A brand new world: challenges to established brands

Like the landed gentry of the 19th century, who could live comfortably on the income from their land, today’s ‘dividend aristocrats’ have long enjoyed growing streams of income from their brands. And just as agricultural disruption led to an existential crisis for the landed gentry, so today’s ‘branded gentry’ are having to adapt to rapid changes in the consumer landscape being forged by the next generation.

At the side of the kitchen sink, where Fairy Liquid once had pride of place, you’re just as likely to find Tesco’s own brand, which many of today’s consumers probably reckon gets the job done just as well for less. Pots of Yoplait and Danone around the breakfast table may feature in the memories of older readers. But the scene is changing — now new entrants are challenging that favoured place, with the likes of Chobani in the US appealing to the desire for more natural and healthier foods through adept use of social media and well-placed free samples.

Branded consumer goods companies are the bedrock of diversified investment portfolios, so what happens to them matters for anyone seeking to help clients manage their finances. Relative to the wider market, these dividend aristocrats have enjoyed fairly stable returns, gently rising demand and fewer ups and downs in their earnings over the long run. The strength and durability of their brands has given them a high degree of pricing power and control.

However, as discussed in our previous blog, ‘Why millennials matter’, this younger generation is changing the investment landscape according to its tastes and values. These established brands, or the ‘branded gentry’, need to evolve to keep up, or else see their long-relied-upon returns suffer.
 

A more level playing field

Further adding to the challenge for the ‘branded gentry’, access to finance has improved for young businesses through websites such as Kickstarter, or peer-to-peer lending platforms. Supply chains have been shortened by digitisation and 3D printing, which make manufacturing products quicker and easier. Smaller companies are also adept at spotting changes in consumer tastes and refocusing their business where necessary; changing according to the demands of the younger generations. Small companies can be agile where the branded gentry can’t.

Private-label goods – goods manufactured by one company, sold under another brand – are also on the rise. They are becoming increasingly popular in answer to consumer demand for value for money and scepticism about the price premium charged by some ‘superior’ brands. Low-cost supermarkets, such as Aldi and Lidl are spearheading this: 90% of products on their shelves are private-label.
 

Big reach; small cost

The rise of social media has also been of huge importance to new businesses; suddenly they have a loud voice for little cost. Not only this, but specific segments of consumers can now be targeted more cheaply and effectively than ever before. The key challenge is how to hold the attention of the younger generation who have constant stimuli thrown at them. Headlines a couple of years ago claimed that the attention span of the average member of Generation Z had shrunk to eight seconds - shorter than the humble goldfish. The younger generation is being so overwhelmed that they have had to learn to apply stringent filters to everything that comes before them. Businesses have just eight seconds to capture their attention.
 

Shop till you drop

Even the way we shop has changed enormously. The high street is emptying as more of us are choosing to shop online and ‘add to cart’ remotely. Subscription models, which enable automatic reordering of previous purchases, are becoming increasingly popular too. For example, Amazon’s Subscribe & Save, which offers a discount on subscriptions for multiple products. This model hooks consumers in, where before they may have run out of products they’d forgotten to reorder.
 

Meet challenge with active management

The emerging consumers of the next generation may be seen to be less loyal to established brands than older generations, instead preferring new, smaller entrants. However, we are confident that many of today’s major consumer goods companies can survive and even thrive by recognising and adapting to the rapidly changing consumer landscape.

Investment managers need to keep an eye out for those brands that aren’t adapting, or their performance will suffer the same fate. They should also be alert to spotting the early adapters and holding onto them. Active management is needed. Passive index trackers will not identify those brands that remain at a standstill and eventually fall by the wayside.

You can read more on how some big brands are adapting to “A brand new world” in our next and final blog in this series.