The death of the consumer brand

For decades big name consumer brands have dominated traditional retail shelf space, leveraging their in-store presence and huge advertising budgets to gain consumer trust in an information-scarce retail landscape. While this strategy has long proved fruitful, the development of online stores has revolutionised the retail environment, creating unlimited shelf space and a customer product review culture which has acted to break down the significant barriers to entry of the past.

Barriers to entry have eroded in multiple areas. Unlike in-store shopping, online retail has democratised shelf space. Social media and digital marketing have dramatically reduced the cost to build brand awareness - a savvy campaign can be very cheap (remember Dollar Shave Club), but more broadly a targeted Instagram and Facebook campaign can hit the right customers (your followers) at very little cost. In the Consumer-Packaged Goods space, high quality outsourced manufacturing has become easily obtainable and the challenges of distribution have materially abated.

Brand perception / value has been replaced by reviews
In the old world we lacked immediate access to tools like product reviews and as such a 'trusted' brand was a beneficiary of that information asymmetry. For example, at the supermarket the safer option traditionally would be to choose a brand like Kellogg’s, rather than a lesser known cereal brand, or selecting the more expensive western brand over the Chinese one for a child's toy, despite the actual quality or value propositions not necessarily matching perception. Brands now have an incentive to provide a good customer experience in terms of quality and value - their reputation is visible and clearly quantified by the product itself rather than the marketing engine. The brand name is no longer the customer default for measuring quality. The value of the instore salesperson is reduced. The value of mass advertising similarly so.

Investment implications
Many of the big-name consumer brands are consistently referred to as "safe havens", "defensive" and "low risk" however we believe increasingly they are the opposite. High return on Invested Capital (“ROIC”) and high multiple businesses are now seeing their competitive advantage over peers erode hence putting their high ROIC and multiple at risk. Accordingly, in our opinion this can lead to poorer management decisions which exacerbate the problem.

Capital allocation often suffers via poor M&A - the desperate search to replace their poorly perceived and declining revenue brands with new up-and-coming ones comes at a big price; typically paying a big price/sales multiple in the hope that the sales can be leveraged via a bigger distribution capability. There are numerous examples of failure and very few of success from a return-on-investment perspective.

Further, in such circumstances management typically experience increasing pressure to meet investor expectations which can often result in the introduction of cost-out programs in the form of lowering crucial R&D spend, frontline sales capability and avoiding necessary capital spend. This is illustrated by US food, home and personal care companies which over the past five years has seen advertising and marketing spend reduce by 11-12% in aggregate while R&D investment has fallen 6%.

Who wins and who loses?

In a more competitive and dynamic landscape, successful brands are no longer just about pure scale. Successful brands of the future are those that are able to demonstrate tangible advantages and genuine points of differentiation around product quality, performance characteristics or unique features. We believe these characteristics are more easily found in high-end luxury goods items than in everyday staples where product differentiation is minimal. This explains why our consumer brand exposure includes Ferrari and Hermes. Direct relationships with end consumers are also a key determinant of success and underpins our confidence in Nike as brand with staying power.