Branding and Starbucks' New Logo

Starbucks recently decided to modify their well-known logo, dropping the Starbucks Coffee border, enlarging the emblematic siren/mermaid, and making it all Starbucks green.  They're attempting to "modernize" the image and allow for the possibility of introducing non-coffee items in the future under the Starbucks brand as well as providing more emphasis on the fact that their products can be found in supermarkets and other settings besides its own retail stores.
Source: CNN Money, courtesy of Starbucks

There has been a backlash from some Starbucks aficionados as some are hesitant to change, especially when it has remained the same for the past 20 years.  Some like the new design, though, and the backlash is nothing compared to Gap's similar decision a few months ago, wherein they eventually stripped the new logo and reverted back to their original.  In the case of Gap, however, they completed abandoned their brand with the new logo, in my mind.  It was terrible business decision although some speculate it was publicity stunt to simply gain attention and the new logo was never intended to be adopted - to which Gap denies this conspiracy theory. 

Source: CNN Money
Gap's stock performance up to the date of the logo unveiling was down 12% for the year.   A week later, they announced they were dropping it, and its stock has been up 21% since that point through 1/5/2011 (GPS is down a whopping 8% today, by the way).  Obviously, its reversion back to its old logo isn't necessarily why the stock has performed well (correlation and causation are not nearly the same), especially considering competitors like Abercrombie, Urban Outfitters, and J Crew are up similarly over the same period (although American Eagle hasn't been so fortunate).  However, it's always a good thing when you get consumers to think about your brand and its identity (assuming it has been a positive one).  Perhaps bringing the possibility of the change to the forefront in the minds of many individuals, Gap consumers sought to seek out the brand again once it symbolically rededicated itself to its core principles.  While the backlash may have hurt sentiment from a managerial and marketing confidence standpoint, simply getting into the discussion again does seem to reap positive rewards.

Gap's main downfall in the logo decision, in my opinion, was attempting to almost rebuke their old identity.  Changing the font, the color of the font, and the style completely seemed to disregard its existing brand rather then building upon it for the future.  They abandoned the classic identity and thus would potentially alienate existing consumers.  If you have a decently strong brand following, that's the worst thing you can do.

Some argue that the "Starbucks Coffee" text amounted to millions of dollars in free advertising as consumers walk around with drinks in hand - while true, the new logo is readily identifiable (perhaps moreso due to the enlarging of the image) to their intended audience so I don't think the "losing free advertising" argument holds that much water.  Starbucks really doesn't advertise through any paid means (print, TV, etc.) and they don't need to because of the army of consumers that walk around with their easily recognizable products in hand.  Some firms branding is not dependent on being plastered on TV and billboards - much like Five Guys has recently exploded despite not advertising.  Five Guys delivers a product that fulfills a niche - all natural thick Idaho potato french fries and all-beef patties made to order that satisfies the gap in the marketplace between super fast-food fries and burgers and more upscale sit-down restaurants.  They have simply found the neglected niche, made a good product, and delivered results.

Starbucks new logo is similar to Gatorade dropping the full "Gatorade" text on the lighting bolt. Gatorade now simply has a "G" with the lightning bolt, sticking to their identifiable past with the lightning bolt with a simpler G identifying the brand.  (Although I'm not too sure about their branding themselves as "G" when talking about the product in ads - it's a simply a letter, but that's another topic all together as it's unrelated to the logo change).  Starbucks likewise stays true to their roots with the same stylized mermaid, in the same green color, while expanding their markets to possible non-coffee ventures, enlarging the image further to make it even more visible (since there is no longer a border taking up space).  I think the new Starbucks logo will stick for these reasons unlike the Gap one.  Whether the logo change is better than leaving it alone from a business standpoint is certainly up for debate and only time will tell if it stands the test of public scrutiny.

This post isn't investing-related exactly, but relates to business and company branding and marketing.  Obviously, such decisions can have an impact of stock price and public perception so I thought it'd be interesting to mention it.  Plus, I never promised all posts would be directly about investing.  While I still think the vast majority of individual investors are best served by investing in low-cost index funds, those with the desire or inclination to augment their holdings with individual stocks need to pay attention to company reputation, which is certainly affected by branding.  

