Challengers, locals and ‘craft’ have disrupted traditional consumer business models. However, having a strong global brand can still create significant shareholder value.
In an age where consumers are more empowered, the hard fight to appease a younger generation has driven an attitude shift from corporate management teams. For consumer brands to remain competitive, they need to use digital channels and storytelling to bring their brand to life, whilst maintaining its core values.
Contrary to popular belief, there is ample evidence to suggest that leading brands are not dying. In fact, the brands that are harnessing data and consumer insights are actually growing global sales. These companies remain highly valued by the market and customers return more frequently to make more purchases. This is the kind of loyalty from customers driven by an aspiration towards quality and heritage, as well as being heavily influenced by digital and social channels.
One of the best examples I’ve seen is in the world of consumer sportswear. These global brands are considered aspirational, gaining share at the expense of local rivals. German juggernaut Adidas has seen a great deal of consumer interest resulting from the wider focus on healthier lifestyle trends. The strength of the Adidas brand is helping to drive better margins in both footwear and athletic wear.
Loyalty from customers is driven by an aspiration towards quality and heritage, and heavily influenced by digital and social channels
Adidas's management also recognises the importance of technology as a key investment area. The company's much heralded ‘speed’ initiative is now coming on-stream, with 100,000 pairs of shoes to be designed at its state-of-the-art robotics factory this year. This may only be a drop in the ocean for its total annual trainer production (close to 300 million), but certainly represents clever marketing.
Ferrari is another leading brand. The company has one of the finest examples of competitive advantage, driven by its luxury brand appeal and market reputation. Every Ferrari model evokes the spirit of the prancing horse, whilst artistically and mechanically delivering innovative engineering and design. The company enjoys more predictable revenue visibility than almost any other luxury brand or automobile company. It has multi-year waiting lists for new cars and high consumer loyalty (60% of sales are to existing owners). In 2017, the new Ferrari 812 Superfast sold out so quickly that the company has enough demand to account for the car’s entire five-year lifecycle.
Leveraging its pricing power, Ferrari boasts earnings before interest, taxes, depreciation and amortisation (EBITDA) margins more often reminiscent of the luxury than the automotive sector. This is highlighted in the chart below, where we compare Ferrari's historical margins with other OEMs (original equipment manufacturers) such as BMW, Daimler and Volkswagen.
Looking ahead, the company is ambitiously looking to accelerate the number of global car shipments to 9,000 in 2018. On Ferrari's race towards immortality, the cars and the brand are a unique creation.
As consumer needs become more demanding, companies face continuous challenges to ensure they remain relevant. We believe companies like Ferrari and Adidas are better placed than others at realising the true value of their assets. As an investor, I want to identify the companies with strong brand investment, aspirational qualities and that have global scale. Not an easy task but those that do tick the boxes can often go on to create significant value for shareholders.
Not enough carbon is straining parts of the UK economy. This seems hard to square with the usual warnings that too much carbon is straining the world economy. A CO2 Catch-22, it seems?