Photo: Evan-Amos. Source: Wikimedia
Brands didn’t used to exist. “Build a better mousetrap” Ralph Waldo Emerson said in the 19th century, “and the world will beat a path to your door.” If you could grow better corn or pigs or make better chairs or knives or church organs, you didn’t need to advertise. The quality of people’s work was highly variable. If your products were good and your character was good, word-of-mouth would get around and there would be a broad, well-worn path to your house, even if you lived in the middle of the woods.
But that changed with the growth of mass culture and mass marketing during the “Mad Men era. Products became standardized with standard packaging. The overall level of quality improved. Companies had to find a way distinguish themselves from one another. Savvy managers created branded propositions that offered both functional and emotional value. Ads for children’s medicine didn’t focus on whether sick kids got better but on how anxious parents could feel better when their children were ill.
Vicks Vaporub ad from 1922. Public Domain. Source: Wikimedia
So long as a brand was considered superior to its competitors, the company could charge a little more. The management challenge was to create an identity where premium cash flows exceeded the additional marketing expenses needed to create the brand. One official at a large consumer product company described branding as a contract between a company and consumers. If the company breaks that contract through poor quality or mismanagement, consumers will enter into a contract with a different brand.
Well-managed brands could create durable value. Many global brands built in the 1950’s are still dominant today: Coke, Tide, Marlboro. Their managers created an economic moat that generated outstanding returns for investors. Over the years, different attempts have been made to breach that moat. In the ‘90s, Walmart and Costco realized that as distributors, they had power, too. By making their operations more efficient, they could lower prices, building foot traffic. They could then use increased sales to cut into P&G’s or General Mills’ margins, cutting prices further, and retailers built their own brands, focusing on the consumer “experience.”
But that model is over. It’s not just that consumer preferences are changing, consumer behavior is changing. Brands can be seen as a way to lower your search costs. You didn’t need to read studies on automobile safety and reliability, you knew your (insert favorite car) will get you there because the brand is dependable. The best surprise is no surprise. With the rise of online shopping, peer ratings, and competing search engines, it’s no longer necessary to depend upon a brand for quality assurance. Customers using Amazon’s Alexa to make first-time purchases without specifying a brand usually get products from the “Amazon’s Choice” algorithm: a well-rated, well-priced item that ships with Prime. Alexa is offering consumers a concierge service. So is Yelp for restaurants, TripAdvisor for hotels, and Google for just about everything. You might think that Amazon or Google will tweak their algos to favor themselves, but that would be foolish. The only thing a concierge can sell is its own reliability.
This doesn’t mean that brands are done. It just means that they need to offer great products at great prices. More information and ubiquitous mobile search means continuous competition. And consumers should be the winners.
Douglas R. Tengdin, CFA