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 your kitchen sink, where Fairy Liquid once had pride of place, you’re just as likely to find Tesco’s own brand, which today’s consumers reckon probably 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 yoghurt scene is changing rapidly — now Chobani is challenging that favoured place by appealing, through its adept use of social media and well-placed free samples, to the desire for more natural and healthier foods.
A brand new world
Companies selling branded goods are under threat in the brave new world of a mobile internet, where product quality is conveyed through user reviews rather than brand names. We believe they can continue to thrive, but only if they make significant efforts to be agile and innovative, to present their brand values clearly and authentically, to understand what consumers want and how this is evolving, and to engage with customers in radically new ways.
These branded gentry — the big, global brands — have tended to be successful investments over the long term, enjoying fairly stable and predictable returns. The strength and durability of their brands was seen as giving them a high degree of pricing power and control over their own destiny. Their predictable earnings and growing dividends earned many a coveted status as so-called dividend aristocrats, and a firm place at the core of many diversified portfolios around the world. So what happens to them is particularly important for investors.
Millennials are on the cusp of overtaking baby boomers as the biggest age demographic, and will in turn be overtaken by Generation Z. These next generations have exposure to a plethora of alternative options online, and a greater willingness to try new brands in the hope of getting a better customer experience or a cheaper price.
Millennial preferences matter to brands, as the next generation grows in importance and their emphasis on values, cost-consciousness and experience over possessions influences wider spending habits (figure 7). And not only are consumer tastes shifting in significant ways, but smaller niche companies have been good at spotting these changes before less nimble established brands.
Against this backdrop, the branded gentry can no longer rely on ‘lazy loyalty’. They’re losing their advantage as barriers to entry come down: access to finance is more readily available to challengers; new entrants can have a big reach without big costs; and there are many new ways to shop, offering plenty of options for cost-conscious consumers.
Figure 7: Generational differences
How millennials and baby boomers consume user-generated content, such as online reviews.
Source: Olapic, January 2017.
A new brand of vigilance
While there are a number of challenges for established brands to acknowledge and overcome, we think talk of the ‘death of brands’ is greatly exaggerated. Some will undoubtedly fall by the wayside, as they always do, but others are already successfully adapting and more will follow suit. Those in attractive growth areas with management teams who are forward-thinking and embed agility, innovation and rigorous consumer insight into their businesses should continue to thrive.
For investors, the key will be to identify the brands that can adapt to this ‘brand new world’ and to avoid the ones that can’t or won’t. We continue to keep a close eye on this changing consumer landscape to spot these threats and opportunities.
You can read more on the outlook for brands in our recently released full research report, A brand new world, part of our series looking at the challenges facing future generations.