When A Company Has No Brand Power

There are three dozen companies that spend over $1 billion per year on advertising. If you are a sports fan, you might assume that Anheuser-Busch is the largest advertiser in the world, though it actually comes in the $21 spot with an advertising budget of $1.5 billion. The giants in the industry have been AT&T, Comcast, Verizon, and General Motors, with budgets between $2.5 billion and $3 billion. The true giant in the sphere is actually Procter & Gamble, mostly because it has a diverse constellation of brands that need constant brand equity upkeep, and P&G spends $5 billion per year raising product awareness for customers. It spends over $2 billion per year on TV ads.

There is a lot to learn from studying advertising budgets, as you can learn a lot about effectiveness when you see American Express spend 4x as much advertising to consumers as Visa does, yet Visa grows at almost 4x the rate of American Express.

Ever wonder why companies do this? Because if a company loses its brand equity, then there is no reason to pay a slight premium price for the product over a generic, and the overall business becomes nothing more than a commodity. This is how a business stops creating wealth for shareholders.

A case study of Chiquita Banana can illustrate the point. Back in the 1940s, the United Fruit Company invested heavily in Chiquita Banana advertisements that showed up exclusively in movie theatres, gradually creating a customer base that would memorize the song, singing it to themselves in a somnambulant state without realizing the brand equity that Chiquita Banana was building in their minds.

People today look at the mighty power wielded by ExxonMobil (read the book “Private Empire: ExxonMobil and American Power” when you get a chance to see what I mean) across the world or Coca-Cola in the South and think that is the pre-eminent example of global dominance, but the true prototype is the United Fruit Company (along with the Standard Fruit Company n/k/a Dole Foods) that established plantations in Southern and Central America to sell bananas and other tropical fruit in the United States. They were so dominant they became the origin of the phrase “banana republic” to explain their inordinate influence over third-world governments in Guetamala, Costa Rica, and Honduras.

Between 1899, and 1984, the United Fruit Company was one of the best investments in the history of the world, compounding at 18.5% returns. Cheap food, strong brand equity to charge a premium, and the constant repetition of sales can create wondrous consequences for shareholders. One dollar invested into United Fruit in 1899 grew to almost $6,000,000 by 1984 (inflation adjusted, we are talking about a $75 initial investment in modern times).

Even after Carl Lindner Jr., a businessman from Cincinnati, took United Fruit Company and transformed it into Chiquita Brands International, the business still boomed. The $0.704 dividend remained steady throughout the 1990s, and shareholders got to collect 3-4% of their purchase price as earnings gradually increased at a mid single digit pace. The dividend freeze, and moderate earnings growth, was the result of a deteriorating business. Like Nabisco Foods in the days after Adolphus Green, Chiquita Brands International lived off the glory of the past, collecting profits and dividends without investing in advertisements to maintain the Chiquita Brand name with the younger generations. With generational turnover, Chiquita’s profits eventually disappeared. The company, once on the Top Ten list of most dominant in the world, filed for Chapter 11 bankruptcy on March 19, 2002. The years of constant reinvestment into the stock would have wiped out your entire investment.

There were warning signs beyond the frozen dividend, which acted as a heuristic for the company’s troubles. Throughout the 1990s, profits fluctuated wildly. You’d see $900 million profits in 1992 become $400 million losses by 1994, before yo-yoing to $800 million in 1997 profits. By 1999, profits disappeared and the company remained in the red until its bankruptcy filing.

This is why investing always has a forward-looking component to it. This is why shareholders shouldn’t wail about advertising costs being a waste of money (though, of course, you are free to criticize the effectiveness of a particular advertisement or whether the advertising budget amount is appropriate given market size and attainable company projections). If the cost-cutters from 3G axed Anheuser-Busch’s advertising budget by 90%, I would become very concerned about an Anheuser-Busch investment (I’d probably start diverting all dividends and take five or so years to make a decision, as brand deterioration from lack of advertising usually takes a decade or so to create significant harm.)

It’s also important for companies to keep in mind payoffs that don’t immediately manifest themselves. Who knows if seeing an All-State commercial takes ten years to manifest itself, for a teenager to treat it as his first-stop option when starting a family and looking for insurance. Advertising doesn’t always bring immediate results, and companies shouldn’t neglect the aspects of business that don’t immediately show up on the next quarterly earnings report.

It is, as Munger says, one interconnected mess. I am generally skeptical of the claim that you can make do with less, and the notion that cutting advertising or research & development budgets can be in the long-term interest of the business is not an argument I find persuasive. Who knows what blockbuster drug Pfizer could have invented, but did not, because it cost the costs of research and development to appease shareholders in the short term?

With consumer companies, brands are built through advertising and word-of-mouth, and maintained through advertising and dedication to quality (or, at a minimum, meeting market expectations). People often buy a product because they think “This is what people like me do” or “This is what my family has always done.” That cycle gets started through advertising, and the abandonment of corporate advertising can turn a consumer brand into a commodity business. The decline of Chiquita banana can be traced to a cessation in brand building. There is always more to the story than the next quarterly earnings report.