Brands Are Not Always What They’re Cracked Up To Be

Brand matters in CPG but not in automobiles. The difference comes down to cost structure.

The Automotive Paradox

There are many valuable auto brands—Porsche, Ferrari, BMW, Mercedes—but brand does not provide a barrier to entry when measured by ROIC and market share stability. Customer loyalty tops out at 30%, purchase frequency is low, and online research keeps search costs down.

Cost Structure Explains It

In automobiles, R&D and advertising make up only 6.5–9% of total costs despite totaling $11–13.5 billion in dollars. Simple inputs—materials and labor—overwhelm the cost structure at 87–88% variable costs.

Contrast With CPG

In consumer packaged goods, variable costs are only 63% of total costs. Marketing, distribution, and SG&A comprise the majority. This ~24% difference in cost composition makes a huge difference in the power of brand as a barrier.

The Takeaway

It is too simplistic to declare that brand matters or doesn’t. It depends on the cost structure of the industry and the nature of purchase frequency to see what barrier brand might provide.