Tangible returns from intangible brands

Ian Carmichael

Fairlight Asset Management

The recent update to the Fairlight brand and the internal process that we undertook in working through the defining characteristics of our business and how to represent this in font, colour and imagery inspired more general thoughts about the value of company brands and their place in a portfolio.

Firstly we must define what is and isn’t a brand. Many things are branded but that does not necessarily make them brands. The distinction comes from the economic benefit that a product gains from being associated with a brand. A good brand all else equal will direct a consumer to purchase your product ahead of a competitor. An exceptional brand will allow the selling price of a product to increase merely due to its imprint.

To understand the value of brands it is helpful to consider the problem that they were designed to solve. Consumer staples products until the late 19th century were typically manufactured by local grocers or pharmacists in small batches. Product quality was highly variable from vendor-to-vendor and even week-to-week with the same vendor which meant the consumer was never sure if the goods would live up to expectations.

The key value proposition of the mass market brands that emerged at this time was consistency. These new branded products could for the first time be manufactured in modern facilities that would reliably produce the same product for years with very low variability in quality. At the same time the national railroad systems were rapidly expanding which allowed goods to be distributed across countries at speeds that had been previously unimaginable.

If consumer staples brands are predominantly about signalling reliability, what about more discretionary products like cars and handbags? Discretionary brands, especially of the luxury variety, derive a lot of their value from their utility in social signalling. An owner of Gucci loafers is prepared to pay many times the cost of materials and labour required to manufacture the product in order to signal to others that they are a person of refined taste and considerable means. This use of brands as a means of social expression appears innate to humans and helps explain the long-lived nature of many of today’s luxury brands, a large number of which are more than a century old.

Cooper Companies

Within the Fairlight portfolio, there are several companies that derive a substantial amount of their value from proprietary brands. One such example is Cooper Companies, a California-based manufacturer and brand owner in the contact lens industry. Cooper’s two main consumer brands are complementary in terms of their market positioning with Clariti known as a reliable and value-for-money lens, whilst MyDay has succeeded with its premium positioning.

MyDay has modest technical advantages over Clariti with enhanced oxygen transmissibility and UV light filtering, however as both are silicon hydrogel daily lenses the products are a lot more similar than they are different. This is borne out in customer reviews which are almost uniformly favourable for both brands. It is thus hard to escape the conclusion that the MyDay brand plays a key role in supporting the approximately 20% price premium that MyDay lenses sell for over Clariti lenses.

The role of branding is also important at Coopers in converting first-time customers into subscribers. Daily contact lenses need consistent replenishment throughout the year and brand familiarity ensures that most customers remain loyal to the one brand. This subscription dynamic combined with the effective use of multiple brands to segment the market result in attractive contact lens gross margins of 65%. By way of comparison Apple, widely considered to be one of the strongest brands in the world, most recently reported a gross margin of 43%.

The Fairlight View

Brands are an important intangible asset from which some companies are able to derive significant value. Those businesses that understand how to develop and steward brands often exhibit both the qualitative and financial characteristics that Fairlight looks for in potential investments.


Ian Carmichael
Portfolio Manager
Fairlight Asset Management

Ian is partner and portfolio manager of the Fairlight Asset Management Global Small and Mid Cap Fund.

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