Why did L’Oreal spend nearly €7.4bn on advertising and promotional activity in 2015? Why does the market value L’Oreal shares at a 70% premium to the Stoxx 600? Because conventional knowledge suggests a strong brand will allow a business to attract more consumers, retain their business and generate higher gross margins. Often, the value of a brand will be absent from financial reports, yet brands have proven crucial for the value creation of businesses across all industries. As financial professionals, we are often uneasy with the subject of marketing and brand-building; a mixture of art and science, perhaps as complex as investing itself, yet we implicitly pay-up for brand equity. Much like we pay-up for a Coke over cola, Apple over Android and (maybe one day…) Louis (Vuitton) over Michael (Kors). A rose by any other name… would not smell as sweet.
There is a rapid pace of change in the way we consume media and make purchasing decisions, which causes us to question whether this highly-valued brand equity is being eroded. Professor Itarmar Simonson of Stanford University (co-author of Absolute Value) talks of “a shift in how consumers make decisions, which leads to a diminishing role of brands, loyalty and marketing persuasion.” I believe that brands remain hugely valuable, but recognise companies have to adapt the way they build and maintain their brands in the digital world.
Has the internet democratised the market to the detriment of big brands?
Advertising spend is moving online – eMarketer estimates that in 2016, 35.8% of US advertising budgets will be allocated to online – where larger brands could face tougher competition. Advertising ‘space’ is virtually unlimited and more advertisers are able to compete for attention, including smaller or start-up brands. However, developing content that both reaches the consumer and resonates with them is not easy. There are many examples of small brands with successful digital advertising campaigns but few have achieved consistent success. Ultimately, the bigger the budget, the greater the chance of achieving a consistent message.
Furthermore, online retailing brings potentially endless shelf-space and may allow smaller brands to compete with their larger competitors at the point of sale. This could erode one of the key barriers to entry the FMCG industry has enjoyed for many years. However, online retailers and category-leading brands tend to work together to improve the consumer’s experience, which often results in those leading brands remaining the most prominent. If the consumer is specifically looking for a niche brand they’ll probably find it but it’s unlikely to ‘jump out’ while doing the weekly online shop.
In How Brands Grow, Professor Byron Sharp of the University of South Australia distils brand equity as “mental and physical availability” meaning the propensity for the consumer to find the brand where they make the purchase decision and to think of the brand in this process. These principles have not changed. However, companies need to adapt their marketing and distribution strategy in order to successfully promote “mental and physical availability”, to reach the consumer regardless of channel.
In the following diagram, McKinsey illustrates its insights into the consumer decision-making process. The circular process emphasises the importance of having a brand that is consistently ‘available’ to consumers. In my view it is still the larger brands, with larger budgets, that are positioned to ensure that.
There are examples of where brands have been disrupted but in my view these are not primarily a result of the new digital environment but more a result of a failure by the brand owners to correctly position their brands or adapt to changing tastes.
Companies need to adapt to their consumer; whether selling beer or designer handbags
The rise of craft beers in the US is an oft-cited example of how big brands have been disrupted by small, local competition. Craft beer now accounts for 20% of the US beer market by value and, alongside premium imports, accounted for almost all the growth of the US beer market over the past decade, at the expense of AB Inbev and Miller-Coors. This was not because of structural changes to marketing nor channel fragmentation, in my view. Rather, the brewers were selling an inferior product, having failed to innovate despite changing consumer taste preference toward more flavoursome beer. Brewers caught on late but are now acquiring craft brands or developing their own (AB Inbev is now a top three producer of ‘craft beer’ in the US) and so it seems increasingly unlikely that markets waiting for a “craft-beer revolution”, such as Australia, will ever experience one.
More recently, in luxury goods, several brands (including Chanel and Burberry) reduced prices of some products in China. Again, I do not believe that brands have weakened. We must not forget that these price cuts happened after successive years of price increases and in the context of Chinese prices far higher than for the same product in Europe or the US (beyond tax differentials). Increased travel and the internet improved price transparency and thus consumers became savvier about what products they buy. Luxury brands are reducing global pricing inequalities, rather than facing consumers who no longer want luxury goods.
With great brands come great responsibilities
Managing brands has become more difficult but remains an important driver of profits for companies in the consumer sector and beyond. We will continue to invest in companies with management we trust to build brands for the long-term. In my view, that means consistent investment in advertising and promotional activity, appropriate consideration of the channels and content used and improving distribution. Yet, companies must go further than this: the product offering should not be compromised. Product quality, customer service and consumer-relevant innovation must all be upheld. All of these factors combine to form the consumer’s opinion of a brand and, ultimately, a brand’s value.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.