Showing posts with label brands. Show all posts
Showing posts with label brands. Show all posts

Monday, March 17, 2014

The Drive to Luxury: Commodity Fetishism or Innate Human Need?

Over the last several decades, across the globe, there has been a marked increase in consumers' collective demand for luxury goods.  What are luxury goods and why do consumers seem to express such an insatiable demand for them?  While most researchers cannot agree on a standard definition for luxury goods, they generally agree that it is any consumer product or item that is not a true "necessity."

In other words, access to potable water is a necessity to survive in the world, but owning a diamond-studded watch is not.

Some researchers argue that the luxury marketplace focuses the consumer on a perceived need to belong to an elite group and manifests desire for extremely high quality products, often far in excess of actual need.

Some political commentators on the left have argued that luxury goods are a negative form of "commodity fetishism," a term coined by Karl Marx. Marx decried the capitalistic drive toward exclusionary private property and seemingly irrational desire for classist exclusion that he believed luxury goods represent.

He argued that humans were encouraged to ascribe irrational value to arbitrary materials (such as gold or diamonds), which then are perceived as having a false "intrinsic" value in the marketplace.  He argued that such exclusion was designed to oppress the working classes, and served no other socially beneficial goal.

Yet, despite persistent economic turbulence and political instability in many emerging markets, the global luxury goods market remains largely robust.  Indeed, the pursuit of luxury has been a sustained growth trend, even in societies that have experienced substantial political perils.

But is this trend just a blip, or a new long-term reality?

I contend that the drive toward luxury is a positive feature of normal human economic and psychological development, and not just a short-term phenomenon or an irrational manifestation of oppressive capitalism gone awry.

As any human society develops, its' collective needs and consumer preferences will gravitate from satisfying the lower-level human needs (such as general stores selling staple household goods) toward increasing demand for brands that represent quality, the respect of others and social achievement.

Maslow's hierarchy of needs is a theory in psychology proposed by Abraham Maslow in his groundbreaking 1943 paper "A Theory of Human Motivation" in Psychological Review:

In essence, Maslow argued that all human behavior can be analyzed within the general framework of this pyramid, representing a dynamic progression toward higher thought processes and a greater degree of social functioning as one's temporal needs are met.

In other words, once a person's immediate physical needs and safety/security are satisfied  he will gravitate toward forming communities and families, and eventually, trend toward morality and achieve self-actualization.  Without one's lower-level needs met, that person -- and eventually his entire society -- will flounder.

From the perspective of predicting and analyzing consumer behavior, Maslow’s hierarchy can be thought of as also predicting macro-level social mobility and consumer preferences.  Such a model allows one to understand trends in demographics, and even develop sound long-term financial and investment strategies.

In other words, in a properly functioning society where social mobility is fluid, eventually, the retail options will become higher-end, and luxury goods retailers will move in.  The “local hardware store” will be replaced by a mass market retailer.  The mass market retailer eventually will be replaced by the shopping mall.  The shopping mall eventually becomes filled with luxury goods retailers.

Therefore, over time, as societies economically, psychologically and demographically evolve, luxury goods should become both desirable and attainable.

Financial data bears this trend out. Standard & Poors Global Consumer Enterprises Index is comprised of thirty of the largest publicly-traded companies in the GICS consumer discretionary sector that meet specific investability requirements.  The index provides exposure to leading publicly-listed companies in developed markets, which meet minimum international revenue exposure requirements.  100% of the companies included relate to consumer discretionary spending.  

Since this custom Index was created by S&P in 2009, it has demonstrated 5-year annualized returns of 25% growth, an astounding rate of return: 

Empirical consumer survey data bear out this trend, as well.  In a recent survey conducted by Empathica Consumer Insights Panel, the largest reported reason that consumers made a luxury purchase was to "reward themselves" (31.9%), although many consumers also indicated they were finally getting around to buying a luxury item that they had previously delayed purchasing (17.5%).  

Others bought a luxury good for a significant other (12.5%), or said they had extra money to spend and just wanted one (11.5%).  Despite the recent recession, three out of four consumers indicated that they perceived that there are the same or even more luxury brands available today than there were two to three years ago, making this luxury goods market more competitive than ever.  Interestingly, 28% of consumers also report that they will tell others about their luxury purchase through social media sites like Twitter, Facebook or blogs.

