“How did Coca-Cola build their moat? They deepened the thought in people’s minds that Coca-Cola is where happiness is. The moat is what’s in your mind.” – Warren Buffett

On the way to the beach this summer, my family stopped at Hershey Park in Pennsylvania. At the Hershey factory store, we stood in line for a solid hour with hundreds of others for the five-minute automated tour outlining the history of Hershey chocolate.

From a logical standpoint, this was a silly thing to do. Why go through all of that to learn about a branded combination of sugar, milk, and cocoa?

As Rory Sutherland, the vice chairman of advertising house Ogilvy, succinctly puts it in his book Alchemy: “When you demand logic, you pay a hidden price: you destroy magic.”

And, whether we knew it or not, that’s what everyone in line was looking for – magic. Indeed, we left the tour happy, with the kids fascinated by the animatronic singing cows and the free Hershey bars at the end.

There’s nothing objectively remarkable about Hershey Kisses or Reese’s Peanut Butter Cups. There are higher-quality chocolate options like Ghirardelli and Godiva, and consumers have more ways to indulge their sweet tooth than ever before.

Still, the combination of various Hershey’s brands and their taste – consumed again and again over generations – morphed into doses of nostalgia for Halloweens past and other happy childhood memories shared with friends and loved ones. And that magic combination is what brings four million visitors to the Hershey factory tour each year.

Money alone cannot disrupt such illogical yet magical feelings, which makes these sorts of brands defensible as “moats of the mind.”  They are inextricably linked with our memories and identities, and consequently impact our brain chemistry.

Here are a few examples from our portfolio:

• For decades, Ferrari has dedicated billions of dollars pursuing motorsport excellence and refining its design and engineering capabilities. Over time, these factors built a brand for racing, heritage, and luxury. Consequently, they’ve won the hearts and minds of generations who’ve passed down their love for Ferraris to their children and children’s children. What’s more, most Ferrari enthusiasts will never own a Ferrari automobile, which start with price tags over $300,000 on average. To illustrate the power of Ferrari’s brand, in 2019, it shipped 10,131 cars while its museums in Italy welcomed over 600,000 visitors. The dream of owning a Ferrari is greater than the reality.
• Nintendo is in the early stages of capitalizing on the nostalgia it established with the first generation of mass-market video game players in the 1980s. Many kids who grew up in that era playing Mario and Zelda games are now parents themselves and share their affection for those characters with their own children. This defensible advantage increases the likelihood of success for each first-party game Nintendo produces. Successful game franchises are not born overnight. Even well-funded competitors like Amazon can spend years and millions of dollars to create a new video game franchise and struggle to gain traction.
• By sponsoring the likes of Cristiano Ronaldo, Tiger Woods, and Michael Jordan, Nike has attached its brand to elite athletic performance. Its advertising doesn’t even tell you anything about the quality of the shoe or apparel. That’s assumed as a given. Instead, Nike wants its customers to link their identity with its brand, representing athletic achievement and motivation. In other words, if you want to think of yourself as an athlete, you need to wear Nike gear.

Not every brand is a defensible asset. Even good brands are vulnerable without proper stewardship and brands based solely on “search cost” advantages are particularly at risk in today’s direct-to-consumer digital marketplace.

To be defensible and valuable on its own, a brand must be both recognizable and relevant. What makes moats of the mind defensible and valuable is that they extend the brand’s relevance across time by standing for something on their own. In contrast, many emerging brands struggle to maintain relevance and become quality traps. Put differently, young brands need to consistently prove themselves to consumers while established moats of the mind brands are given benefit of the doubt and have more room to innovate and take chances.

Similarly, having moats of the mind doesn’t mean that Ferrari, Nintendo, or Nike can rest on their laurels. Like any moat, they give their management teams time to create products that delight their fans. What management does with that time is what determines shareholder value creation. Proper stewardship leads to more magic for successive generations of customers and perpetuates the positive feedback loop around the brands.

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