This is Part I of Building Bulletproof Brands, a series that explores how the internet destroyed traditional moats for physical goods brands while also creating new ones that are stronger than ever before.
How does one build a brand that lasts for centuries? Today, in the consumer goods space—specifically in apparel, fashion, footwear, beauty, cosmetics, accessories, and furniture—it's an especially challenging quandary given the ferocious speed at which Amazon and fast fashion giants like Zara and H&M are growing, while other legacy physical goods brands are struggling. The internet reorientated the playing field for brand durability and is now forcing both upstarts and incumbents to think about brand in an entirely new way.
This series puts forth a framework for building lasting physical goods brands in the 21st century. Part I looks at the previous formulas for building lasting brands and why they no longer work. With this history in mind, Part II proposes a new formula for building durable brands. Finally, Part III highlights the promising technological advances and opportunities that are enabling new bulletproof brands to exist and outlast their predecessors.
Businesses vs Franchises
Before diving into the specifics of building lasting brands, one has to understand why some companies last while others do not. This comes down to a simple idea: a company lasts for centuries because of the inherent mechanics of its business, not because of the quality of its management. Warren Buffett's 1991 letter to Berkshire Hathaway shareholders explains this idea as the difference between a franchise and a business.
An economic franchise, according to Buffett, is a company whose product or service 1) is needed or desired; 2) hard to substitute; 3) financially unregulated. These three factors allow the company to "regularly price its product or service aggressively and thereby to earn high rates of return on capital." A franchise's underlying fundamentals are so strong that the company can prosper regardless of mismanagement, which is bound to happen at some point in a company's existence.
A business, on the other hand, is only competitive if its product or service is cheap or scarce. But these two attributes are fickle, according to Buffett. "With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack." Poor management can ruin a business, while it can only hurt—but not kill—a franchise. Buffett concludes that most companies fall somewhere in between a business or a franchise, and "can best be described as weak franchises or strong businesses."
Today, most companies in the consumer goods, retail and fashion space are businesses by Buffett's definition. Some are weaker and some are stronger, but they remain businesses that either compete on scarcity at the high end (luxury brands) or compete on price at the low end (middle and lower market brands). Maintaining solvency on these two vectors is, as Buffett explains, entirely predicated on good management.
Most products and services can be substituted for others (Shoe A is not that different than Shoe B), which makes individual products hard to defend. The vast majority of physical goods businesses don't have any inherent moat, which is any sort of competitive advantage a company has over time relative to its competitors. Since a company and its brand are intertwined, a fickle business means a fickle brand—one that might last for years, not centuries.
Franchises, however, prosper over time by creating a virtuous cycle from a product that is in high demand, impossible to substitute and untouched by pricing regulation. While it's possible for most consumer goods products in the retail, apparel, fashion, footwear, accessories and furniture space to fall into this category, few have figured out how to become franchises. Since a company and its brand are intertwined, a durable franchise means a durable brand.
Product + brand + distribution
Before the internet, most successful brands were the combination of product + brand + distribution. These three elements took massive amounts of time and money to create and maintain. The integration of these three factors created some of the most well-known physical goods brands of the twentieth century, including Ralph Lauren and Tory Burch in the middle of the market and Levis and American Eagle on the lower end of the market. At some point, each of these brands succeeded by building a desirable brand, pairing it with a desirable product, and using retail stores to make it physically accessible to different types of shoppers.
While the integration of product, brand and distribution sustained many physical goods companies, it is no longer enough. The internet commoditized product, brand and distribution. These three developments have fundamentally challenged the viability of most companies—their one-time advantages have evaoprated.
1) The commoditization of product
Before the internet, designing and producing products took an immense amount of time and money. Highly trained product designers and engineers would spend considerable time and money bringing products to market. Prototyping required tons of connections, logictics and machinery, which took months to procure. Then, bringing prototyped products to market required maintaining complex supply chains that were managed using fax machines and phone calls. Once a company put this much time and effort into creating a product, another company would have to spend nearly, if not more, time on it to seriously compete. Because of this, there was simply less competition between products.
