May 13, 2020
Most people love doing business with people they know. They also tend to support their neighbors, cheering on a "home-town boy”, and supporting the underdog. What does that have to do with stock investment decisions? Maybe more than one would think.
A 1997 study confirmed the reality of that Familiarity Bias. Reasons cited include the advantages of local brand knowledge, a tendency to support new "home-grown" ventures, and easier access to information about a local company, its founders and its products.
Locally-owned business thrives due to "word-of-mouth" growth, not necessarily because of a healthy balance sheet or favorable financial projections. If a local firm can't deliver a needed service, or a delicious pizza, it is not likely to survive, no matter how profitable it might seem.
Is the converse true? Can a successful local business transform itself into a desirable publicly-traded company? And, if so, can it survive some inevitable bumps in the road?
The simple answer is "Yes."
While analysts point to many factors that are instrumental to financial decision-making, there is growing awareness that emotional reactions may be just as important as evaluating a company's financial strength.
First, there is an emotional attachment to a stock that boasts a local history, either of family association or ownership, or both. Termed the Endowment Bias, it gives the investor the illusion the stock is more valuable than it truly is because of the investor’s ownership and sense of accompanying pride.
Another recognizable anomaly is known as Affinity Bias, described as a decision based on how personal values are affected, rather than on strictly economic values. Securities performance may not be viewed as important as consumer experience. Consumers tend to buy and support "feel good" brands, placing lower value on financial performance.
The bottom line is that, over the long term, emotional appeal together with sound management principles and effective financial practices may be a combination worth a second look.
Irrevocably tied to Detroit since Henry Ford put together the original "quadricycle" in 1896, Ford made it through a depression, several wars and growing competition in the decades that followed. Company mystique only grew stronger. It still resonates with Detroit area residents, and now internationally. Ford is a major Detroit/Dearborn area employer, and local loyalty is intertwined with the conviction that grit and determination will see the company through current and future hurdles. Although owning Ford stock has occasionally been a rocky ride for investors, "Ford people" have historically supported the company, whether by buying Ford automobiles or holding onto their stocks.
Dayton's, the beloved Minneapolis retail store that grew from a small dry goods company formed in 1881, gave birth to an early discount chain in the 1960s, capitalizing on the theme of community. The now giant international corporation has never altered its local orientation, even though Dayton's retail stores have been long gone. Target still celebrates its "small-town roots" and local connections. The company actively supports local communities with financial support, in-kind donations, individual volunteer efforts and ongoing sustainability to build loyalty among customers and employees alike. The company boosted hourly pay rate by $2 through May 30 for front-line workers during the pandemic, and earmarked $300 million for additional bonuses, paid leave, benefits and relief fund contributions.
The 2015 merger of Kraft Foods and the Pittsburgh-based ketchup company ushered in a wealth of concerns for investors. But the emotional appeal of Heinz stems from a history of employee benefits that were revolutionary during the early years of the company, as well as the "Heinz 57" products, many of which originated in "Mom's garden." Today, investors may be nervous, but the stock price jumped last month, largely due to the company's response to the COVID-19 pandemic. Although the future of Kraft Heinz may be different, there is little doubt that Heinz remains a "home-town" brand and a favorite in Pittsburgh.
Opening its doors for the first time in 1971 on a narrow storefront at Seattle’s historic Pike’s Place Market, the Starbucks name pays homage to the first mate and romance of Herman Melville’s Moby Dick which resonated with Seattle’s rich fishing industry. Quickly, the company established itself as the local pride and joy. The passionate purveyors of coffee and everything else that draws on into a coffeehouse eventually catching the eye of Howard Schultz, Chairman and CEO. The global company has successfully carried their unique feel from their original location in Pike’s Place throughout the world with their unique roast releases, curated indie musical playlists, and acknowledgement of local community pride through branded merchandise.
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