Value insights: When pricing power becomes a superpower

For long-term investors, pricing power and brand equity can be highly desirable qualities in a business. Value investors should keep them on their radar, for when the price is right.

Feb 22, 2023

4 minutes

Alessandro Dicorrado
Steve Woolley

Pricing power and brand value are two of the most desirable qualities in a business. When managed appropriately, they can result in healthy returns for the company and its shareholders. At the same time, maybe just occasionally, they can give customers what they want, too.

We were reminded of this when a colleague recently read ‘Organizing Genius: The Secrets of Creative Collaboration’. Among other case studies, the book discusses the Walt Disney Company and its remarkable ability to generate goodwill, brand value and a steady stream of profits, from a loyal customer base across the ages (and across age groups). As the authors opine, “Disney stands virtually alone in its ability both to move its child-oriented merchandise and to involve adult consumers willingly in the lucrative process”. Indeed, the member of Ninety One’s Value team writing this has, in the past month, taken his family to a Disney on Ice show, booked a holiday to Disneyland Paris, subscribed to Disney+, booked tickets to Disney musical Frozen, purchased and helped assemble multiple sets of Disney Lego, and, it must be admitted, found (and expects to find) each of those experiences highly enjoyable. We are not alone. As the authors of ‘Organizing Genius’ observe, “Perhaps what is most remarkable about this phenomenon is that the adults who do most of the buying do so not with a sense that they are being exploited … but with contented smiles on their faces”.

There is a price to pay for those smiles, and it is … well, the price. Whether it is the ancillary items at Disney on Ice (spinning sparkly wand? That’ll be £30 please) or the cost of seats near the stage at Frozen (bids under £100 need not apply), the Disney experience does not come cheap. Perhaps the ultimate illustration of this is the relentless price increases for attendance at Disney theme parks: the 50-year price progression of a one-day ticket to Disney’s Magic Kingdom is a thing of wonder for pricing-power advocates and shareholder-value disciples alike. Over half a century, the cost of entry to the ‘happiest place on Earth’ has increased by 8% annually. With the possible exception of tobacco, this is surely one of the greatest (and most consistent) examples of pricing power being successfully executed. The Magic Kingdom and other Disney theme parks still regularly reach capacity.

It would be remiss of us not to mention that this pricing-led strategy is far from universally supported. Activist investor Nelson Peltz argues that the price hikes are in reality being used to fund heavy losses in Disney’s streaming business, an approach he regards as unsustainable. It will be interesting to see how these dynamics play out over the coming years. Perhaps growing scepticism over Disney’s strategy could result in its shares trading down to a sufficiently attractive level for Ninety One’s Value team to get involved. After all, companies that possess attributes such as strong pricing power and brand equity tend to make great investments when bought at the right price, and we are keen to keep them on our radar.

Given Disney’s ability to grow its brand equity across so many channels (theme parks, shows, toys, streaming platforms, and clothing and other merchandise) the authors of ‘Organizing Genius’ conclude that “the company has given new meaning to the term synergy”, and note that Disney has a whole department of corporate synergy for such brand maximisation. You could be forgiven for thinking this is all rather dry, and far removed from the ‘magic’ of Disney. Perhaps that is an inevitable consequence of said magic being the intellectual property of a publicly listed company with a market capitalisation just shy of US$200 billion. Still, cut through all the management speak and synergistic strategies, and there is a product there that is worth paying for, and one that we would wager will still stand the test of time a further 50 years into the future. At a significantly higher price, of course.

Authored by

Alessandro Dicorrado
Portfolio Manager
Steve Woolley
Portfolio Manager

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