Overview
Companies regularly try to build acceptance and a competitive moat to limit competition and ideally, increase margins. The theme of this installment is to address the uses and abuses of branding. From institutional investors’ and risk managers’ perspective, prior barriers are being broken and new ones created.
Examples - Branding is typically understood as the association between a product and other (ideally positive) things. The goal of branding is to sell a similar product at higher volume for a higher price.
Strong branding examples include:
- Rolex spends millions promoting the “exclusivity” of its products when the reality is far from the perception.
- Disney is associated with nostalgia, optimism, and wonder.
- Nike’s Jordan shoes are associated with Michael Jordan’s appeal and athletic ability.
Particularly notable in the last example, often firms establish a brand via celebrity endorsements and sponsorships. However, as (1) products have become commoditized and (2) producers have become specialized, incumbent brands’ defensive moats have shrunk.
Products becoming commoditized
Perhaps commoditization is clearest in the automobile industry. Consider the following features: power seats, FM radio, air conditioning, power windows, rain-activated windshield wipers, automatic high beams, lane keeping assist, large-screen infotainment systems, and remote start. All these features were once premium options available only in luxury vehicles. It would be difficult to find any new car without these features today. Thus, luxury car manufacturers have become increasingly reliant on brand to differentiate.
Increasing Specialization
As discussed in the prior risk commentary, chip “foundries” have been segregated from chip design. However, this trend has occurred broadly in manufacturing.
A result has been the “drop shipping” market whereby e-commerce businesses outsource the processes of procuring, storing, and shipping products. There may be some collaboration on product design, but the e-commerce businesses largely specialize in identifying demand and marketing.
Brand new world 1; Some lower entry barriers
In 2022, Kanye “Ye” West ended his contract with Adidas after much controversy to release his brand on his own. The Yeezy brand had sold over $1bn in shoes for Adidas since 2019. YouTube celebrity Mr. Beast has released his own candy bars while other YouTube celebrities KSI and Logan Paul have released their own sports drinks, Prime, which earned $1.2bn in revenue last year. In June, the soccer star Lionel Messi released his own brand of sports drink, Más+ by Messi.
Historically, these celebrities would have endorsed existing brands as releasing their own products would have been too challenging. However, commoditization and specialization have greatly reduced this challenge. The shift away from traditional media has also enabled celebrity-owned brands to market their products at a lower budget and to a more targeted audience.
Rather than endorse existing corporate brands whereby the celebrity might get a base guarantee and ~10% of revenue, it would be much more profitable to make ~60% of revenue (given expenses).
Packaged consumer goods and apparel have been most disrupted by celebrity-owned brands due to the consistent quality of product (Gatorade tastes the exact same no matter where it is purchased), the availability of other providers to produce and deliver the product, and the ease of brand association (a customer can see Messi drinking the product).
However, other product categories will see increasing commoditization and likely specialization. Thus, they too will face pressure on incumbents who are overly reliant on branding.
Brand new world 2; Some new entry barriers
Conversely, there are some areas where the barriers appear to be persistent and perhaps growing. Per an Oct. 19, 2024 WSJ article¹, VISA has been successful in massively increasing its market share:
Likewise, Microsoft, Google, and Amazon appear to be more than holding their own, although portions of their businesses might face challenges from technology changes and regulators. In fact, these large producers have benefited from commoditized services such as cloud computing where their large scale can enable lower costs.
Conclusion
There is little doubt that firms constantly seek to create competitive moats for their businesses, but establishing and maintaining them remains a challenge for even the best managers. The “trick” for sophisticated institutional investors and risk managers is to recognize those challenges and adjust accordingly. Note that the recent news of Boeing "narrowing its focus" is likely to be viewed as a gift by other plane manufacturers.
Sources
[1] https://www.wsj.com/finance/banking/visa-wanted-a-vast-empire-first-it-had-to-beat-back-its-foes-3b3067f3?mod=Searchresults_pos16&page=1