Investing in brands - key issues

The process begins with a comprehensive understanding of the category in which the brand competes. In line with this, one needs to understand the margins within those product categories. For instance, a premium category will have very different margins to those within a lower category.

The next important question for investors to ask themselves is whether the nature of the brand holds potential for added value in the future. This might involve the expansion of the brand's range through the introduction of complementary products. Brands that offer little or no future value are an investment choice to avoid.

Measuring affinity

Brand affinity is not easily measured but there are key indicators, which potential investors can use to determine how valuable a brand's image is. It is necessary to consider how long the product has been on the market. A brand that has been around for 30 years is likely to hold more value than one that has only been around for two.

Competitors and the environment in which the brand operates are also important areas to research. A brand that stands alone in its category has less brand affinity than one that exists in a highly competitive category where very similar products are competing, yet remains the brand of choice amongst consumers.

With particular reference to a brand's sustainability, watch for products with the potential for innovation. A brand can never afford to remain dormant; a sustainable brand should be able to reinvent itself on a continual basis, increasing the ways in which it adds value.

An immediate warning comes with brands that exist in a highly competitive market where there is no scale for growth, therefore rendering the brand virtually unrecognisable. Stay away from investing in brands that have a very low market share in a category with many competitors.

Meeting investment goals

Beyond the value of the brand, it is also necessary to focus on one's own investment criteria and the reasons behind one's potential investment. Some investors are specifically seeking out a product that will complement their current range of products and others are looking for a specific category of product. It is important to note whether a brand fits in with one's goals and objectives.

Determining the potential value of a brand is just one step in a series of functions that need to be performed before deciding to invest in a brand. It is extremely important to understand the financials behind a brand as well as perform manufacturing due diligence. This relates to what it takes to produce the product, including the materials or ingredients it uses.

If after a thorough investigation, one finds that the brand is a questionable investment, rather steer clear and invest one's money in a more reliable product. However, if the brand passes all of its checks with flying colours and one does decide to invest, remember that it takes a significant amount of time to establish a brand. Consumers have to learn to trust one's brand and that takes time. Investors need to be patient when measuring results.