Is disruption changing everything?
Technology is disrupting everything from cars to healthcare, but that does not mean successful brands have lost their emotional power.
In a year of rapid political changes, it is all too easy for investors to miss important shifts elsewhere. Among these, few themes have been more important than technology, which has continued to disrupt traditional business models across a range of industries.
In the UK, a slew of retail redundancies, store closures, negative earnings announcements and bankruptcies cannot be put down to Brexit pressures alone, even if political uncertainty may have been a factor. Many long-standing High Street chains continue to suffer from the disruptive impact of online shopping – dubbed “the Amazon effect”. The pace of change has led to warnings that the High Street itself may not survive in its current form.1
“The rise of the internet presents headaches for big brands,” says Michael Collins, investment specialist at Magellan Asset Management. “One challenge is the ease of price comparison either via apps such as ShopSavvy and BuyVia or by checking on Amazon.com. This development limits the ability of Big Brands to charge premium prices.”
Yet if the consumer retail sector is often the most visible victim of technological disruption, it is very far from being alone. Take dentistry, and the time-saving impact of a new device called a CEREC that is being sold by Dentsply. If you’re missing a tooth or need a tooth replaced, the CEREC machine allows the dentist to take a scan of your mouth – and makes you a new tooth there and then in the dentist’s office.
“Historically, the dentist would take an impression, make a cast, send it to a lab, the lab would send it back, and then you’d come back once or twice to have the new tooth installed, whereas now they can do it all in one stop,” says Dan O’Keefe of Artisan Partners, manager of the St. James’s Place Global fund, which owns Dentsply. “That’s why the penetration of the machine has doubled from 10% of dentists in the US to 19% – it’s a fantastic machine. And there are hundreds of millions of people worldwide who are missing a tooth.”
Some of the areas facing disruption are fundamental to everyday life, among them transportation. Indeed, the biggest car brands are facing once-alien pressures, from the rising importance of a car’s software (as opposed to hardware) and even from new upstarts. Not long ago, the established players felt relatively secure, given the time it takes to build a successful auto brand and the complexity of their manufacturing processes – the average car has 30,000 parts.2 Today, that security is fast evaporating.
“One of the biggest themes in the future will be mobility,” says Mark Baribeau of Jennison Associates, co-manager of the St. James’s Place Balanced Managed fund. “In the third quarter of 2018, Tesla’s Model 3 was the number one selling automobile in the US by value – and was fifth by number of units. This upstart with an underdeveloped concept is already leading in terms of sales in a very large economy and it’s upsetting the auto industry because they’re going to be left behind.”
Moreover, the shift to electric cars is already gathering pace much faster than expected. Until July this year, the NIO EP9, a Chinese-manufactured electric supercar, held the production car lap record for the Nürburgring, before top spot was reclaimed by a Lamborghini.3
“In 2015, the transition towards electric cars was seen as a 2030 story if we were lucky,” says David Winborne of Impax Asset Management, manager of the St. James’s Place Sustainable & Responsible Equity fund. “The technology was perhaps there but the infrastructure wasn’t. But over this relatively short period, the transition to electric cars has come to be seen as a 2025 story, not a 2030 one. One of the drivers has been government policy – another has been improved battery life.”
As if that wasn’t already enough, car manufacturers may be facing a still more fundamental threat, with the very concept of car ownership now in question.
“You almost never actually use a car, so why own it? Why not just hail a ride on your smartphone?” says Baribeau. “And that’s what’s happening. You specifically see it among millennials, where car ownership is lagging.”
Yet in some areas, technology is going further still, not merely disrupting old industries, but disrupting the broader market by introducing entirely new ones.
“There’s a kind of disruption that is creating an entirely new business or industry that didn’t exist before,” says Sunil Thakor of Sands Capital, co-manager of the St. James’s Place Global Growth fund. “That’s what’s happened in the world of genomics, an industry being pioneered by Illumina, an American company. Illumina can sequence all of your 20,000 genes and unlock your genetic code. Its tools play a big role in the pharma R&D business.”
Capitalism has long been associated with “creative destruction”, a term popularised in 1942 by Joseph Schumpeter, an Austrian finance minister and political economist (although the concept was derived from Karl Marx and possibly even Charles Darwin). However, the rate of that destruction has been notable in recent years – and even the disruptive technology giants aren’t immune.
“Who’s going to compete with Google, Facebook or Amazon? They basically have won the war and the competition mechanism no longer works,” says Tommy Garvey of GMO, co-manager of the St. James’s Place Balanced Managed fund. “These are valid points. Every decade, you could invest in Fortune’s top ten companies, go away and do nothing about it.”
“But if you look at the top companies in 1999, seven of them went bankrupt and three had big scandals. So we accept that things have changed and some of these companies are genuinely exceptional. But we would rather understand companies and pay what we believe to be fair prices.”
The brand is dead?
Amid all this change, it is tempting to conclude that the old brands are on their last legs, merely waiting for the next technological whirlwind to rip away their market share. Michael Collins of Magellan believes the big brands face no fewer than six major threats: health concerns; escalating trade disputes; complaints and campaigns on social media; internet-facilitated price comparison; growing vulnerability for the franchise model (given retail disruption); and the potential for tighter antitrust rules.
Yet Collins also sees great strengths in some of the established brands. Steve Jobs, founder of Apple, once said: “I don’t know if, in 50 years’ time my iPhone will still be a success but…everyone will still drink Dom Pérignon.”
Collins agrees with the sentiment and gives the example of Robert McNamara, who was US defence secretary from 1961 to 1968. Strictly rational in his approach, McNamara had previously worked for Ford, where he pushed the concept of efficiency above all else – and at the cost of style and elegance. His approach was not successful.
“He failed to grasp the insight the consumer giants had gained at that time; that marketing emotion was how to sell quality goods when competing against other worthy goods,” says Collins. “To create ‘category leaders’, titans such as Proctor & Gamble and Unilever studied their products and customers to form ‘branded propositions’, or marketing strategies, that tugged on emotions to magnify product advantages or nullify deficiencies. Philip Morris’s Marlboro Man, for example, was designed to overcome the view that filtered cigarettes were effeminate.”
“Appeals to self-esteem, aspiration, winning and optimism succeeded in two ways, as long as product quality held; they helped build market share and allowed companies to charge more. Retail chains noticed this success. So they developed brands, which spawned ‘own’-labelled goods.”
For investors, technology may be disrupting established industries left, right and centre, but they are not yet altering human nature.
In short, reports of the death of the brand may be exaggerated.
Artisan, GMO, Impax Jennison, Magellan and Sands Capital are fund managers for St. James's Place.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The opinions expressed are those of Artisan, GMO, Impax, Jennison, Magellan and Sands Capital and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or adopt a strategy. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.
1 http://www.retailresearch.org/whosegonebust.php, accessed 21 December 2018
2 Source: Japanese Motor Works, accessed 21 December 2018
3 Source: Digital Trends, accessed 21 December 2018