What differentiates leading consumer brands?

A leading consumer brand can be tricky to define. ‘Leading’ doesn’t necessarily mean ‘luxury’, nor does it just mean a household name. There are many well-known brands that, though successful, don’t fall into the category of a leading consumer brand (LCB) from the perspective of our targeted investment universe. So, what exactly constitutes a leading consumer brand, and what might it bring to your portfolio?

High barriers to entry

Leading brands have intangible strengths that allow them to capture a piece of the customer’s mind, acting as a ‘tax on emotions’. There is no set formula of how to achieve this: turning a brand into a leading brand takes decades, even centuries in some cases. This creates a powerful barrier to entry, which leading brands will invest in to protect. This in turn gives them pricing power.

Pricing power

LCBs have the ability to charge a premium for their products or services and are generally able to pass on price increases as long as brand desirability remains high. They are generally unaffected by price wars within their sector.

Delivering exceptional customer service and experiences

There is a growing trend among consumers to move towards services as well as goods. This hasn’t harmed the prospects for leading brands; if anything, it has strengthened them. Health- and wellness-oriented companies, wine and spirit brands and premium travel providers now cater to consumer desires for specific experiences. Delivering an exceptional customer experience is vital for LCBs, which typically aim to curate a feeling or a community around their brand. This means creating memorable interactions that stay with consumers and cultivate loyalty. To achieve this, they will narrow the focus of their appeal to a specific audience.

Control of distribution

The control of distribution is important, as it ensures the quality of the consumer experience as well as that of the underlying product. You may have the best product in the world, but if a consumer associates buying it with a trip to a busy supermarket or a run-down corner shop, they may not develop an emotional attachment to it.

Ferrari knows a thing or two about controlling distribution, with a strategy that revolves around limiting production and intentionally creating scarcity. In 2019, it capped production of cars at about 10,000¹ vehicles a year. While this was up from 7,000 in 2014², most of this additional capacity was shipped to China, with availability kept largely stable in mature markets³. This is a fine balancing act, but it protects the brand's reputation and ensures that demand remains high. On average, it makes its customers wait almost a year for their cars to be delivered⁴. ‘Pile ‘em high, sell ‘em cheap’ this is not.

It is not just luxury brands that control supply. Nike may not limit production in the same way that Ferrari does, but it is selling a growing number of items directly to the consumer that are only available through its flagship stores and own website, leading to higher margins⁵. You can still find its goods in sports stores where the focus appears to be on volume rather than the customer experience, but even here, Nike stands out: a pair of its simple white sports socks will cost more than twice as much as those from a comparable brand⁶. The message is clear – Nike is a class apart.

What isn’t an LCB?

So, now we know what LCBs are. But what separates them from other successful, even very successful, brands?

An example of consumer brands we do not plan to include within our investment universe would be the fast-food giants, even though some of them are among the most recognisable and well-loved brands in the world.

There are many reasons for this:

• Low barriers to entry, resulting in comparatively little pricing power
• Lack of control over the customer experience given their franchising models – for example, some will have takeaway-only outlets at stations and motorway services, as well as standalone restaurants
• No sense of exclusivity among their customer base
• Low profit margins on many of their products, meaning performance is dependent on volume

There is nothing inherently wrong about such business models. They have worked extremely well for many fast-food businesses, some of which post gross profits in the billions of dollars, but they’re markedly different from what we consider to be LCBs.

Away from fast food, other non-LCBs may cut corners to boost profit margins, heavily discount goods if they have excess stock, or hold back on investment during downturns. Leading consumer brands will take a longer-term view.

ESG considerations

The movement towards sustainability and ESG (environmental, social and governance) factors hasn’t gone unnoticed by these brands, either. Limited product runs not only mean less waste, but higher desirability among consumers. This in turn means products often gain value in secondary markets such as Depop or eBay, adding to the feeling that consumers are investing in the brand. There is also a growing trend among consumers to ‘buy less, but buy better’.

LCBs are also careful to effectively contain potential ESG scandals. Many have built up their reputation over hundreds of years, so won’t risk anything that puts this in jeopardy.