Branded products often suffer impairments during times of economic stress as consumers search for cheaper alternatives.  However, the combination of attractive products and intelligent marketing can sustain brands even in a poor economic climate.  Interbrand’s report (pdf) covering the best global brands of 2010 suggests that the most entrenched brands have retained their position reasonably well while up-and-coming brands managed to make significant advances.

Interbrand uses a methodology that attempts to determine a brand’s value based on a brand’s financial performance and an assessment of the intangible power of the brand in delivering earnings power.  Some elements are clearly subjective but the top brands in the listing match what many observers would consider to be successful brands. The report lists individual brands rather than companies (for example, Blackberry is considered a brand rather than Research In Motion).

The top five brands for 2010 include Coca-Cola, IBM, Microsoft, Google, and General Electric.  The top five rising brands in terms of improvement in ranking are Apple, Google, Blackberry, J.P. Morgan, and Allianz.  The five brands with the largest decline in value were Harley Davidson, Toyota, Nokia, Dell, and Citigroup.

Here is a brief except from the report regarding Coca-Cola:

Year after year, Coca-Cola demonstrates its ability to adapt to whatever challenges the marketplace throws its way. The number one brand for the 11th year in a row makes its brand central to its business operations. This year, for example, it oriented business operations around a new philosophy of “consumer engagement,” which yielded benefits such as a more robust social media strategy, continued development of owned media projects like its World of Coca-Cola Museum, smart product placements and ads that stir emotions.

Investors must carefully monitor the economic moats created by powerful brands when evaluating investment opportunities.  The best brands, such as Coca-Cola, consistently generate high levels of profitability on the tangible capital employed in the business.  However, brand values can change over time as society changes.

A change in brand value is likely to be less rapid in the case of low-tech/low cost consumable products like Coca-Cola compared to advanced technology such as Microsoft’s software or Blackberry devices.  Investors who pay a premium to obtain valuable brands should carefully determine whether a brand is entrenched enough to provide a reasonable assurance that the premium will be recovered over time.

The danger of brand erosion is particularly apparent when evaluating Toyota’s steep drop in ranking this year.  We pointed out the potential for brand erosion at Toyota earlier this year during the height of the recall story.  Unfortunately subsequent reports that the acceleration issue was mostly driver related did not receive the same prominence as the stories regarding the initial recall.

Disclosure:  The author owns shares of Microsoft Corporation.  No direct position in Coca-Cola;  indirect position through ownership of Berkshire Hathaway shares.