investment viewpoints
Discovering and investing in the most valuable brands of the future
Investing in the world’s future most valuable brands requires an understanding of the secular forces driving long-term societal change and consumer megatrends.
Our world brands equity strategy has invested in the world’s leading, upcoming and digital brand names in order to generate capital growth since 2009. Our strategy focuses on superior financials, commitment to sustainability, and the establishment of a successful brand label or a portfolio of brands. Most of these brands have very solid balance sheets with little debt and very high free cash flow generation. These brands typically have pricing power, loyal consumers and in many cases, a high switching cost. Thanks to the power of the brand, companies like Apple1 can expand into new product categories like music and movies streaming.
Many of these consumer-facing brands, in particular our digital brands and upcoming Chinese brands, have demonstrated their ability to perform well during crises, such as the ongoing COVID-19 pandemic in 2020. Brands like the Chinese streaming platform BiliBili targeting the younger generation (Gen-Z), Japanese video games brand Nintendo or the e-commerce giant Amazon1 are linked to home entertainment and the means to work from home, both of which have been integral to the effectiveness of quarantine measures. Around 40% of our strategy’s exposure is now to digital brands.
A number of large international brands in technology and consumer space also have an eye on the evolving shopping experience, in anticipation of digital and connected consumption becoming bigger than offline consumption. In 2019, Canadian yoga-centric apparel brand Lululemon announced a five-year growth plan with the aim to double online revenues within 5 years. Nike has previously stated that it expects over half of its sales to eventually come from online, and has opted to appoint a tech executive as CEO, specifically in order to accelerate the company’s digital transformation.1
The pandemic is not the only force impacting consumer behavior, however. Identifying brands that are expected to perform well in the future requires keen analysis of secular forces which are driving long-term change.
Demographics and the rise of the brands in the East
Our world’s changing demographic makeup serves as an example of a megatrend that will bring about change worldwide. The global population is set to grow by a billion persons by 2030 and the global middle class is expected to add 2 billion to reach 5.3 billion people over the same period. This expanding middle class and the new digital generation represent an enormous opportunity for leading and new brands. China and India alone are expected to represent over 43% of the global middle class within the next 10 years. Companies that are best positioned to meet the demands of this consumer class in the East will be at an advantage, and there will be a very noticeable impact on brands which effectively align themselves with this development.
This will most likely be a contributing factor to the ongoing ascension of Chinese or Indian brands. We anticipate multiple Chinese brands, in particular, will be ranked in the top 10 of the world’s most valuable global brands, versus only US and EU-based brands today. Research from BrandZ reveals that among the nine brands entering the most valuable ranking for the first time in 2019 were four brands from China, including smartphone brand Xiaomi, and home appliance brand Haier.1
Digital and connected consumption
The largest and most powerful megatrend for all brands worldwide is the shift from offline to online consumption. Success and failure of a brand in 2020 during the ongoing COVID-19 pandemic has been driven by the ability to engage digitally with consumers and sell goods and services online. In addition to grocery shopping, entertainment is moving online, attracting new consumers.
Brands will be able to increase the consumer’s digital experience with the help of artificial intelligence (AI) on their own internet site, e-commerce platforms and social media platforms, reinventing the shopping experience. Consumers are becoming better connected and increasingly used to fledgling technologies such as virtual reality. Amazon1, for example, offers an augmented reality service which allows consumers to see products in their own homes prior to any purchase. A post-COVID world may place even greater emphasis on the ability to shop from home. Social media platforms will enable brands to engage with millions of user on a more personal level and reach all new consumer groups around the world in an easy and cost efficient way.
Digitalisation also has long-term implications for the entertainment industry. One promising category of future digital brands which grew very fast in 2020 is esports. The esports market expected to hit USD1.1 bn in 2020, representing a 16% increase on 2019. A number of notable brands have grown their presence in this space recently, including Chinese digital brands Tencent and BiliBili.1 Another promising area is sharing platforms. The shift from ownership to experiencing goods through sharing is growing very fast in many consumer product categories.
Future consumption is not only increasingly digital but also more ethical and healthier
Another of our core beliefs is the idea that healthy living will continue to grow in popularity. According to the Global Wealth Institute the market for the so called “Global Wellness Economy” stood at an estimated USD4.5 trn in 2018, encompassing a range of sectors including cosmetics/personal care with a market size of 1.083 trn and physical fitness with a market size of USD 828bln. The breadth and scale of this rapidly expanding market has implications for a diverse range of households names including L’Oreal and Nike, for example.1 Also very promising from an investment opportunity perspective is new brands entering the healthy food and weight loss market, currently valued at USD702 bln. This trend has further to run, in our opinion, not least due to a renewed interest in health and wellbeing that is an inevitable consequence of the COVID-19 pandemic.
Our final core belief is that a sustainability mindset will become standard among consumers, investors and in boardrooms. The sustainability revolution is already well underway and it is set to drive exponential growth in ethical spending. The increased appetite for more responsible consumption drives companies to find new solutions, innovate and even create new product categories or industries. One new product category, for example, is the push of the auto industry to electrify automobiles with different technologies. So far, electric vehicles or hybrids are expected to grow in popularity. This has implications for brands such as Tesla, which seeks to dominate this new auto segment with best-in-class and scalable technology to elevate Tesla’s brand in this category.1 Industry experts expect a penetration rate of at least 45% in China, for example, by 2030.
We believe a series of trends and challenges are underway that will transform economies and the brands that drive them. Brands which embrace digitalisation, seek success in the East with new consumers, and have more sustainable products are more likely to thrive, whereas those which are unwilling or unable to meet these developments head on will be left behind.
Long-term investment in the future’s most valuable world brands requires an appreciation and understanding of these trends and the impact they are expected to have on society.