A company's brand is perhaps its most valuable commodity.  While it certainly must provide a product or service consumers desire - and Starbucks did that by revolutionizing the American coffee house and offering items previously unheard of to the American consumer - the reputation of the brand propels a good business with a good product into a great business.  If Nike all of a sudden developed a new line of Air Jordans that had a defective sole that wore out in less than a month, it would still sell like hotcakes initially simply due to the Nike and Air Jordan brands.  Nike has widespread appeal to their intended (widespread) demographic and have developed a product that has consistently exceeded consumers' expectations.  It also has a "cool" factor, which doesn't hurt one bit.  Based on this historical data, consumers assume the brand will continue to deliver exceptional results.  Eventually, however, a poor product will catch up to the brand and its reputation would subsequently suffer.  That's why maintaining a positive reputation is essential to a good business model as it delivers repeat customers and referrals.

On this note, if you do intend to choose individual companies to invest in, not only must they have a product that others desire, but having a good brand and reputation is key to continued financial and stock price success.  That's why I encourage people to seek "best of breed" companies.  If you're interested in a particular sector - say fast-food industry - one must not only look at the financial statements and valuation metrics, but its general perception among the intended demographic.  If McDonald's and Burger King had the same fundamentals, I'd rather own MCD - its brand is simply stronger at this point in time in my mind.

While I'm certainly not a marketing or advertising expert, I find such business decisions intriguing, and if you invest in individual companies, you probably want to pay attention to how the company is perceived by its intended clients.  I want to emphasize that last point.  A company like McDonald's needs to market its brand to appeal to the masses, in particular to demographics where fast-food consumers are more readily available.  On the other hand, while public perception of a company like Goldman Sachs can have an effect on its stock price, its financial well-being and long-term stock price will definitely be more affected by its financial bottom line and perception of the firm from its more high-rolling clientele.  Goldman Sachs doesn't need to appeal to a 17-year old making minimum wage. 

Of course, a logo is not the only marketing and branding a company does.  But its importance cannot be understated as it's truly the identifier of the firm.  Starbucks gets a ridiculous amount of free advertising simply by consumers being on-to-go with a cup saying "Starbucks Coffee" on the side.  While removing the company name gets rid of this free by-name advertising, the Starbucks mermaid/siren has become so ubiquitous and well-known that Starbucks can pull it off without any adverse affects, in my opinion.   Much like Nike's swoosh - it has a simply elegance where the name is not needed.  People just know the swoosh and that leads to even more allure perhaps.

On a somewhat different topic, I recall an engineering dean talking about reputational surveys and rankings.  She was saying that Georgia Tech could essentially eliminate half of its labs and faculty and people would still rank it highly because of its perceived level of historical excellence over the long-term.  While cutting corners might eventually cost Georgia Tech its reputation as an engineering powerhouse, in the short-term administrators and students would give it the benefit of the doubt due to its established brand.   Brand significance spans beyond the corporate marketing world.

A company's reputation and brand is perhaps its most significant commodity to continued success and growth.  While quantitatively analyzing such a variable proves extremely difficult, I thought it would be an interesting topic to explore in this post.  While financials of a company tell an important story, the public perception of the firm cannot be overemphasized.  If a firm has a bad quarter, but perhaps its due to the recession or in a cyclical sector, as long as its brand is widely recognizable or positioned in such a manner to become that way, I would select it over another competitor all else being equal. 

There is no substitute for a positive reputation and brand.  Building one is key for a company's long-term success.

Daniel Solin at Google

Following is a nice video of Dan Solin, author of The Smartest Investment Book You'll Ever Read, talking to Google employees about individual investing from a few years ago.  It's quite long, but certainly worthwhile if you're just starting out.  Nothing revolutionary, but provides a good framework for those coming up with an asset allocation plan; and keeps it very simple.  I came across it when checking out the Do-It-Yourself (DIY) Investor blog.


Jack Bogle Interview

Check out this interview with the founder of Vanguard, Jack Bogle, courtesy of Money Magazine.  Nothing unprecedented, but interesting nonetheless.  He says it's the most difficult time to invest in his career right now.  Here are two interesting excerpts of Bogle's thoughts.