Therefore, consumers consistently express a deep need to have the ability to "reward themselves" through the purchase of a luxury good that was not a true necessity.  The approval, perceptions and respect of others played a critical role, as well.

Over time, I predict that this drive toward luxury is here to stay, as it represents the innate human drive to progress toward higher levels of achievement and acquire the respect of others, and not simply irrational exuberance or the exploitation of artificial demand.

Sunday, May 12, 2013

The Seven Dollar Toaster - How Brands Decline in a Disposable Economy

In 2012, I purchased a Toro brand lawmower at Home Depot for $400.  This lawnmower was supposedly "guaranteed to start."  After only 3 uses in 1 month, the mower simply and inexplicably refused to start again.  
After sending a personal letter to the CEO of Home Depot (that he actually responded to, to his credit), the retailer decided to replace the unit with a new one.  I used the replacement lawnmower only 2 times so far in 2013.  Now, the second unit refuses to start.
A quick visit to reveals that this Toro brand lawnmower received 38 ratings, 24 of which were only 1 star, the lowest rating possible on that site. Customer comments such as "piece of junk," "buy anything else," "broke after 3 weeks," disgusted" and "definition of a lemon," can only lead to the conclusion that Toro may end up facing yet another class action lawsuit.
But, in all honesty, what mass market brands haven't demonstrated a notable decline in quality in recent years?  This dramatic drop-off in quality that almost all household brands are exhibiting is called the "Wal-Mart effect," essentially blaming the power of the massive discount retailer for the decline of all brands.
For example, Wal-Mart sells a toaster that retails for $7.84 — a price that an article on Grist points out effectively renders its longevity virtually irrelevant.  If it breaks, just buy another.  
If you are another toaster manufacturer, how can you compete by offering a high quality toaster for $50? No, instead, you lower your own quality dramatically and try to sell competing toasters for $20 or $30.
Consequently, since 1995, the number of toasters and other small electro-thermal appliances sold in the U.S. each year increased from 188 million to 279 million. The average household now buys a new TV every 2.5 years, up from every 3.4 years in the early 1990s. These changes exceed the pace of population growth.
We buy more than 2 billion bath towels a year, up from 1.4 billion in 1994. In general, prices on household goods have fallen by about one-third since the mid-1990s.  Since 1994, the consumer price of apparel as well, in real terms, has fallen by 39 percent.  Quality, like price, is a fraction of what it used to be. 
And as Grist points out, while there are certainly factors beyond Wal-Mart that have contributed to this ever-expanding avalanche of consumption, Wal-Mart has clearly been a major driver of the trend.  Its astounding growth and profitability rest on fueling an ever-faster churn of products, from factory to shelf to house to landfill.
In a paper that was released in 2010, three business professors illustrated how inducing manufacturers to cut product quality enhances Wal-Mart’s competitive position: “Because lower quality products are usually cheaper to produce, it is often argued that discount retailers induce lower quality in order to drive down prices.  Our model suggests, however, that the competitive and bargaining position effects provide incentives to induce lower quality regardless of changes in production costs,” the authors write.
In other words, because of the fierce competition with Wal-Mart, all brands have an incentive to lower their quality and production costs each successive generation, in a perpetual bid to increase profits.  
Brand equity suffers eventually, but only relatively, since other brands' quality will decline, as well.  Many brands seem to have succumbed to this desire to increase profits over the short-term, without any real vision for how to survive the onslaught of customer complaints. Only time will tell which brands will survive this march to mediocrity in a disposable economy.

Wednesday, July 18, 2012

Mistakes Some Brands Make

For all the discussion of the outer limits of brand protection explored by companies who are pushing the envelope, here are five common mistakes that many brands make by not doing nearly enough.

1.  FAILING TO REALISTICALLY BUDGET.  Some companies fail to allocate an appropriate and realistic budget to support all the needs of a robust brand protection program.  This is one of the biggest mistakes that even well established, sophisticated companies make. A typical marketing department will comfortably spend millions of dollars a year placing glossy advertisements in Vogue that will attract a customer’s attention for a millisecond as she flips the pages. But that same company will spend a fraction of that budget to take down dozens of high-profile counterfeit websites that show up in a search engine's top results for the brand, even when those websites will confuse thousands of customers and measurably hurt sales.

