You hear a lot about the concept of disruption and the impact that this is having on established brands. The rise of social media has been a key enabler for small challenger brands to reach consumers and gain market share in sectors like retail that have been dominated by large firms. Vihari Ross, Head of Research at Magellan, is a consumer brand specialist tasked with navigating this dynamic sector.
In this interview, Ross provides an insight into the practical steps that she takes to figure out which brands are most likely to be challenged and those that are more resilient. Nestle and Kellogg’s are two seemingly similar global brands but as Ross explains, their outlooks are quite different with implications for investors.
Social media has meant it's never been easier to start up a new brand and to build a following online. What that's meant is you get all these challenger brands that have popped up and started to advertise through social media, build a following, and essentially start eating the lunch of some of the traditional big brands.
The thing to look at is, what is the degree of exposure to these risks? It's actually a category by category and geography by geography analysis that we go through. What is the degree of their product suite that is sugary or processed? What is the degree of what we call fragmentation taking place in the categories? That means how much a challenger brand is actually taking share. In some categories, challenger brands have being taking all the growth away from these big brands.
We can look at examples around the world. Amazon is still primarily a US phenomenon, and after buying Whole Foods in 2017, their push into grocery is still very much a US based risk. We've looked at Europe for example, which has the highest private label penetration in the world that's been pushed by the Aldi's and the Lidl's, as well as China that has among the highest online grocery penetration in the world. It gives you a bit of a guide and a goalpost as to what the degree of impact could be on any individual US centric company, or even a global multinational in terms of the degree of impact.
What you've seen in the China example is that there's this concept of when you go online, there's an infinite aisle and you can have thousands and thousands of products available to buy, but if you think about your own behaviour, who goes past page one of Google? People just look for the top two brands. Generally what happens is, and what we've seen in the China example, is brand number one and brand number two actually have higher market shares than they have in other parts of the world and its brands three, four, five, six, seven, eight, nine, ten, in terms of relative ranking, that actually get killed in that situation. Number one and two tend to consolidate market share around themselves, and then of course you have the private label alternative.
To give you an example, Nestle, it's a global multinational business but it has 70% of its sales where it is the number one and two brand, and its average market share is sort of 30%. It's twice as big as its competitors in general in the categories that it operates in, and that means it has more spending power as well. And then the categories that they are exposed to are quite important as well. They're in high end chocolates, they're in coffee, where they've just strengthened their position through an alliance with Starbucks. They're also are in infant nutrition, which is a very brand heavy category as well.
You compare that to something like a Kellogg, which has only 37% of its sales where it's the number one or two brand. And even within those categories it's no bigger than its competitors in terms of spending power. And then of course the big issue facing a company like Kellogg is the categories that it's in. This health and wellness trend is an incredible burden for them to overcome because people have moved away from buying sugary cereals and snacks, and of course that business is trying to adapt in making snack sized versions of the products they used to sell. But you can imagine that it is incredibly difficult for that business to grow given the hurdles that it's facing and given its relative market position.
So that business, for example, in the recent reporting season just optimistically said,
"We're hoping to get zero growth in the next few years."
And on the other hand, you've got these other business like Nestle. On the surface of it both of these companies have what you would call strong brand portfolios, brands that everybody knows and loves, but their future prospects actually look very, very different. I think the implications of that are, would you pay the same price for a Kellogg versus a Nestle in terms of multiples? Of course you wouldn't because those prospects looking forward are so different.
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