The rise of the internet and the smartphone has led to some disruptive changes to consumers and society. Slowly, but surely these innovations are changing the old ways of doing things and having a major impact on businesses and the economy.
One of the major trends that I would like to explore is the role technological innovation has on traditional brands. For decades, FMCG companies have built up strong moats and have been very profitable and stable companies because of the strength of their distribution and marketing.
Ensemble Capital had a good note last year that captures this:
These brands created value by lowering “SEARCH COSTS” for consumers. Search costs are the costs incurred by a prospective buyer in trying to determine what to buy. In the case of a consumer packaged good like canned food, toothpaste, or laundry detergent, the search cost for consumers is the cost of trying to determine the quality of the product and weighing this against price differentials prior to purchase. By eliminating this cost for the consumer, companies with a successful brand were able to charge more for their products, even while providing an improved cost/benefit offering to the consumer. The consumer could pay more for their products, because doing so reduced the search costs they were otherwise incurring
Companies with a trusted brand could earn excess economic returns so long as the cost of building the brand costs less than the premium consumers were willing to pay for a product due to the brand. Because brands have historically be very durable (notice the global brands that were built in the 1950 are still dominate today), they created an economic moat that caused these companies to generate outstanding returns for shareholders.
Many of the most well known brands in the world are based around reducing search costs. For example the Coke, Gillette, and Yellow Cab brands are assurances of quality and value that reduces the search costs of consumers looking to purchase beverages, razors and transportation.
But this is changing rapidly. Companies like Google, Amazon, Uber and TripAdvisor are causing search costs to fall dramatically. Consumers now can, via reviews or from social media see peer reviews of products they want to purchase. This massively reduces the premium traditional brands can charge their customers. And when you combine this with the rise of outsourcing and contract manufacturing, you can see that there is a lot of room for new brands to come in and capture market share from existing players. Amazon for example does this with its AmazonBasics brand. It is not uncommon for batteries of AmazonBasics to be half the price of Duracell or Energizer because the company doesn’t need to spend on advertising, marketing or on traditional distribution. And, given the reviews online, you can see that consumers also love the product!
Scott Galloway has a great video that describes the effect of the fall in search costs not just on FMCG companies, but also on the auto industry and on traditional TV and print media:
So what’s the way forward for brands? Ensemble capital has a follow up to its original post, where they say:
The Death of Brands does not imply the death of great products. It implies the death of top brands that do not in fact represent an outstanding product at a fair price. The very worst thing the concierge brands could do is recommend products that serve the concierge’s financial interests, but are not in fact in the best interest of the customer.
Ultimately you need to be able to show your end customer that you are giving them good value for what they pay.
Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.