2.  RELYING SOLELY ON THE GOVERNMENT.  Another mistake that some brand owners make is assuming that law enforcement personnel and Customs agents are familiar with their brands when they encounter counterfeits of their products during a raid or investigation.  The truth is that well-intentioned police officers and Customs agents can only seize and detain items that they have a reasonable suspicion is fake.  A brand owner cannot assume that the Customs officer looking through a cargo ship at a major port knows how to tell a real pair of sunglasses from a counterfeit.  That is why it is so important to reach out to law enforcement and develop ongoing relationships.  Train them to detect the differences between real and fake products of your brand.

3.  PRIORITIZING INCORRECTLY.  It is important to prioritize targets based on a variety of factors including size, but it can be a mistake to place seemingly “low-level” targets on the back burner for too long. In fact, some of the largest counterfeiting and smuggling rings can be uncovered by pursuing a seemingly small target, such as a storefront or street peddler. Sometimes, these sources will reveal a treasure trove of information about their counterfeit supply chain that can lead to significant seizures of counterfeit goods.

4.  GOING IT ALONE.  Another mistake some brands make is to go it alone, and try to take on the entire counterfeit industry in isolation. But savvy counterfeiters deliberately rip off dozens of brands in order to diversify and spread their risk, and also focus on what sells best in any given season.  Therefore, it doesn’t make much sense for brands to refuse to partner and share information with other brand owners, who are also victims in this struggle.

5.  GIVING UP ENTIRELY.  The absolutely worst mistake a company can make is to give up entirely and abandon their brand to the vicissitudes of the counterfeiters' marketplace.  Brand protection efforts require a long-term strategy, and while it sometimes feels like bailing out the ocean with a spoon, it is critical to stay the course.

Sunday, July 8, 2012

Pop Art: Free Expression or Trademark Infringement?

A frequently-asked question of Intellectual Property lawyers relates to pop artists' use of famous, trademarked products in the context of artistic expression, and whether such uses are protected free speech, or are really nothing more than infringement and dilution cloaked in the guise of art.  Examples include Andy Warhol's famous paintings of Campbell's soup cans (above), as well as the juxtaposition of famous brand logos on guns and weapons of war such as Peter Gronquists' controversial uses (see below).  The legal analysis is not simple, and depends largely on the factual circumstances surrounding the use of the trademarked products.

A trademark is a word, symbol or design used to identify the source of a product. In order for a court to determine if the unauthorized use of a trademark constitutes unlawful infringement, at least eight (8) non-exhaustive factors are considered, including: (a) the strength of the mark; (b) degree of similarity between marks; (c) proximity of the products; (d) likelihood that senior user will bridge the gap between the goods; (e) actual confusion; (f) junior user's bad faith; (g) quality of the junior user's product; and (h) sophistication of the relevant consumers. Polaroid Corporation v. Polarad Electronics Corp., 287 F. 2d 492 (2nd Cir. 1961).  Additionally, the Court will consider if the use is "likely to dilute" the fame of a famous trademark through either blurring or tarnishment. 15 U.S.C. § 1125.

Even when grounds for a potential infringement or dilution claim exist, certain defenses are available to an artist depicting the trademarks in an artistic creation. Primarily, the artist may be able to defend the claim on the grounds of "fair use" of the trademark. However, fair use is an affirmative defense, which means that it is only asserted once the artist has been sued in court.
An illustrative case involving the use of trademarked products as part of an artistic creation is Mattel Inc. v. Walking Mountain Prods., 353 F.3d 792 (9th Cir. 2003). In that case, photographer Thomas Forsythe developed a photographic series entitled "Food Chain Barbie," which depicted Barbie dolls in various disturbing and provocative positions, such as being roasted in an oven or in a blender and fondue pot (see below):

Copyright Thomas Forsythe
After being sued by Mattel, Forsythe argued that his creative images attempted to "critique [ ] the objectification of women associated with [Barbie]," and to "lambast [ ] the conventional beauty myth and the societal acceptance of women as objects because this is what Barbie embodies." Id.
The Ninth Circuit Court of Appeals found that Forsythe's use of the Barbie dolls in this manner constituted fair use, as it was transformative, defining this requirement as: "add[ing] something new, with a further purpose or different character, altering the first with new expression, meaning, or message." Id.
The Ninth Circuit explained that "when [trade]marks 'transcend their identifying purpose' and 'enter public discourse and become an integral part of our vocabulary,' they 'assume[ ] a role outside the bounds of trademark law.' Where a mark assumes such cultural significance, First Amendment protections come into play: '[T]he trademark owner does not have the right to control public discourse whenever the public imbues his mark with a meaning beyond its source-identifying function.'" Id.
To try to address concerns about exposure to claims for trademark infringement, some artists incorporate disclaimers in their catalogs or on websites that advise the consumer that the use of the trademarks is not licensed or authorized by the trademark owner. While a disclaimer can help address possible confusion, it does not guarantee freedom from liability.
Ultimately, to prevail in convincing a Court that a particular use of a trademark in a painting or photograph is sufficiently transformative to shield that use behind the First Amendment, will depend on the facts of the given case.
The legal outcome, much as the appreciation of the pop art itself, may very well depend on the viewpoint of the beholder.

