PLANET PAPERS: A brand new world

Brand values must be clear and authentic, while companies need to understand what consumers want and how their tastes are evolving. It will mean engaging with customers in radically new ways. The threat is especially acute for companies with long-established brands, painstakingly built and maintained over decades, which used to command consistent loyalty and predictable consumer demand. These global ‘brand champions’ are key parts of portfolios and economies, so what happens to them is important for all investors.

The emerging new generation of consumers are more aware of the world’s challenges and have a sense of collective responsibility as global citizens to deal with them. In their own words, they are ‘woke’ and they actively use social media to promote causes and instigate change. While this approach is sometimes derided as ineffectual or ‘slacktivism’, there are numerous examples of movements begun through social media that have galvanised public opinion in order to effect fundamental social change, Black Lives Matter being a striking example.

There is much talk, and some evidence, that the new generation of consumers are less loyal to brands than their parents and grandparents. This shift may be due to their exposure to alternative options through their time spent online, and a greater willingness to try new brands in the hope of getting a better customer experience or a cheaper price. There is also growing mistrust of institutions, government and the media, as measured by the Edelman Trust Barometer. The 2020 survey shows that a majority of the population don’t trust the institutions it tracks. This makes younger generations less willing to defer to the judgement and brands of their elders and the companies whose television adverts they remember growing up with.

In Edelman’s latest survey, more than half of the respondents globally believe that capitalism in its current form is doing more harm than good. This makes consumers more likely to mistrust big business and prefer to support smaller businesses or brands — or at least those that seem smaller and more authentic. Consumers are increasingly willing to support, and often pay a premium for, brands which have a clear sustainable ethos and are seeking to help solve environmental or social problems. Younger generations in particular appear to be willing to sacrifice a reasonable degree of data privacy in order to be able to enjoy a more personalised service or brand experience tailored to what matters most to them.

Branded consumer goods companies have tended to be successful investments over the long term. They enjoy fairly stable and predictable returns, gently rising demand and little in terms of earnings volatility through the economic cycle — particularly in the area of consumer ‘staples’, such as soap or toothpaste, that consumers need to buy no matter how poor they feel. The strength and durability of their brands was seen as giving them a high degree of pricing power and control over their own destiny. In many cases, these companies were also seen as benefiting from the rise of urban middle classes in emerging markets, who often see Western-branded goods as aspirational, which would give them an additional engine of growth.

The predictability and cash flows of the consumer goods companies enabled them to pay growing streams of dividends, encouraging the market to value them highly because of the reliable growth they offered. However, COVID aside, the predictability of these companies — the bedrock of many diversified portfolios around the world — is being called into question by the radical changes we are seeing in consumer tastes and behaviour. Some are meeting the challenge head on, and seem to be benefiting from an approach that looks beyond shortterm profits to longer-term relevance and sustainability. One example is the multinational consumer goods company Unilever. As head of investor relations Richard Williams says, with some 2.5 billion people using Unilever’s products around the world every day, “We have a duty to be responsible”.

Unilever’s own results show that its sustainable brands are growing faster and have better profit margins than the average for all of its products. A decade ago, Unilever set out to decouple its growth from its environmental impact while increasing its positive social impact through the launch of its Sustainable Living Plan. The plan’s main goals, supported by time-bound measurable targets, are to improve health and wellbeing, reduce environmental impact and enhance livelihoods. These targets include halving its products’ carbon footprint by 2030 and sustainably sourcing 100% of agricultural commodities by the end of 2020. Meeting the targets is also part of the company’s incentive plan for executives and senior management. Although the need for personal protective equipment to restrain the spread of COVID-19 has threatened to stall or even reverse progress on reducing waste from single-use plastics, strides are being made in reducing waste at the company level.

For example, Unilever plans for all of its plastic packaging to be reusable, recyclable or compostable by 2025. In May 2019, global food and drinks giant Nestlé reported an 8% reduction in its food waste since 2016. Budget fashion retailer H&M offers to reuse, recycle or repurpose any used clothes brought to any of its stores, with nothing going to landfill. In July, its UK rival Primark followed suit with a similar nationwide in-store recycling scheme, encouraging customers to donate “pre-loved” clothes from any brand to be “re-loved”.

As Rathbone Greenbank Investments’ deputy head of ethical research Kate Elliot notes in her 2019 article Reducing waste, protecting value, the way companies deal with the issue of plastics will also determine whether they benefit or get left behind by future changes in regulation and consumer preferences. Fast fashion was an emerging threat to the more traditional clothing brands. Yet more recently this industry has itself had to adapt to consumer concerns about the obvious waste of trying to keep up with the latest trends. Inditex, the owner of clothing retailer Zara, has demonstrated particular success, enabling it to offer much faster-moving product lines. It can quickly reorder those that are most popular, or design new products which data insights tell them are likely to be popular. Zara has also responded to growing demand for more sustainable products, pledging in 2019 to use only organic, sustainable or recycled cotton, linen and polyester.

