Overview
Brands have been touted as the “special sauce,” creating insurmountable barriers to competition and ensuring financial soundness. Sophisticated institutional investors and risk managers are well-served by knowing and anticipating breakdowns in branding barriers.
A Watch Story
There was a time when knowing the correct time was critical. Villagers often relied on the local church bells to mark the more important hours of the day. However, as societies advanced, the periodic ringing of the bells became increasingly inconvenient. Personal watches emerged, first with the pocket watch and later with the wristwatch.
Over time (pun intended), Rolex emerged as a premier provider of wristwatches, a position it continues to enjoy to this day. However, with technological advances led initially by brands such as Timex and Seiko, later by digital watches, and now via nearly any digital device, accurate timekeeping was no longer the preserve of the storied European watchmakers.
Despite the quartz and digital revolutions, Rolex’s preeminent position remains. Turning to the question of the basis for a firm’s ability to maintain demand when the apparent core function diminishes in value (i.e., keeping time), perhaps the reason for purchasing the product has shifted. Our view is that people (primarily men in Rolex’s case) purchase watches (many of whom own more than one Rolex) not only to tell time but rather as a symbol of affluence, wearing a marker that often costs more than $10K.
Rolex markets its watches as rare and containing ever-valuable gold, but the reality is that around one million are made each year, and the gold content is minor compared to the cost. Nonetheless, the brand holds value as a socially acceptable marker.
Might Rolex lose its dominant position? To twist the De Beers diamond maxim (“Diamonds are forever”), nothing is forever. Perhaps Rolex will be viewed as passé, another brand will become preferred, or tech-enabled watches will continue to grow. In the meantime, it dominates the luxury watch market.
Diamonds are Forever
The diamond firm De Beers marketed its products with the slogan “Diamonds are forever,” implying that it is worthwhile to pay outrageous sums for the product with the assumption that it would last forever and could be passed down to future generations.
“Very few things last forever, but natural diamonds are our eternal treasures. They radiate light and hold their magic, undimmed for billions of years.” ¹
De Beers”
However, as often happens, technology has upended that view with increasingly perfect, low-cost manufactured diamonds, which would be impossible to distinguish from mined diamonds but for a serial number engraved on their girdle. Furthermore, lab-created diamonds sidestep the potential taint of mined diamonds. Thus, lab-grown diamonds should continue gaining acceptance.
Jaguar
Turning to the automobile market, if brands are important, why has Jaguar nearly disappeared? As of 1967, the Jaguar XKE was considered to be the premier sports car and, among enthusiasts, is still considered one of the top collectibles. However, over time, it was surpassed on the racing circuit and in retail sales by Ferrari, Porsche, Mercedes, and a variety of other brands. As of several years ago, the top sports car brands touted their ability to go from 0 to 60 in under 4 seconds and achieve top speeds in excess of 150 miles per hour. (The irony is that most buyers drove at an average speed of 30 miles per hour.)
Yet again, technology has shifted the sands under major brands. Many electric vehicles are faster than traditional sports cars, thereby depriving legacy players of their bragging rights. We will see how the markets develop, but our view is that it is probably just a matter of time before lower-cost electric vehicles become a more acceptable alternative. Perhaps that time is approaching, as suggested by the photograph below.
Conclusion
There is little doubt that brands are important, but perhaps the more important feature is that if the value provided to the buyer and whether a product is meeting the stated and perceived needs of the buyers.
Sources
[1] https://adiamondisforever.com/
Picture 1: John Torcasio on Unsplash