In the last 12 months, several high-profile consumer goods companies have issued profit warnings, most notably Kraft-Heinz. Some commentators have proclaimed the end of the era of big brands. The future, they argue, belongs to smaller, so-called ‘craft’ brands. But I believe that the demise of big brands has been greatly exaggerated.
The more things change …
In calling the end of the big brands’ dominance, people point to the disruptive influence of technology. It’s true that technology has laid waste to many industries in recent years. In consumer goods, we are told that technology is helping new entrants overcome the traditional hurdle of capturing consumers’ attention.
In days past, big brands had a near monopoly on our eyeballs through print slots and primetime TV. These commanded millions of viewers and readers. But compare the share prices of advertising agency WPP and broadcaster ITV with those of Facebook and Alphabet (Google’s parent company). This comparison shows just how much the advertising and media landscape has changed. In theory at least, any company can now capture our attention using these new advertising channels.
The reality is a little different. Both Google and Facebook use an auction system to set the price and the position of adverts. Inevitably, the companies with the deepest pockets command the prime slots.
This matters. According to advertising agency Wordstream, 41% of clicks go to the top three Google adverts. The top advert is four times more effective than the average. Clearly, the new technology still overwhelmingly favours the brands with the biggest budgets.
But what of changing distribution channels, the rise of Amazon and the shift to online shopping? Surely these create opportunities for new companies to enter the market and ‘eat the lunch’ of the big brands?
Changes in shopping habits have certainly created winners and losers in retail. In the last 70 years, for example, the UK has gone from a ‘nation of shopkeepers’ to a nation of supermarkets. The rise of the supermarkets had a profound effect on smaller companies. Unable to produce their wares at scale and deliver them nationally, they found themselves squeezed out of existence.
The result was a significant decline in independent and regional brands, and a huge capture of market share for large multinational brands. The continued pre-eminence of Irn-Bru, Scotland’s other national drink, at the expense of Coca Cola and Pepsi, is a rare exception.
So, will the unlimited ‘shelf space’ offered by the likes of Amazon reverse this trend by putting small brands on an equal footing – a near impossibility on the limited shelf space of the local Tesco? I think not. There is a big difference between being listed and actually selling. Amazon’s data suggests that a remarkable 70% of consumers do not get past the first page of search results on its website. And some 35% of consumers purchase the very first item. So much for the discerning consumer! On top of this, the top four search results are sponsored listings auctioned by Amazon. Again, the odds favour those with the deepest pockets.
Snapping up success
Of course, some brands have successfully challenged their bigger and more established rivals: Fever-Tree with tonic water and Dollar Shave Club with razor blades are two of the highest-profile examples. Undoubtedly, both companies have executed their strategies very impressively. But their success has been given added impetus by mistakes from the incumbents. In the case of tonic water, the UK market leader Schweppes, hindered by a complex ownership structure, failed to maintain its brand in the minds of consumers through limited marketing and little product innovation.
Meanwhile, Gillette was offering new products at higher prices. Consumers perceived to offer less value for money – how much better, really, are five blades than rather than four? And even this story had a happy ending for the big brands. In 2016, Unilever bought Dollar Shave Club for $1 billion. So if the new kids on the block have something innovative, like Dollar Shave Club’s direct-to-consumer subscription model, the big boys can always buy them.
Evolution not revolution
As with any industry, consumer tastes and preferences evolve. So there will be always some turnover in brands. But this shouldn’t be confused with an existential threat to all big brands. As the proliferation of craft brands shows, launching a brand has become easier. But the barriers to actual success remain high.
I will leave the big-brand bears with the example of Heineken. In 2018, despite being in its 155th year and despite the worldwide craft-beer movement, the Dutch premium lager grew at its fastest rate for over a decade. If this is the end of an era, I’m happy to raise a glass to it.
Author: Angus Tester, Investment Manager European Equities, Aberdeen Standard Investments. To find out more about Aberdeen Standard Investments contact your financial adviser.
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.
The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.
Any data contained herein which is attributed to a third party (“Third Party Data”) is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use by Standard Life Aberdeen**. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely.
To the extent permitted by applicable law, none of the Owner, Standard Life Aberdeen** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.
**Standard Life Aberdeen means the relevant member of Standard Life Aberdeen group, being Standard Life Aberdeen plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time.