On the bond bubble:
Bond yields at roughly 3% are so poor it's hard to believe. I wouldn't call it a bubble, though, because if you hold for 10 years you will get that 3%.

 Why indexing works:
Indexing wins whether markets are efficient or inefficient. In an inefficient market, a good manager may be able to win by five percentage points a year over a decade. But by definition, a bad manager must lose by the same amount. It all has to average out. So even if the market is very inefficient, the index will still capture your share of the market return.  So I don't rely on the efficient-markets hypothesis. I go by the "cost matters" hypothesis: Whatever the market returns, on average you will beat your rivals if you lower your costs. And that's what index funds do.
 Here's a video of Bogle talking about his inspiration:

Article: The Evolution of an Investor

This article is over three years old, but its story is quite interesting and its message profound so I thought I'd link to it now.  It's the story of Blaine Lourd, who got rich as a stock broker, but later changed his tune when he realized he was nothing more than a salesman pushing companies for no particular reason other than making money for himself.  He wasn't serving the best interest of his clients.  Eventually, he decided to take action and now only recommends Dimensional Fund Advisors' index funds to his clients.

It's a fairly lengthy piece, but definitely worth the read.  Check out The Evoluation of an Investor by Michael Lewis, the financial journalist who has written for Vanity Fair and The New York Times Magazine as well as published several best-selling books, on

Bond Bubble? My Thoughts

Somebody posed a question regarding the bond market in the comments section of another post, so I thought I'd also clarify my thoughts on that matter in this post as well. There has been a lot of talk about a bond bubble and investors are wary and seeking alternative investments. Is that a wise course of action?

First, I think having the proper perspective on this issue is in order. Even in a doomsday scenario for bonds, the losses would pale into comparison to the potential losses and risk involved with investing in stocks. To further illustrate this point, check out the Growth of $10,000 chart of Vanguard Total Bond Market (VBMFX) courtesy of Morningstar since 1986.  The blue line is VBMFX, while the orange is the average intermediate term bond fund, and the green line is the BarCap US Aggregate Bond Index.

Growth of $10,000 since 1986
Source: Morningstar, Inc.
As you can see, it's been pretty smooth sailing and the volatility of such high-quality bonds is not that grave.  The most severe pullback was the big "bubble" of 1994, which produced a maximum loss of about 4%.   Google Finance reports VBMFX's worst three-month return as -3.00%.  While we certainly could have a historic pullback, previous measures of risk and volatility are indeed helpful.  (Note that the average intermediate-term bond fund pulled back nearly 9% in late 2008 after the MBS mess.  Yet another illustration as to why high-quality index funds are the way to go.  Clearly, too many bond managers took unnecessary risk in the effort to reach for yield).

Compare this total bond fund (blue line) to VFINX (Vanguard S&P 500; orange line) for even more perspective.

Growth of $10,000 since 1986
Source: Morningstar, Inc.
The decreases that were more apparent on the first graph have all but vanished when you compare it to the volatility of equities.  The bumps are nothing but small pebbles on the bond side.  So, while there is definitely risk involved in the bond market (I'm not saying it always goes up), it's important to have the understanding that the risk is still paltry compared to stocks even in this time of low interest rates.

Having said all that, I don't think investors' concerns about the bond market are without merit.  We live in unusual times and find ourselves in unusual circumstances - on the surface, the cautionary tales about bonds at this point in time do seem to have some valid points as we have somewhat "the perfect storm" of conditions that would signal a bond bear market.  

When interest rates rise (and they will undoubtedly rise unless we fall into a similar situation to Japan in the 1990s with low interest rates for a long period), your bond funds will take a hit in the short-term.  The longer duration of the fund, the bigger the hit.   However, as long as you hold your bond fund longer than the average duration, you should still end up ahead of the game and not have to really worry that you'll end up with a loss in the position over the long-term.  In this article from Vanguard, it is suggested that rising interest rates actually benefit investors over the long-term as long as you reinvest your interest income (Bonds and rates: The reality behind the headlines, February 2010).  They provide the following data:

Bond Fund Total Returns (annualized)
           Change in yield                            Year 1                 Year 3              Year 5                Year 7                  Year 10
Rising Interest Rates
Constant Interest Rates
Falling Interest Rates

Source: Vanguard

You can read their assumptions in the attached article.  Essentially, though, they conclude that while falling interest rates lead to better performance in the short-term, consistently rising rates are actually better for long-term performance (7+ years) assuming investors stay the course and reinvest interest income.

