V14: Brand & Customer Loyalty — how to analyze it

Strong brands = pricing power = higher margins = higher ROE. Apple, Coca-Cola, Nike. A brand is the moat that is hardest to build but strongest once it exists.

This is V14 — Brand & Customer loyalty in the AKM1 model: one of the 20 variables that together determine whether a company is an institutional quality stock or a company of stories. In this article you get the variable explained, how to calculate it yourself, and how three of history's greatest investors would have interpreted it.

Why the variable exists

The origins of the brand can be traced to antiquity. Roman bakers marked their bread with unique symbols (1st century AD) to distinguish themselves from competitors. Medieval guild requirements (1100-1500s) forced craftsmen to mark their products — so defective goods could be traced to the maker. The modern brand system was born with industrialization in the 1800s — mass production required differentiation. Coca-Cola (1886), Lipton (1890), Heinz (1869) were early brands built on national distribution + consistent quality + advertising. In Sweden, brands such as Volvo (1927), Electrolux (1919), Atlas Copco (1873), SKF (1907) were founded during this period. The early 1900s saw 'brand building' as a discipline — ad agencies (J.

The power of the brand — the moat's art of patience

What is a brand, really? A brand is not a logotype or a name — it is the sum of all the associations that consumers (or B2B customers) have around a company, a product, or a service. When someone hears 'IKEA' they think of: flat packages, Swedish design, low prices, assembly, meatballs, family outing. When someone hears 'Volvo' they think of: safety, Swedish quality, heavy, reliable. When someone hears 'Atlas Copco' (B2B), an engineer thinks of: quality, precision, expensive, reliable. These associations are the brand. They take decades to build and can vanish in weeks during a crisis. The brand is the moat in its most subtle form — it is not legally protected like a patent, but it is cognitively protected. Customers CHOOSE the brand again and again, even when cheaper options exist. This is 'pricing power' — the ability to charge a higher price than competitors without losing customers.

Measuring brand strength in practice

Finding brand data in the annual report A brand is hard to measure directly — it is an intangible asset that is partly booked and partly not. Three places to look. First: the balance sheet under 'Intangible non-current assets' — the line 'Brands'. When a company acquires another company, the acquired brand is booked at market price (e.g. Amazon bought Whole Foods for 13,7 bn USD of which ~1 bn USD was the brand). Internally developed brands are NOT booked — they are 'hidden value' in the balance sheet. Coca-Cola's brand is worth ~80 bn USD according to Interbrand, but book value is only ~5 bn USD (acquired brands). The difference = hidden brand value. Second: the CEO statement and investor presentation — look for 'brand health metrics', 'brand awareness', 'customer satisfaction', 'NPS'.

Brand traps — illusions and erosion

Brand erosion — the silent killer A brand can erode slowly over several years without anyone noticing. Three warning signals: 1) falling NPS over time — if NPS drops from 65 to 55 to 45 over 3 years, the brand is under attack. 2) shrinking premium price — if the company must cut prices to hold volume, pricing power has weakened. 3) changed customer demographics — if loyal customers switch to younger or older segments, it indicates brand shift. A classic example: H&M 2015-2018. NPS fell from 60 to 45, the premium over Primark fell from 25% to 10%, loyal customers moved to Zara. The brand eroded — but the company still believed they were 'fashion giants'. The share fell from 360 SEK (2015) to 150 SEK (2018) — 58% value destruction. Another example: Nokia 2007-2013.

Three perspectives on brand & customer loyalty

Peter Lynch: Lynch loved brand moats. In 'One Up On Wall Street' he argued that 'a brand people love is worth more than a factory'. He mentioned Coca-Cola, McDonald's and Johnson & Johnson as the examples. Lynch's rule: 'If people pay 30% more for your brand than for a generic copy, you have the moat.'

Benjamin Graham: Graham saw brands as a form of goodwill. He adjusted the value down due to the difficulty of measuring. Graham preferred measurable assets (factories, cash) over intangible ones (brands). But he acknowledged that strong brands provide 'earnings power' that lasts longer than patents.

AK1's interpretation: AKM1 weight 5%. The brand is assessed in three ways: (1) pricing power — can the company charge a premium price?, (2) customer loyalty — how high is churn?, (3) brand awareness — awareness in the target group. AKM1 combines V14 with V07 (gross margin) — a strong brand + a high gross margin = genuine pricing power.

Go deeper

From brand recognition to moat architecture

Want to practice with worked examples, chapter by chapter? The course Brand & Customer loyalty (V14) contains 6 chapters, the Lynch and Graham perspectives, and how AK1 uses the variable in the wave matrix. See also the complete guide to Swedish stock analysis for how all 20 variables fit together.

FAQ

What makes a brand a competitive advantage?

A strong brand gives pricing power — the ability to charge more than competitors without losing customers. When customers choose the brand again and again despite cheaper alternatives, as with Apple or Coca-Cola, the company's margins are protected in a way that neither factories nor patents can achieve. The brand is cognitively protected: it lives in customers' associations rather than in statute, and can therefore outlast a patent — but also vanish faster in a crisis.

How do you measure brand strength in practice?

The brand is partly hidden in the accounting — internally developed brands are not capitalised, so Coca-Cola's brand is booked at only a fraction of its estimated value. Look for indicators instead: pricing power (can the company charge a premium?), customer loyalty (low churn, high revenue retention), NPS and brand awareness in the CEO statement and investor presentations. AKM1 combines the brand assessment with gross margin (V07) — a strong brand together with a high gross margin suggests genuine pricing power.

What is brand erosion — and how do I detect it?

Brand erosion means the brand's power quietly weakens over several years. Three warning signs: falling NPS over time, shrinking price premium (the company must cut prices to keep volume) and shifting customer demographics. H&M's development in 2015–2018 is a classic example: satisfaction scores fell, the premium over low-price competitors narrowed and loyal customers switched to Zara — the brand eroded while the company still saw itself as a fashion giant.

Is a strong brand always better than other moats?

No — every moat has its own nature. Patents are legally strongest but expire; network effects grow stronger with size; brands are the hardest to build because it takes decades, but can last for generations. Peter Lynch disliked relying solely on patents precisely because they are time-limited, while Benjamin Graham preferred measurable assets over intangible ones. In an educational context, the point is to identify which type of moat a company has — and whether it holds over time. The course Brand & Customer Loyalty (V14) shows how.

This is educational financial analysis, not investment advice.