The Power of Brands

Posted on 08/06/2011

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Yesterday, after what felt like a couple of hours of trying to scratch my eyeballs out of their sockets, I decided it would be sensible to make my annual purchase of anti-hayfever tablets.  Arriving at the local supermarket, I found a number of branded and unbranded products on sale.  The two leading branded products in the UK are Clarityn (owned by Merck) and Benadryl (owned by Johnson & Johnson) and were both on sale, each for £3 for 14 tablets containing 10mg of the active ingredient, Loratadine.  However, there was a also supermarket own-brand packet of tablets that cost £1.50 for 28 tablets (manufactured by Galpharm, part of Perrigo Company) also each containing 10mg of Loratadine.  Given that the tablets are chemically-identical, consumers purchasing the branded versions are effectively spending 4x the price of the unbranded version for no additional benefit.  The only difference was that the branded products have design-heavy packaging and a name recognisable from TV adverts, while the non-branded version came in packaging of which a United Nations food-drop would probably be embarrassed.

For me, this provides a fantastic example of the power (and value) of branding within the consumer goods industry.  Here we have identical products where the branded version can earn a 300% premium over its unbranded competitor simply for assumed “quality” benefits that don’t actually exist.  It doesn’t take a smart analyst to notice that if consumer goods firm can extract premiums such as these where the goods are identical, they can do similar things in the case of goods that have genuine differences or provide consumers with intangible benefits such as status signalling (more on that here).  This supports the argument that strong brands should be worthy of a premium to equity investors as this helps build competitive advantage which enables their owners to generate high returns on equity over a long period of time.

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Posted in: My Thoughts