They conclude: "[I]f you're holding bond funds as part of your long-term asset allocation, a rise in rates probably shouldn't prompt you to make any changes. Indeed, you can benefit by sticking with the bond allocation that's right for you."

Here are two more Vanguard articles with similar messages and talking about the current bond environment: Should you beware of a bond bubble? (August 2010) and Risk of loss: Should investors shift from bonds because of the prospect of rising rates? (July 2010).  They have much the same message - don't fret about a bond bubble due to rising interest rates since over the long-term the small decrease will be more than compensated for.  They believe that individual investors are best served by maintaining their asset allocation and holding for the long-term, since reinvesting interest income will put you ahead. This is undoubtedly true. If you're a long-term investor, shouldn't you only be concerned with the long-term performance?  

I'll provide a contrarian viewpoint courtesy of the Finance Buff's blog entry You Should Still Beware of A Bond Bubble (August 2010).  He posits that if interest rates go up as expected, bond values will go down. It doesn't matter that the losses are small compared to the potential losses in equities - it's still a loss.  Shouldn't investors actively avoid such obvious potential losses?  And while it's true that reinvesting interest income in your bond funds over the long-term will benefit you in a rising interest rate environment, the Finance Buff argues that the returns would have been even better if you sidestepped the short-term rise in interest rates and invested in bonds at a slightly later time.

I think both perspectives have a valid point.  Interest rates are going to go up; it's just a matter of when. When that occurs, your bond fund's NAV will take a hit. The longer-term duration funds will take a larger hit than the shorter-term ones. Over the long-term, this temporary hit will be compensated by reinvesting interest income at higher rates and you'll end up ahead if you stay the course.

Bonds are held as part of an individual's portfolio to moderate volatility and increase diversification.  Thus, you shouldn't completely abandon your bond holdings nor switch to equities with that allocation under any circumstance. Nevertheless, if you are uncomfortable with potential for short-term losses in the bond portion of your portfolio, I think there are a couple viable alternatives. 

First, you may elect to shorten the duration of your bond holdings.  Instead of selecting a Total Bond Market Index fund (VBMFX has an average duration of 4.7 yrs), choose a short-term index like VBISX (2.6 yrs). This will cut the potential for short-term losses in about half.  (Obviously this comes at the expense of expected returns. There is no free lunch.)

For more information on how bond prices interact with interest rates, see this bogleheads article: Bonds: Advanced Topics - Duration

"For example, a bond with a duration value of 5 years would be expected to lose 5% of its market value if interest rates rose by 1% (100 basis points)."  Thus, while the total bond fund might lose 5% of its value, the short-term index would lose only 2.5%.  These figures are not exact and for illustrative purposes as there are other factors that can affect such an outcome.

Secondly, you may choose to use CDs as an alternative to your bond position. This is what the Finance Buff suggests.  You could also use a combination of short-term bonds and CDs.  I think that's a reasonable course of action.   Or even all three positions if it's a significant sum of money - keep a total bond, short term, and CDs.  Spread your money across the strategies.

In the end, while the above two options will probably reduce the chance for a significant short-term pullback and you'll be less affected by the potential "bubble," you will not be able to time it perfectly as to when to get back in the bond market. Thus, you'll miss some opportunity and whether you come out ahead (when compared to simply sticking with your previous asset allocation to total bond) will largely be determined by luck.

Thus, if you're simply interested in your long-term performance, it probably makes the most sense to stick to your asset allocation plan. If you're concerned about short-term volatility in the bond market and have discipline to jump back in, it's reasonable to shift to shorter durations and/or CDs and then re-assess this position as time goes on. Will you come out ahead of the other strategy? Maybe.  Will your short-term volatility be decreased? Yes.
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