Brands have functioned for hundreds of years as heuristics, or short hand, for quality so consumers do not have to conduct market research themselves. Brand sales tend to be sticky resulting in a higher persistence of supernormal profits for the companies that own them. As such for consumer facing companies brand power has tended to be a critical component of the economic moat that sustains competitive advantage.

Under the traditional bricks and mortar retail model the value of the brand is both intuitive and measurable. Consumers do not have the time to research all options and indeed cannot afford the time/money to do so. Brands provide utility to consumers and in return margin is allowed to accrue to the brand owner.

The emergence, and subsequent domination, of Amazon represents a fundamental challenge to the concept of the brand. Peer reviews enable consumers to rapidly assess quality allowing new products to scale rapidly by word of mouth alone. Notably, the global share of the top 10 consumer multinationals fell 200bps 2012-15 as some $36bn of sales shifted to independent labels. Amazon’s dominant position represents its reward for facilitating this transfer of economic power to the consumer. The group now accounts for $1 of every incremental $2 spent online in the US.

None of this is new. The detrimental impact to brand value of the migration of retail online has been well digested by the market. However, what about the next phase of the retail evolution, Voice? Here the connotations may be so wide reaching that we have yet to see outcomes fully understood, let alone discounted.

Voice technology has the potential to pivot Amazon from passive facilitator of brand dilution to commander in chief. Alexa, and other platforms, aims to provide consumers with a single point of contact for all aspects of modern connected life through a device located in the home or car linked to the internet. The goal is ownership of the gateway to the consumer.

The existence of a gatekeeper is not new, Amazon has been fulfilling a limited version of this role for some time. The crucial difference with Voice is the nature of the interface between consumer and seller and the potential for a winner takes all outcome. Alexa has no visual cues, one of the key hooks for brands. Packaging and other emotional imagery are rendered obsolete. Most crucial for the question of brand value is the fact that there is now an influencer placed between the consumer and the decision making in the form of an algorithm, the shopping assistant. For Amazon this creates an unprecedented opportunity to exert control over consumer expenditure. Unique among the Voice platforms Amazon has its own competing product suite of consumer items which creates an incentive to nudge revenues down its own channels.

Scott Galloway amusingly observes this effect in one of his many public talks (How Amazon is Dismantling Retail). Bringing an Amazon Echo on stage he asks it to order batteries for him. The only brand the device will suggest is AmazonBasics batteries. Apparently it could not find any other batteries. Clearly online the usual branded suspects are available, albeit more expensive. However Alexa knows the speaker lacks visual cues and exploits that. This is not to say AmazonBasic batteries are inferior, user ratings are similar to leading brands. However the opportunity for control is clear, as are the connotations for sales of brands which compete with Amazon products for Alexa users.

Amazon is doing all it can to drive penetration; products ordered through Alexa are significantly cheaper than online while Alexa products are often offered on sale on Amazon’s website. According to Digitimes Amazon will shift 10m smart speaks in 2017, 3x 2016 levels.

There are implications for the global investor at both a macro and micro level. From a structural perspective rising Voice penetration is likely to further the automation = deflation trend where value is internalised by the consumer rather than realised in productivity.

The risk to the traditional B2C consumer discretionary sector is clear. While there will be firms who navigate the challenge successfully the overall margin flowing to brands is likely to decline. Already the number of people who preface a product order over Voice with a brand name is declining. Perhaps it is instructive to look at the tobacco sector after the introduction of plain packaging. A 2014 study in Australia found that long term smokers’ perception of taste deteriorated and many were no longer able to differentiate between brands stating they all tasted the same (World Trademark Review). Voice does not quite equate to plain packaging given the consumer still receives the branded product but the buying interface is equally trademark-free. For branded products competing with Amazon’s burgeoning stable of names the outlook could be even bleaker.

The point we take away as investors is that brand can no longer be relied upon to generate earnings power and sustain competitive advantage in the way it traditionally has done.     

From a portfolio standpoint this suggests an increasing risk in the ‘quality consumer’ space which we observe has become increasingly crowded. Brand is one of the most relatable and identifiable sources of competitive advantage and many global portfolios focused on long term growth are built around a core exposure to brand owners. In contrast within our Global Leaders portfolio we take a much more holistic view of the components of a company’s moat encompassing the strong franchises operating in the B2B space, well removed from the threat of Voice. Notably just three of our nineteen stock holdings operate in the consumer staples space.

As the trends in Voice play out the likelihood of a deeper debate around the anticompetitive influence of Amazon may well be unavoidable. The slow, but inexorable, burn towards regulation of big tech is one of the many reasons we do not hold any FANG-like stocks in our Global Leaders portfolio.



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