Consumer brands are increasingly under threat as consumers switch to private label products both online and offline.
Ensemble Capital just posted their take on what is happening to consumer brands:
These brands created value by lowering “SEARCH COSTS” for consumers. Search costs are the costs incurred by a prospective buyer in trying to determine what to buy. In the case of a consumer packaged good like canned food, toothpaste, or laundry detergent, the search cost for consumers is the cost of trying to determine the quality of the product and weighing this against price differentials prior to purchase.
Times have changed:
An alternate way to reduce search costs is for the distributor rather than the product manufacturer to play this role. The success of Costco is in large part built on the idea that any product sold in their stores is of high quality and is a good value.
But now the internet allows for the reduction of search costs on a global scale. Products like LaCroix sparkling water, Dollar Shave Club razors, and transportation service delivered via Uber have all exploded onto the scene, draining value from the Coke, Gillette and Yellow Cab brands because in each case, the online distribution of information radically reduced search costs for consumers.
We don’t think the internet or social media or the logistical monster that is Amazon are doing anything to reduce the importance that people place on the role that brands play in developing and expressing self-identity. But we do think that these trends are bringing to an end the 70-year run of excess returns earned by companies who built their businesses on the back of search cost brands.
Clients of Ensemble Capital own shares of Costco (COST), Ferrari (RACE), Nike (NKE) and Tiffany & Co (TIF).
Full blog post here: Intrinsic Investing: The Death of Many Brands