“History doesn’t repeat itself, but it does rhyme.” – Mark Twain*
Market pundits trot out this quote all the time when discussing the markets. It often rings true. Then there are times when history dumps everything into an industrial blender and hits the frappé button.
For well over a decade we have been dealing with the fallout of the GFC. This has come with a ultra-low interest rate environment. This has forced investors to look for returns in private equity and venture capital. This ‘free money’ has made it much easier to build out a business that either creates a whole new category or takes on an entrenched brand. Which begs the question, what if legacy brands aren’t worth they thought they were? As Josh Brown at the Reformed Broker writes:
In the battle for capital right now, the brands and intangibles and user bases and networks are winning by a landslide against the things that used to be important. And the companies that are rich in those old fashioned things, like Walmart, Disney and McDonalds, are spending all of their time and attention to transform themselves into the spitting image of their upstart competitors.
The most recent example of this is Kraft Heinz, a large Berkshire Hathaway holding. The company wrote down the value of its goodwill for the second time in six months. If you believe management these were ‘starved brands.’ What if Kraft and Heinz are ‘zombie brands’? Doomed to wander the earth in search of something that will never revive them to their original form.
When its cheaper and easier to build something new, it makes sense that consumers can (and will) downgrade older stuff. Jamie Powell at FT Alphaville calls this the ‘death of cultural transmission.’ If Kraft mac and cheese can fall victim to this phenomenon, then brands as big as Star Wars may be at risk as well. Powell writes:
“But with Netflix chief executive Reed Hastings naming sleep as a “competitor”, mobile gaming on a exponential rise, and smartphone usage among teenagers regularly described as an addiction, it is also hard to believe that a 40-year-old movie franchise can endure to the same degree it did before. And that could be a problem for Disney.”
It’s not that new trumps old. It’s that there is so much new coming out, so rapidly, that some of it will resonate with consumers and displace legacy content (and brands). That isn’t to say there is no value in old brands.
Brands are like Ben Graham’s proverbial cigar butts. There is always a chance of getting a few more puffs out of a legacy brand. Blackrock’s new private equity fund took control of Authentic Brands. They must think there are a few more puffs in classic brands like: Marilyn Monroe and Sports Illustrated.
Legacy companies are not going to give up without a fight. That is why companies like General Mills are willing to spend big bucks to make Lucky Charms relevant again. We will see whether this bet on retro cool works.
Did you know that payment company PayPal has a market cap of roughly $125 billion compared to Goldman Sachs with a market cap of roughly $74 billion? Surprising, for sure. Not a direct comparison, for sure. You can argue whether this relative valuation is correct or not, but you can’t argue it doesn’t matter.
There are going to be more examples like this. Beyond Meat being the most prominent of late. A new company, backed by a bottomless well of venture capital, that is disrupting incumbent brands. Thereby forcing these companies to find ways to relevant in a new way or go by the wayside like the last puff on a dying cigar.
*As a general rule, when in doubt attribute a quote to Mark Twain.