With market share, the goal to be and stay number one can be a great growth driver. Companies that have mastered brand loyalty offer some of the safest investments with the best profit and growth prospects available.
This means better returns for investors with the added protection from economic downturns. Of course, most companies don’t have the marketing strategy figured out to grow brand loyalty.
As investors, we should avoid companies with little to no customer loyalty. But when we do come across a company that has built a growing loyal customer base, it’s worth a second look and possibly an investment.
Defining Brand Loyalty
The American Marketing Association defines brand loyalty as:
1.The situation in which a consumer generally buys the same manufacturer-originated product or service repeatedly over time rather than buying from multiple suppliers within the category. 2.The degree to which a consumer consistently purchases the same brand within a product class. – AMA
As investors, we want to find companies that people are choosing of their own free will. Given two or more options, people will always buy Company A. These are the brands that people will buy for life, tell their friends and family about, and act as human billboards. If it happens often enough, the company builds a consistent loyal base that grows exponentially.
It may sound obvious, but these are companies worthy of an investment. Loyal, repeat customers provide consistent, stable, long-term profit growth. The stocks of companies with high market share and brand loyalty provides safety that other stocks just don’t have. The customer loyalty provides added protection during an economic downturn and spurs growth afterward. This economic moat adds a margin of safety for your invested dollars with the benefit of long-term growth.
Signs Of Brand Loyalty
There are several characteristics of companies with high brand loyalty. Their products and services tend to have:
- perceived value
- brand trust
- customer satisfaction
- repeat purchase behavior
- competitive advantage
- pricing power
All of these provide happy, long-term repeat customers even in the face of higher prices. But it must be maintained to hold on to those customers. Companies that understand the power of brand loyalty consistently outperform the S&P 500 over the long-term.
And Now The Companies
Companies that control market share in growing industries can offer safety and gains for years. They have a built-in competitive advantage due to the high quality they place on the customer and their products and services.
Take Microsoft or Intel. Both of these companies controlled market share in the PC market. They still do. But back in the early 90s, the computer industry was a young, fast growing space. If you had noticed this trend from the beginning, invested in both companies, you would have seen huge gains.
There are other examples, too:
- Coca-Cola (KO) – The king of marketing and brand awareness. What once was considered a special treat has grown to be one of the biggest marketing successes ever.
- Disney (DIS) – You could probably throw Disney right up there with Coke. Disney is marketing machine. ESPN is one of the fastest growing networks ever and the consistent branding expertise Disney has shown over the years has kept the company on top for decades.
- Harley Davidson (HOG) – when you think of motorcycles, you think Harley. It’s all in the image which has been created, for the most part, by its loyal customers over multiple generations.
- Phillip Morris Int. (PM) – yes, cigarettes. The cigarette companies practically invented marketing and Phillip Morris is the international arm of the once global company. Altria (MO) being its US market sidekick. Both have great customer loyalty. Phillip Morris is still in its growth phase, while Atria is the mature company.
- Apple (AAPL) – has had a mainstay of diehard fans since the beginning. With its recent rejuvenation with such products as the iPod, iPhone, and iPad, Apple has produced another generation of loyal customers for the foreseeable future. It’s the perfect example of pricing power.
- Whole Foods (WFM) – it’s hard to put any store on the list, much less a grocery store. But Whole Foods has gone beyond the typical grocery store chain and carved out a niche as the leader in organic, good for you, fresh food. They charge a premium for products and people are willing to pay up for that organic label.
- Starbucks (SBUX) – who thought coffee was such a big business. Starbucks has built itself into the premium coffee seller and easily recognizable. Globally, they amount to only 1% of all coffee sold.
All of these companies have steadily built a loyal customer base in similar ways. They all provided great investment opportunities. And they all continue to expand into new markets growing their market share and loyalty.
A strong brand grows and holds market share. Even when it raises prices. As investors, we should look for companies that have a history of brand loyalty in their industry. These brands provide added safety along with certainty, stability, and consistent cash flow growth for decades. They are a long-term investors dream, producing profits year in and year out.