Then the internet happened, which crushed the barrier for design and prototyping, in addition to making supply chains globally and instantly accessible with an internet connection. This decreased the time it took to bring products to market. With enough networing, resources and time—which are easier and cheaper to come by because of the internet—envisioning and producing most products is now increasingly possible.
Today, the vast majority of products can be copied and produced. The extreme end of this process is quite simple: people send a product to a factory and say "make this cheaper or different—or both." In due time, they will have a "good enough product" in their hands. Most products, especially disruptive ones, start at this level. With more time, resources and expertise, the good enough product becomes better and better and surpasses many existing products on the market that stood still.
It's easy to see the effects of this lower barrier of entry from the litany of knockoffs and copied products flooding the toy, electronics, furniture and apparel industries. Buzzfeed even coined the term "memeufacturing" to signify the commodification of product at the internet's hands.
More realistically, one can see the effects of this shift on Amazon, as the company builds out its private label offerings across multiple verticals. The company has twenty different private label brands at last count, a number that will continue to grow. There are countless stories about vendors selling products on Amazon only to learn that the company's private label arm, often under the title of Amazon Basics, designed its own version and sells it at half the price. If Amazon hasn't done it (yet), someone selling on Amazon's third-party marketplace will.
The other place to see the commodification of product is in the fall of product-driven brands. One example is J.Crew, run until recently by “merchant prince” Mickey Drexler, who built merchandising-focused brands such as Old Navy, Banana Republic, and Madewell. Drexler made his career by focusing on technical product details such as the weight of fabric, trims and details. At a conference in 2010, talking about J.Crew, he said that “at the end of the day, I think the franchise lasts as long as the creative product gets flown through.” What he failed to realize is that the product attributes he mentioned—the fabric, trim and fit—are less of a differentiator every day as the barrier to entry continues to fall. He is far from alone, but his misunderstanding of how the industry's underlying fundamentals are changing should be a cautionary tale.
While the majority of products are not defendable, a very small percent of products are because of the degree of innovation in their design and manufacturing processes. Apple's iPhone, Tesla's Model S and Dyson's Ball Vacuum fall into this category. The ability to manufacture and scale these highly innovative products is also defensible. Zara has one the the most nimble supply chains in the world, which allows it to respond to demand at scale faster than any other company. Apple has one of the most complex international supply chains, which allows it to deliver the highest quality and highest margin products in the world. These exceptions are successful because innovative design and manufacturing is deeply embedded in these companies' culture which, at scale, is hard to replicate. This expertise remains defensible.
Even so, copying happens in business every day. This creates an exponential amount of noise and competition for shoppers, which is the reality of a competitive market. Surviving is the crucial difference between a business and a franchise. A business can be in jeopardy if another business copies its product, but a franchise can maneuver past these issues and often escape untouched. While it's still technically possible to build a franchise around a product, it's increasingly rare. Besides a handful of exceptions, product is no longer enough to make a brand bulletproof.
2) The commoditization of brand
Historically, a company would enlist graphic designers, ad agencies and media buying agencies, and then plow tons of capital into marketing to grow quickly and universally. Spending money on this legacy infrastructure (billboards, print ads, commercials) created a virtuous cycle: the more a brand spent, the more powerful it became. The more powerful the brand, the more it would spend to retain that power. This is how many of the biggest consumer goods companies—Pepsi, Kraft, Nike, Adidas, Gap, Levis, Ralph Lauren, etc—asserted their dominance.
