Name Brands and the Companies That Make Them

It's no secret that the stocks that have done best in recent years have

been the biggest ones. This is anomalous for many reasons. Small companies

have always been able to move faster (it's easier to turn a speedboat than

an aircraft carrier) and grow faster (it's easier to double a thousand

dollars than a billion). Large companies almost inevitably become

bureaucratized; they're run by corporate "suits" who lack the vision of the

founding entrepreneurs. I make all the arguments in Chapter 10 of Crisis

Investing for the Rest of the 90s.

Why, then, have the stocks of large companies done so well? One reason has

been mutual fund mania; funds must almost necessarily restrict their buying

to big companies. A major fundamental reason has been that the big companies

control the "name brands", which are an interesting phenomenon.

 

What's in a name?

Name brands became popular because everybody liked them and bought them;

now everybody buys them simply because they're name brands. The names

themselves have become a franchise with considerable market value, and

identifying companies with a dominant name brand franchise is part of what

Warren Buffet has built his fortune on. I question, however, whether the

investment and business climates aren't changing.

It seems to me there was a time when name brands were seen as just a way to

help make people aware that a product existed. Then they evolved into an

implicit guarantee of quality, or at least consistency. Then they became an

exhibition of the fact that the buyer bought "quality", and presumably could

afford to pay a premium. Now, I believe, they're quickly degrading into

commodities, meaningful mainly to those suffering from a lack of taste or

discrimination.

Perhaps you remember the days when they'd give you a T-shirt free if it had

a company's name on it: You got a free T-shirt, they got free advertising.

It used to be that what amounts to the label on one's underwear was worn on

the inside. Now the same T-shirt actually costs more than an unadorned

version. It has irked me for years that if I wanted a particular garment

made by Ralph Lauren, or Levi's, or Descente, or a thousand other

manufacturers, I had to display their names prominently on my person - and pay

for the privilege. The hoi polloi seemed to love it throughout the 80's,

however; apparently it demonstrated that they could afford a name brand, or

were hip enough to know what it was. I thought it was stupid and garish, and

that it would represent another sea change in society when name brands lost

their cachet.

One reason name brand companies expanded their profits so much in the 80's

was that they milked all the value they could find in the good will attached

to their names, selling ancillary products. Who would have guessed (in the

‘50s), that Camel cigarettes would market clothing, and Harley Davidson

would become a cigarette brand?

But now everybody is trying so hard to create a name brand that the concept

is rapidly losing panache and, hence, market value. Starting with the rapid

rise of generic brands (I believe the trend really accelerated after the '87

market crash), the handwriting was on the wall. Phillip Morris’ devaluation

of Marlboro on April 2, 1993 was a response to the fact that people just

were no longer willing to pay a premium for something which they realized

was no better than its competitors, and cost more only because of the amount

spent advertising it. Worse, it had zero exclusivity, by virtue of its very

success.

 

The generic, Puritan '90s

My guess is that as the ethos of the Neo-Puritan '90s takes hold with a

vengeance, designer labels will increasingly be looked upon as either

ostentatious and nouveaux riche (in the case of up market brands like Yves

St. Laurent and Ralph Lauren) or gauche in the case of mass market name

brands (like Coke and Marlboro). There will be a trend back to wearing and

using products that aren't plastered with ads. Increasingly, the Neo-Puritan '90s will be a

reaction to the Shop-Till-You-Drop,

The-One-Who-Dies-With-The-Most-Toys-Wins '80s, and people who have money are

going to be more loathe to advertise it with flashy labels.

There are other reasons. Society has become urbanized, and sophisticated

consumers have gained more confidence in their own judgment; that's part of

what unit pricing in grocery stores is all about. One consequence of the

Information Revolution is that the average man really is much better

informed than was the case only a few decades ago. He doesn't need a major

ad campaign to reassure him he's hip. As a matter of fact, that very

campaign might make him suspect he's just another down market mooch.

Further, retailers abet the trend away from name brands by creating their

own brands, which typically sell the same quality for 20% less, for bigger

margins, while building customer loyalty to the retailer (as opposed to the

manufacturer), and offering the retailer a chance to create his own name

brand. So many are now doing it that it's almost a parody. How hip are you

if your name brand is owned by Sears or K Mart? But how hip are Lauren and

Yves St. Laurent if you can buy their stuff at Wal-Mart?

The effect is to devalue the franchise of the name brands, destroying a

major part of the value of the megacompanies that own them, just like it

cratered the stock of Phillip Morris on Marlboro Day. As soon as they try to

make it up on volume, the whole reason for their products vanishes.

The good news is that it will leave loads of room for new start-up

companies, whose products will gain popularity by word of mouth (the way the

current name brands got off the ground a century ago). More importantly, it

will spread by a modern variation of word of mouth computer bulletin boards,

talk radio, small cable TV and low-power broadcast TV channels. Mass media,

most prominently name brand TV (i.e., ABC, NBC and CBS), have already lost

their monopoly, and that makes it doubly hard for the name brands that use

them to reach audiences. Some of the world's top haute couture designers don't have

"designer labels", they have no labels, because they see that as

being déclassé.

This is another argument, along with those in Chapter 10 of CI for the'90s,

for buying the shares of small growth companies when the time comes to buy.

One manifestation of this trend is the proliferation of scores-perhaps even

hundreds now-of microbreweries over the last 10 years. It happened just as

(and because) megabrewers were buying all the regional brewers and

homogenizing American beer so thoroughly that it all seemed no more than a

weak admixture of chemicals and alcohol emanating from one central factory

in St. Louis and shipped by pipeline. I believe that phenomenon will

replicate itself in food, clothing, cosmetics, and every other consumer

area. This process of "creative destruction" is what Schumpeter correctly

identified as the essence of capitalism. In a somewhat different context,

Mao said "Let a thousand flowers bloom."

**************

POST MORTEM

I don't think there's much doubt that America is becoming more socially

conservative in many ways. And elements of puritanism that became evident in

the 90's are becoming ingrained now-- the Drug War, Political Correctness,

Radical Feminism, Hate Speech. And name brands continue in decline for the

reasons spelled out above.

 Back