Tuesday, July 3, 2012

Online Counterfeiting Likely to Escalate

Numerous federal lawsuits have been filed by Intellectual Property owners in recent years to attempt to address the intensifying online threat from "rogue websites."
Additionally, the US Department of Justice and US Department of Immigration and Customs Enforcement have seized millions of dollars in assets, as well as shuttered many such websites by utilizing existing criminal laws in the ongoing Operation In Our Sites.

However, while Internet traffic to these sites has been measured and determined to be substantial, little research has been done to empirically survey the existing body of data related to this phenomenon.

A comprehensive empirical survey of over 3,000 Internet websites that federal courts have ordered shut down because of their sale of counterfeit goods has revealed that online counterfeiters can collect immense profits by generating over $10,000 in sales with a $1,000 initial investment.

An analysis of an online counterfeiters' potential profit margin can be summarized in the sample breakdown of typical revenue and costs as follows: The average cost of registering a single Internet domain name: $10-$20 per domain name, annually. The average cost of hosting multiple e-commerce websites on a shared server: $120 to $160, annually. International shipping is either paid for by the customer, or absorbed by seller if it is a nominal cost (less than $10 per item). Credit Card/online payment processing fees: 3-5% of sale price. Wholesale cost of counterfeit goods varies by brand and product category.
For example, a typical counterfeit coat has a $40-$50 wholesale cost, retails for $230-$300 on a rogue website. A typical counterfeit handbag: $40-$50 wholesale cost, retails for $200-$300 on a rogue website. A typical counterfeit bracelet: $10 wholesale cost, retails for $70-$80 on a rogue website. A typical counterfeit watch: $10 wholesale cost, retails for $160 on a rogue website. 

Therefore, starting with a $1,000 investment, if one sets up a hosted e-commerce website ($160) linked to five domain names ($100), and invests the remaining funds ($700) in selling and shipping wholesale counterfeit goods, one could generate: Up to $11,200 by selling 70 counterfeit watches (11.2x the initial investment); Up to $5,600 by selling 70 counterfeit bracelets (5.6x the initial investment); or Up to $4,200 by selling 14 counterfeit coats or handbags (4.2x the initial investment).

This low-risk business model offers a comparable return on investment (ROI) to trafficking in illegal narcotics.  Because of this dramatic ROI, online counterfeiting networks are exponentially spreading on the Internet like an infection. For example, the ROI from a single successful website selling counterfeit products encourages the creation of many more such websites.

Skilled programmers who have access to sophisticated technology and an extensive supply of counterfeit products are creating and operating these sites. To protect their business model, they are employing a variety of creative tactics to frustrate efforts to monitor them and remove them from the marketplace.

For example, they dynamically redirect their websites across multiple servers located in different countries. Significant server bandwidth is dedicated to hosting such sites, with large blocks of server space and IP addresses dedicated to managing the Internet traffic to them. Counterfeiters' websites are creating significant actual consumer confusion. One reason is that prices for counterfeit goods are designed to be credible to suggest genuine, discounted products rather than low quality counterfeits. Goods received are typically shipped directly from locations throughout China and Hong Kong, and

China is the country most often named as the country of the Registrant. However, Registrants do not usually provide legitimate or consistent contact information when registering new domain names, often using gibberish, nonsensical words and false addresses. Further, some Registrants are using the "Privacy Protection" services offered by Registrars to purchase a cloak of further anonymity. Software applications make it easier for infringers to create, register and warehouse thousands of domain names that contain permutations of trademarked brands. These conclusions make it likely that "rogue websites" selling counterfeit goods will likely continue to proliferate, demanding that legal action be taken by brand owners.