Consumer attitudes and spending patterns are expected to be very different after COVID-19 and competition will be intense.
Now more than ever, investors need to pay particular attention to a company’s brand and its client segmentation as we emerge from the pandemic recession. While the recovery should provide some uplift to most company profits, consumer attitudes and spending patterns are expected to be very different after the pandemic and competition will be intense.
Initially, consumers will look to make up for lost time and splurge on experiences, leisure, and hospitality. But COVID-19 has also led many to rethink their priorities, the way they work and engage with community and purpose. Surveys suggest that consumers are likely to be bolder and far more experimental in this recovery and be attracted to brands that reflect their positivity.
Investing in companies that have created strong brand recognition has always been an important element in stock analysis. While financial metrics and the quality of management normally attract the first wave of attention of investors, understanding the intangible element of a brand in helping to create an economic moat around a company that shields it from the full uncompromising force of competition has always been critical.
At its heart, a strong brand is what attracts and retains customers. A brand that is distinctive and relevant will not only attract a greater share of the market but will also be able to charge a premium for its products or services. Brands become a shortcut for decision-making.
‘Don’t #@!% the customer’
In a sea of competition, a great brand will attract more of the target audience through a combination of visual, auditory and memory cues that drive purchases. In time, this will drive an increased share of wallet and ultimately advocacy and referral to new customers. Good brands drive growth which increases the ease of raising capital, investing in product development, and taking out competitors.
When the health response to the pandemic was to put economies into hibernation, businesses hunkered down to protect cash flow. Marketing and investment in branding are often the first things to get cut in a downturn.
While cancelling a media schedule or campaign in a brand feels like a spending tap that can be turned off immediately with little apparent consequence, the opposite has often tended to be true. It has been proven many times in academic research, notably by Harvard’s Roland Vaile in the US recession of 1921 to 1922, that companies that continue to invest in their brand through a downturn will recover faster than those that stop investing. Henry Ford once said: “A man who stops advertising to save money is like a man who stops a clock to save time.”
Marketing and brand development are inextricably linked but when companies invest in spin versus substance, investors need to know. Transparency is heightened in the modern digital world and companies that are not authentic eventually get exposed. Volkswagen lied about its environmental credentials and did enormous brand damage in the process.
Slick advertising campaigns, which customers don’t believe, have the capacity to turn us off a brand quickly as we develop negative associations with their products or services. It would seem obvious that all companies should follow the Atlassian core value of “Don’t #@!% the customer” but it’s surprising how many companies aim to profit at their customers’ expense.
There is a massive difference in marketing that genuinely aligns with a business’ values in driving positive brand associations and helping customers to make a more informed choice. A great example was Woolworths recent “green” campaign, which promoted its commitment to being 100 per cent renewable by 2025. It was authentic, distinctive, relevant, and provided a direct connection to many of its customers’ value sets.
For investors, putting a price on brand value has always been the complicated part. International accounting standards prevent the recording of brands as assets on financial statements due to their subjective nature. However, the goodwill from previous acquisitions is recorded as an intangible asset on balance sheets.
While difficult to value, good investors know it when they see it. Companies such as Tesla and Apple transcend their markets and can command a premium to their competition. The successful maintenance of strong brands allows the brand owner to earn an economic rent above its cost of capital while generating above-average growth. Simply put, their enterprise value reflects their current customer loyalty as well as an expected premium over other competitors well into the future.
Brands that achieve resonance earn a special place in consumers’ lives and consumption routines. COVID-19 has redefined what is important to customers. Priorities have shifted. Relevance comes from a deep understanding of the customer and their journey from awareness to purchase. Being distinctive in the sea of competition takes effort, but the rewards are worth it.