Building a moat around your business is a lot like building a moat around your castle -- it's a great way to protect your assets and keep intruders at bay. Although there are many different ways to build a moat, a brand moat is one of the strongest.
What is a brand moat?
A brand moat is simply an economic moat strategy that's developed around the concept of branding. A moat is something that's unique about a business that can't be reproduced easily. Although most businesses like to think they have unique branding, most really don't.
So, when you build a brand moat, you're building a strong brand with a clear identity that isn't going to appeal to just anyone. It appeals to who it appeals to, and it sells the fantasy of a specific lifestyle or other benefit, often with the side effect of creating hardcore devotees for life.
Overview
What is a brand?
Many people think of a brand as a name of a company -- maybe a logo and a color scheme -- so it's understandable that many people starting new businesses think simply having these things gives them a brand moat. Unfortunately, there's a lot more to branding than meets the eye.
For a brand to really thrive, it has to be unique, and that doesn't just mean hiring a graphic designer vs. going with clip art for package design. A unique brand is intangible, but it goes well beyond the basics.
Brands are a feeling you get when you think of the company. Brands are a certain kind of aspirational thinking that makes you feel special or like you're part of a group. Brands are something you can bond over across generations, because they've been so steadfast and constant that you know you can still rely on them to deliver the same benefits they gave your grandparents. Brands are timeless and unbreakable and comfortable and familiar.
Examples
Some examples of strong brand moats
There are plenty of great brand moats out there right now, but some are certainly better than others. For example, in the world of sportswear, you've got companies like Nike (NYSE:NIKE), Converse, and Puma; in the lifestyle segment, you've got Harley-Davidson (HOG 1.37%), Starbucks (SBUX -1.39%), and KitchenAid. For clothing, there are retailers like Doc Martens and Levi Strauss (LEVI 0.26%). The list goes on and on.
Every one of these brands is a common household name, and one that is immediately identifiable with a specific feeling or type of image. Tough guys ride Harleys, domestic goddesses use KitchenAid appliances, soccer moms are living the Starbucks life, and punks wear Docs.
Why they matter
Why do brand moats matter to investors?
The uniqueness of brands with moats makes them difficult to touch in the world of business. Most companies with brand moats have been in business for a long time, building their brand into a ubiquitous image that cannot be shaken from the popular imagination. Cola is cola, but Coca-Cola (KO 0.02%) is summer, you know?
For investors, identifying strong brand moats is one way of choosing companies that will stand the test of time, since generations of customers have come to know and love what the companies have to offer, and they believe they can rely on them into the future. This often creates a situation where customers are paying premiums simply for the branding, and that also helps shareholders.
Choosing stocks from companies that you know and that you use in daily life is one way of tapping into the power of a brand moat. Compare these to the nearest competitor and see just how far apart they truly are. That's not to say that a competitor without a brand moat can't make money or that they can't be a profitable investment. But, there is something more durable about companies with brand moats that have stood the test of time.