Monetizing Beauty: How the Masters Do It

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"First win the eye, then the heart, then the mind,"  believes design firm Lewis Moberly, which works on Diageo-branded beverage Bailey's. Diageo management spoke eloquently on good design as crucial innovation on their first innovation webcast.

Consumer goods rely on attractive packaging to induce customers to buy before all others. Diageo's marketing director explained, "Ogilvy executive creative director Rory Sutherland concludes... most of our decisions about brands are emotion based – there are too many of them, coming too fast for our logic centre to process, so we rely on the visual."

Attention to design has led Coca-Cola (NYSE: KO) to the number one rank in the Interbrands annual 100 Best Global Brands followed by Apple (NASDAQ: AAPL) at number two for 2012.  Apple achieves the number one rank on BrandZ's 2013 top 100 global brands with Coca-Cola trailing number four McDonald's (NYSE: MCD).

The Old Masters of packaging and advertising

Peter Walshe, Brand Z creative director, said of Apple, “Its brand value only increased by 1 per cent this year but it still holds the record for the most valuable brand. And it leads by a long way. The next brand in the ranking, Google, is worth $113.7bn ... so Apple is $71.4bn ahead - nearly the value of Coca-Cola, which just shows how strong, powerful and meaningful that brand is."

Such strong brand performance often belongs to companies that elevate design to an art. Steve Jobs audited a college class in calligraphy and its design discipline helped him craft products in which form follows function beautifully from their logo to the curved edges and brushed steel of Apple devices. The Apple stores are architecturally elegant yet navigable. That's part of the reason why Apple stores make the most money per square foot of any retailer. Hiring design genius Jony Ive hasn't hurt either.

The history of their advertising also encompasses a design trajectory from the straightforward ads of the 1970's to slightly more attractive ones in the '80s (one features a young Bill Gates shilling Apple and another a slim Steve Wozniak) to the increasingly more visually and conceptually  sophisticated ones of the 1990's featuring the "Think Different" campaign. One can also see the evolution of product design paralleling an increasing design sensibility.

But what makes Apple stand out as an Old Master is that function was never sacrificed to form. Products had to work beautifully and better than the competition.

Now that Jobs is gone comes the most challenging era in Apple's history. Just as Apple seemed to wander aimlessly in the desert after the time he was ousted until he came back analysts and investors worry over the pipeline and loss of Jobs' vision.

Coca-Cola has a design heritage second to no one. From famous designer Raymond Loewy's fountain dispenser to the Spenserian script of the Coca Cola logo, visually unchanged for over 125 years, Coca Cola is one of the most recognized brands in the world. Its design prowess was featured in the London  Design Museum exhibition in 2011.

The attractiveness of its packaging and advertising has led to a worldwide Coca-Cola collecting boom over the last few decades. In the past few years Coca-Cola has teamed up with notable fashion designers like Moschino, Versace, and Missoni to design limited edition bottles with proceeds funding health care access for Italian women. Special edition cans have also contributed to the World Wildlife Fund.

McDonald's may seem a surprising choice for a master of design but its bright colors, distinctive arches repeated in its logo, typefaces, and packaging are recognizable even to the pre-verbal child...globally. Sleek Italian design wouldn't necessarily work at McDonald's; function (taste and affordability) is more their aesthetic, but it's not unhandsome.

Why does it all matter?

Companies with strong brands have historically performed better according to BrandZ. Protecting and enhancing the brand are top jobs at these three companies. The strategy has worked although these three have underperformed the S&P 500 this last year, especially Apple.

Apple is trading at an almost laughably low trailing P/E historically, currently 10.55 (almost 7 if you back out cash), and with a yield of 2.70% the stock should be as attractive as its products. At a PEG of .53 it's undervalued, and with no debt it's a steal. The stock is down 24.55% over the last year and didn't run up before the usual blockbuster catalyst of the Apple Developer Conference starting June 10. At the All Things D conference CEO Tim Cook intimated some exciting new product categories were under development.

Coca-Cola, the global beverage titan, offers a 2.80% yield and a forward P/E of 17.70. Coca-Cola may be overvalued with a 2+ PEG, although it is only up 10.3% over the last year, underperforming many consumer staple defensives. Its operating margin is 23.35% but earnings growth remains mired in the middle to high single digits and is expected around 6% for the next five years. Rival Pepsico is up almost twice as much over the last year, and its trailing P/E and yield are almost identical to Coca-Cola.

McDonald's has the highest yield at 3.20% and a trailing P/E of 18.14.  It has been challenged over the past year with same store sales decreases globally. Still, the operating margin of 30.13% is healthy. The stock is up 13.50% this last year.

McDonald's is seeing more challenges to its moat as the global fast food leader with privately held-Subway building more stores in the US and Dunkin' Donuts beginning to offer fast food type sandwiches and expanding their breakfast offerings.

In the eye of the beholder

MillwardBrown, which chooses the ZBrands100 most Valuable Brands for eight years, has seen the value of their Global Brands portfolio grow by 58%, 7% just this year. The power of brand is so important among a cacophony of products available, and these companies understand the challenges of both function and form.

As three of the most recognizable brands on the planet with the most successful packaging and advertising supporting products people love the world over, these three brands are still buys on any dip.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Apple, Coca-Cola, and McDonald's. The Motley Fool owns shares of Apple and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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