In our previous Planet Paper: Changing the planet we noted that investors are increasingly looking for companies that take their responsibilities to the planet, their staff, customers and neighbours seriously, and are run transparently and well. It’s fair to say consumers are also looking for brands that exhibit these qualities. This would help explain why over the long term, more sustainable can also mean more profitable. No company can rest on its laurels, or a good environmental, social and governance (ESG) rating. This was made abundantly clear in July, when it emerged that workers in Leicester linked with making clothes for the highly ESG-rated online fashion giant Boohoo were being paid just £3.50 an hour — nearly 60% less than the minimum wage. Social media lit up with shoppers promising to boycott the company, and its shares lost nearly half their value in the space of a week.

How should brands respond?

Faced with this radically evolving landscape, are there strategies the major branded consumer goods companies can adopt to win over younger generations of consumers and stay relevant in the 21st century? We are confident that many of today’s consumer goods companies can survive and even thrive in this new environment if they recognise the challenge, adopt the right strategies and then execute them with a relentless focus. But investors in companies with major brands will need to be vigilant, monitor progress and continuously separate the wheat from the chaff.  First and foremost, brand owners need to acknowledge the fundamental changes in the way that consumers react to them.

They must make their organisations, marketing, customer engagement and product development more flexible in order to react to these changes and ideally try to stay a step ahead of future changes and trends. As mentioned above, the growing market share of big brands amid the current pandemic suggests many of them are doing this. In the past, it has been too easy to dismiss younger consumers’ behaviour as quirky and faddish. However, as these fads persist and are increasingly adopted by older generations — particularly in areas like the desire for sustainability and ethical standards — they will become impossible to ignore. Brand design consultant Elmwood suggests that brands need to adopt a mindset of ‘agile long-termism’.

That means remaining resolutely focused on their long-term vision and values, which will need to incorporate sustainability, but being more tactical and nimble in terms of marketing their brands in response to the changing patterns of customer engagement. Key to this is a clear understanding of their customers and their desires, and how they are changing. While demographics are important here, of even greater significance is psychographics: the attitudes, values and behaviours that different people have. Brand marketing is increasingly incorporating sophisticated neuroscience in order to understand how people engage with brands at an emotional level, using this information to fine-tune customer engagement and creative advertising. Brand consultancy Interbrand, for example, incorporates the role of the brand in purchase decisions along with competitive strengths and financial performance in its ranking of the top 100 brands.

Younger generations have more options for where to spend their money, and a greater tendency to experiment and trial, but this does not necessarily make them less loyal. Survey data indicates that when they find a brand that resonates with them and works hard to engage and retain them, they will be loyal — just not necessarily to established brands. And the success of brands with a sustainable ethos to date — including those we mentioned and many others — suggest this is resonating strongly with today’s consumers. The days of brands being able to rely on winning a customer and then keeping them for life (“lazy loyalty”) are over because consumers are constantly reappraising their choices and need to be "recruited and re-recruited", as beverages giant Diageo has noted. This combination of long-termism with agile execution is something branded companies should always be doing, simply as best practice, but it has never been more crucial to success — and survival.

 Brand owners must work hard in order to understand what their brands are setting out to be and do and then communicate this story clearly. Again, this is something that brands should always have been doing, but have often lost sight of. Consumers want to know what a product’s sense of purpose is, why it exists, and what the brand and the company behind it stand for. They increasingly want the values embodied in a brand to resonate with the values that they consider important and that they identify themselves with — responsible consumption ranking ever higher among these. The more these values tap into the higher echelons of Maslow’s hierarchy of needs, the more a brand is likely to establish an enduring connection with its customers, as they make an emotional investment in it beyond what its basic product characteristics justify.

What is absolutely key for brands seeking to engage with the next generation of consumers is that they must be authentic in what they stand for. What is absolutely key for brands seeking to engage with the next generation of consumers is that they must be authentic in what they stand for, and must have the values they seek to promote enshrined in their corporate culture. In terms of the story they are telling their customers, companies must walk the walk and not just talk the talk. Social media can be used to rapidly disseminate instances where companies fall short of lofty goals, and perceived corporate dishonesty is quickly punished, as with the recent example of Boohoo.

We’ve seen that as the next generation grows in importance, their emphasis on values is influencing wider consumer behaviours. Not only are consumer tastes shifting in significant ways, but smaller niche companies have been good at spotting these changes before less nimble established brands. While there are a number of challenges for established brands to acknowledge and overcome, we think any talk of the ‘death of brands’ is greatly exaggerated. Some will undoubtedly fall by the wayside, as they always do, but others are already successfully adapting and more are likely to follow suit. Those in attractive growth areas with management teams who are forwardthinking and embed agility, innovation and rigorous consumer insight into their businesses should continue to thrive.

For investors, the key will be to identify the brands that can adapt to this brand new world and to avoid the ones that can’t or won’t. We continue to keep a close eye on this changing consumer landscape to spot these threats and opportunities.

www.rathbones.com

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