Brand Power Gives Consumer Goods Firms an Edge

UK-listed companies such as Diageo and Reckitt Benckiser possess significant competitive advantages through their well-known brands

Michael Waterhouse 20 October, 2017 | 11:21AM
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Dettol sprayIntangible assets are the most common source of competitive edge in companies analysed by Morningstar. They include brands, intellectual property patents, proprietary technology, and are often protected by regulation. Intangibles generally create a pricing premium through brand familiarity or by meeting complex customer needs, or by limiting competition through patents or regulation.

Our equity analysts attribute an intangible asset moat – or competitive advantage - to approximately 500 companies, or around one third of our coverage, which towers above the 25% to which we assign a cost advantage, 20% for switching costs, 13% for efficient scale, and just 7% a network effect.

Brand power occurs most often in business-to-consumer world and can be the strongest antidote to the growing threats to the large consumer brands posed by private-label and niche products. When measuring brand strength, we look for evidence of pricing power. For patents, exclusivity represents a clear competitive advantage. Investors should focus on duration, diversification, and types of patents as well as the health of the product pipeline – a notable factor in the pharmaceutical industry - and disruptive threats.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Diageo PLC3,613.50 GBX-0.43Rating
Imperial Brands PLC1,582.50 GBX0.22Rating
Unilever PLC3,893.00 GBX-0.64Rating

About Author

Michael Waterhouse  Michael Waterhouse is a healthcare equity analyst with Morningstar.