When I graduated college in the early 1980s the accepted wisdom from investment greats such as Peter Lynch and Warren Buffett and business school courses, was that branded consumer goods were a great investment.  Great brands were thought to build moats from competition, allow pricing leverage, build loyalty, and fulfill a yearning by newly emerging middle-income consumers for affordable luxury and quality.

Much this is certainly still true, but one of the secular shifts wrought by the Internet has been to put pressure on the value of many of the national brands.

I was reminded of the pressure on brands by three unrelated events during my recent vacation:

1.  I needed a replacement battery for my Samsung Galaxy 3.  Surprisingly, neither Sprint (my carrier) or Radio Shack offered these.  (This stocking policy may be one of the reasons both companies are doing so poorly.)  Instead, I went to Amazon Prime and promptly bought a replacement battery from a Chinese manufacturer I had never heard of, but that had great reviews on Amazon.  The company also had good prices, a clear description that made it easy to assure the battery would be compatible with my phone, and the product was available on Prime.  I purposely skipped over the Samsung-branded replacement battery, which ranked lower.

2.  When I went for ice cream with my Dad, the local place “Oink’s” was completely packed as it is every night.  (Oink’s has a lot of character and stellar reviews on Yelp, Google, Trip Advisor, etc).  Opting for something faster, we sought out the nearby Dairy Queen (the franchisor owned by Warren Buffett).  The Dairy Queen had been run out of business by Oink’s.  A second one nearby by was also shuttered.  (Thanks to G-d, a third one remains open, providing the occasionally needed ice cream cake and Blizzard.)

3.  Peter Lugli of the aforementioned brand friend and killer, Amazon, sent me a good article from the Economist, a magazine which erudite people like Peter apparently read.  (Not enough graphics for me.).

Taking great liberties with the article, it suggests three main possible components of brand value or equity.

1.  In a world filled with too many choices, a brand provides a level of mental availability (when coupled with physical presence) that makes it easier for us to make purchase decisions.  Brands are mental shortcuts/cues that help us make fewer decisions every day.

2.  Closely related to the above, brands signify consistency and quality relative to a world of unknown providers.

As my examples from vacation show, however, these forms of value are under assault from internet-based rich search and seemingly reliable ratings and reviews from Amazon, Yelp, TripAdvisor, Google, and other sites.  These two forms of brand equity are certainly being challenged broadly and consistently by the Internet, not to mention improved private label brands!

3.  A third element of brand equity is the loyalty engendered by brands that establish an emotional connection between themselves and consumers.  Used properly by brands, the Internet can enhance this emotional connection.  As the article points out, however, this emotional connection is fragile especially for service companies as consumer experience with the brand will outweigh the effects of marketing.  (For example, all of the airlines are well-branded, but our experience is so bad with all of them, the only loyalty we feel is generated by the mileage programs.)

There is one element of brand equity that the article does not mention, which is when our brand choice is highly visible to others.  Let’s call this the fashion element of brand choice.  Some consumers are very careful to manage the brands they wear or the places they frequent to manage their own “personal brand”.  The Internet will have very limited impact on this aspect of brand value–other than through encouraging the sale of knock-offs and grey market goods (Alibaba)!

Polo, Michael Kors, Starbucks, Lacoste, Under Armor, Whole Foods?, these brands and many more are perceived to say something about us to others.  Even the Starbucks cup we carry around may be perceived to say something about us to others versus that Dunkin’ Donuts cup– beyond how burnt we like our coffee.   The Internet will never kill this aspect of brand equity.

I’d suggest that these days if a product is not :

  • either addictive (e.g., caffeine, nicotine, salt and fat, sugar and fat, or Wheat Thins) or
  • one of these “externally exposed”  fashion brands or
  • sold increasingly to folks in emerging markets where an “internal” brand may function like an “external” one

the product’s brand equity may be eroding over time.  No need to panic, but it is time to think more carefully about the nature of a brand’s equity.  If brand equity is not emotional or fashion-driven, it will not be worthless, but it will be worth less.

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