the stickiness of Tide’s branding power. I do think it’s interesting that both Buffett & Bill Gross from PIMCO, among others, suggest that there’s a new, lower level of “normal” for the economy and the stock market. How that affects companies like P&G, Coke, or even some of the luxury retailers is an interesting mental exercise for investors. At what point does wage deflation drive consumers into generic goods vs. the premium brands? I think we’ve already seen some of this in food retailing as the store brands challenge the Krafts, General Mills, etc for cut-back consumer dollars.

    Anyway, I’m not saying it kills the PG investment story (which is too expensive for my taste), just food for thought.

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