But the internet has democratized many of the tools that were traditionally used to communicate, while slashing the cost of reaching a sizeable audience. Adobe Photoshop and Illustrator make graphic design simple; Facebook and Instagram ads, which anyone with a credit card can purchase, allow a brand to spread; and a touch of virality on these social networks makes a brand known. Without a lot of capital—one doesn't need to endlessly buy subways ads—brands are growing left and right. Brand is often considered something earned, not bought, but the power of social media has collapsed the time it takes for a brand to earn its dominance. However, building only a strong brand creates a business, not a franchise.
3) The commoditization of distribution
Before the internet, if a physical goods brand based in New York wanted to reach a customer in California, it would have to open a store or send a paper catalog, which both have high marginal costs. Testing new markets and then expanding into them required significant investment. If a brand wanted to grow, it could only do so linearly, opening physical store after physical store.
The internet changed everything. Distribution prices for physical goods dropped drastically online. Consumer goods can’t be copied infinitely for no additional cost like digital goods such as songs or movies. But brands can now leverage the integration of an ecommerce site, advertising and shipping to serve exponentially more customers. Reaching a customer in New York versus California is a difference of a few dollars, not hundreds of thousands or millions.
Ecommerce, advertising and shipping still cost money but the investment to get started is substantially less money, which is significantly more powerful than a pure retail model. Platforms such as Squarespace and Shopify make opening an online store incredibly easy, further democratizing the powers of online distribution for physical goods companies.
Despite these new advantages, not every new brand will last. But some form of success is more achievable faster than it was before, which is often referred to as the Long Tail. Etsy, for example, allows over one million sellers to build businesses from their homes while Shopify allows hundreds of thousands of merchants to open online shops and sell internationally in a matter of minutes. The ability to build sustainable businesses within niches is one of many new opportunities. However, distribution alone is only enough to build a business, not a franchise.
(Brand + Product + Distribution) x Community
In the past, product + brand + distribution was not the only formula for success. One other main formula took product + brand + distribution as the foundation and layered on community. A community is a group of people that share common values or traits. For a physical goods brand, community is the bond between the brand, the product and its customers, signified as (brand + product + distribution) x community.
This formula is most applicable to the luxury market. Brands such as Hermés, Louis Vuitton and Chanel integrated brand and product, and then built a community around price, quality and exclusivity. Hermés, for example, built its community—which drove the brand's exclusivity—around hard-to-get pieces like the Birkin Bag. Those who could afford and procure one were part of the community, and everyone else was not. The same could be said for other luxury items and the division of the haves and the have-nots. (The products that create the community often diverge from the products that drive the business, as Hermés is Hermés because of The Birkin Bag and its ilk, even though it makes most of its money from scarves and perfumes.)
This type of community is a surface community, which is a top-down community predicated on surface-level (and hard to defend) attributes such as price, product or exclusivity. Surface communities are strong when they are unrivaled but can buckle under heavy competition. For example, when tons of fake Louis Vuitton or Gucci bags flood the market, these companies take a hit since their brands are closely tied to the scarcity of their product, as are the associated logos and prints. When scarcity slips—and it usually will as a function of growth—the entire company and brand suffers.
Predicating a business on product scarcity, as Buffett says, is very challenging to maintain and often does not last long. Even if a product remains scarce longer than most others—the business is strong but remains a business, not a franchise—the resulting community itself is not that defensible.
Building and sustainaing a company's brand, product, distribution and community is not easy. Mastering any of these pillars, let alone all four, takes a lot of time and hard work. However, this does not mean it's defendable over long periods of time. This is not a frivolous or blasé take, but rather a sobering understanding of the hyper-competitive landscape and how challenging it is for companies to retain their advantages.
Defensibility is still possible, but it looks nothing like it used to. If brand + product + distribution is no longer the formula for a lasting brand and (product + brand + distribution) x community is workable but fickle, what is a durable framework to build franchise brands with? The answer lies not in top-down communities, but in scalable and decentralized networks, to be discussed in Part II.
This is Part I of Building Bulletproof Brands, a series that explores how the internet destroyed traditional moats for physical goods brands but created new ones that are stronger than ever before. Read Part II next.