Back From The Future (Part 1 of 2)

If you work in any kind of merchandising business, then at some point probably early in your career, you decided for yourself how to answer the following question:  What is a brand? 

I believe the answer to that fundamental question may be changing now.  Or it may not. 

My answer has always been: Show me the maintained gross margin. If you’re a wholesaler and your maintained gross margin is 40+%, then you’re a brand.  If you’re a brand with your own stores selling your own branded products and your gross margin is 65+%, then you’re a brand.  If your margin is that high, it means that retailers and consumers understand the value you’re delivering and they will pay you meaningfully more than the commodity value of your product.  It means that your design and marketing content is recognized and liked.  And it means that there are consumers who go into stores intending to look for and buy your product.  If you’re at a lower level of maintained gross margin, then most likely consumers who buy your product  are buying it because they came to a store for some other reason, they found your product, liked it enough and bought it. 

The difference between the two is power.  A brand has the power to draw in consumers and to control that magic moment when purchase decisions are made.  If a consumer is coming into a store for a reason other than to buy your brand, then someone else besides you has the power and they make the margin.  The value proposition that motivates the consumer to make a purchase is who has the power and who makes the money. 

In the mergers and acquisitions business, the world has gone brand crazy.  Buyers of companies will pay a lot for a brand and much less for a company without a brand.  And you can understand why.  A brand means the Company has a reputation that will endure as opposed to a product that will sell at just one moment in time. 

But is that right?  Do brands really endure?  Do you wear the same brands you wore ten years ago?  Are the brands you wore ten years ago still just as popular?  In many, perhaps most cases, the answer to that question is no.  So are buyers of companies right to pay a premium for brands?   Tough question, you could argue that one both ways. 

Many people have come to my office and said they are building a brand that is online only.  And I point out to them that almost no one has ever built a brand only online that has become a successful brand and made money.  (I’m not referring to retailers who sell other people’s brands, like Zappos and many others, I’m referring to branded products.)  And, I explain ever so sagaciously, that’s because your product needs to be located wherever consumers are.  If consumers are in department stores, you need to be there.  If consumers are in specialty stores, you need to be there.  And each of those channels reinforces the other, so you can’t judge the success of a channel by when the purchase decision is made.  Just because a consumer buys a product on a site doesn’t mean they didn’t become aware of it and try it on in other channels.  It’s a trick of accounting that we record profits based on which channel a product is sold in but that doesn’t mean the consumer didn’t use the other channels in the process of making a purchase decision or to develop awareness.  And of course you need to be online but building a brand with no physical presence in the world is a tough way to get known by consumers and it’s never been done successfully. 

But the world is changing.  And the habits of millennials are different than the habits of baby boomers.  Millennials get their purchasing information differently than any group that has come before them.  Most boomers get their news by going to a website or other single source and reading it through.  Millennials don’t do that.  Millennials go to social media, see what’s interesting to them, connect through that media to an article or site on one topic and they don’t read through the site, they just read the article that interests them and go back to social media which leads them to yet another site where they get other information.  You may say, that just puts the consumer in an echo chamber, a phenomenon called confirmation bias, where they only see things that they already know and like.  But the data says confirmation bias isn’t happening in social media; for example, about 1/3 of the political news millennials see in social media is information they don’t agree with, about the same as all people historically in media generally.  And this new way of getting information may provide millennials with a way of finding new products and brands that is different from how everyone before them has done it.  They may not need stores to find brands they like. 

So let’s revisit the question of what’s a brand.  And does a product need to be in physical stores to become a brand?  Consider this: Let’s take a pair of shoes that can be landed in a distribution center in the US for $75.  A wholesale brand will sell it to a retailer for $150 and the retailer will sell it for $299.  But what if instead of wholesaling it, or opening up stores of their own, a brand goes to online-only mode and sells the shoes for $200?  That would give them their price of $150 plus another $50 to spend on developing a customer base on social media.  And they have the added advantage of competing with a true price advantage against shoes in stores selling for 50% more.  Isn’t that a great way to build a brand?  Now instead of being at a disadvantage by being online only, a brand has a distinct positive price advantage by being online only.  Check out www.JackErwin.com and you will see a footwear company doing exactly that.  Because the mode of communication with consumers has changed, maybe it’s possible to be a successful, profit-making, online-only brand, which has never been possible before. 

In my business, the mergers and acquisitions business, we sell companies.  But what we really traffic in is change.  We facilitate fundamental changes.  I am fond of saying that the transactions we do are the most important transactions our clients have ever done.  And that makes us students of change.  And one of the things we know about change is that people rarely see it coming.  People believe that the future is only an extrapolation of the present moment but it rarely is.  People assume that what made a brand in the past is what will make a brand in the future.  And they assume that brands that are successful today will be successful tomorrow.  I’m not saying that the way to build a brand has definitely changed.  Saying that makes me think of the equity markets in the early 2000s when people said the way of valuing companies is different now and we all lived inside an internet bubble.  Maybe we need to try to look further into the future, or maybe we need to come back from looking into the future and revisit the fundamental question of what makes a brand yet again.  It’s easy to recognize change in hindsight, not so easy to see it when you’re in the middle of it. 

So I’m asking, should we all be re-evaluating what makes a brand?  Or is online-only just a flavor of the month?  Will millennials change their habits to become like the rest of us or is the future different than the past? 

So… what is a brand?