GAMAX Management AG: How to Avoid One-Hit-Wonders in the Portfolio

Investing in strong brands

GAMAX Management AG: How to Avoid One-Hit-Wonders in the Portfolio

Strong brands have two advantages: The loyalty of their customers and their willingness to pay higher prices. This enables them to generate reliable earnings even in difficult market phases and makes them particularly interesting for long-term and safety-oriented investors. But even for popular brands, the success of the past is no guarantee for the future. Gamax names four factors that indicate why a well-known brand could also be a promising investment.

1. Do not underestimate the value of good brand management

Without continuous care, even the most famous name will be forgotten at some point. This means: If a company invests insufficiently in marketing over a sustained period or tries to improve profits in the short term through drastic savings in marketing spend, long-term investors should be vigilant. This is particularly true in fast-moving and highly competitive industries such as consumer goods and cosmetics. However, excessive marketing costs are a warning sign in the long run, as they not only drag on margins, but also indicate that the products may not be sufficiently competitive. One example of this is Crystal Pepsi from the 1990s which, even after several relaunches, failed to satisfy customers’ tastes.

2. Old brand love does not rust

If a company manages this tightrope act, a brand can thrive across entire generations of consumers. This can be a major advantage in many industries, because a living heritage creates trust and gives meaning to old brands in the consciousness of younger consumers. For example, the Beiersdorf brand Nivea is so firmly anchored in the perception of many Germans that the brand from 1911 was still recognised as the best product brand in the Best Brands Ranking in 2018. Since Beiersdorf entered the DAX at the end of 2008, its share price has climbed steadily by 150 percent plus dividends.

3. Brands that stop are left behind

However, no brand should rely on the glamour of the past. Only those companies that adapt themselves and their products will survive in the long run. Especially for technology-driven industries, innovation is a must so as not to fall behind. This can mean actively advancing new technology, but also reacting to disruptive trends in good time – if necessary, having the courage to change the entire business model. A famous negative example is probably Kodak, whose engineers built the first digital camera in the mid-seventies. However, the company did not use the disruptive potential of the new technology and stuck to color film. The former market leader finally filed for bankruptcy in 2012.

4. Reinventing what is well known is the key to success

In other areas, however, the focus is more on product variations. For example, Nestlé's KitKat bar is available in Japan in flavours such as wasabi, matcha tea or sweet beans. Customers in Germany usually only have the choice between white or dark chocolate. However, adjustment to trends must not dilute the brand identity. One example is Puma, which had placed great emphasis on fashion and was very successful with that in the short term. However, the profile of the sports brand suffered, and customers stayed away when the trend finally reversed. To overcome the crisis, Puma has invested heavily in marketing, a sharper brand image and new products. Investors also seem to have renewed confidence in the traditional German brand: The share price, which reached a low of less than EUR 150 in mid-2015, temporarily climbed above EUR 500 in May 2018.

Avoid one-hit wonders in the depot

The brand world is becoming increasingly fast-moving, thus making it more difficult for investors to know which companies will be successful in the long term or who only benefits from short-term hype. That is why Gamax Junior pays particular attention to whether a company is reliably able to change with its customer. "We are looking very closely at changing advertising plans and product pipelines, as trends can no longer be used as long as before," says Brian O'Rourke, fund expert at Gamax. Company visits and regular meetings with management also play a central role in the investment process to distinguish between lasting brands and more transient offerings.

Read the original article in German here