Brand It Like Buffett in Asian Wide-Moat Consumer-Brand Innovators – Bamboo Innovator Weekly Insight (Issue 88)
June 22, 2015 Leave a comment
| “Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.” |
| BAMBOO LETTER UPDATE | June 22, 2015 |
Bamboo Innovator Insight (Issue 88)
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| Dear Friends,Brand It Like Buffett in Asian Wide-Moat Consumer-Brand Innovators
Warren Buffett: “When you were a 16-year-old, you took a box of candy on your first date with a girl and gave it either to her parents or to her. In California the girls slap you when you bring Russell Stover, and kiss you when you bring See’s. You cannot destroy the brand of See’s candy. Only See’s can do that. You have to look at the brand as a promise to the customer that we are going to offer the quality and service that is expected. We link the product with happiness… there’s something in the mind about a brand. I mean, you have something in your mind about Coca-Cola – but you don’t have anything in your mind about RC Cola because they’ve never been, you know.” Charlie Munger: “We didn’t know the power of a good brand until we bought See’s Candies. Over time we just discovered that we could raise prices 10% a year and no one cared. Learning this changed Berkshire. It was really important… How would you try to create a brand that competes with Disney? Coke is a brand associated with people being happy around the world. That is what you want to have in a business. That is the moat. You want that moat to widen.” Last week, we discussed the Achilles heel of Buffett and Munger in retail stocks in the article “Buying Furniture with Warren Buffett and Mrs. B at Asia’s Wide-Moat Furniture Innovators” and how value investors can overcome this tough investment hurdle to identify compounders before their wide moats become obvious by the investment community. This week, we examine their greatest investment strength – picking consumer brands – and the case of an unusual wide-moat consumer-brand innovator in Asia. Imagine if Warren Buffett-Charlie Munger’s See’s Candies, Coca-Cola, Gillette/Pampers (P&G), Heinz and a host of iconic consumer-branded products that they had successfully invested in are stripped of their trademarked name, logo and nice emblazoned packaging design. Would consumers – and Buffett and Munger! – consider them as “brands” and still buy them? How would Buffett-Munger evaluate Ryohin Keikaku (7453 JP, MV $5.2bn), owner of MUJI? MUJI stands for Mujirushi Ryohin (無印良品), which translates to “No Brand Quality Goods” and “All Value No Frills”. None of MUJI’s 7,500 “minimalist” products, including household products (36.9% of sales, including linen & interior goods, furniture, household appliances, houseware, stationary, cosmetics), apparel (53.5% of sales, including underwear, socks, bags and shoes), and food products (8.2% of sales) have a logo or are wrapped in fancy, distinctive packaging. Plain but not generic, MUJI’s products have a simple aesthetic that appeals to certain customers. In fact, it is the lack of a name brand that many find enticing. With more than 700 stores worldwide (284 directly-managed and 117 licensed stores in Japan), including 301 stores overseas (130 in China), the Japanese retailer has a cult-like following. MUJI seems like a Japanese nazonazo (riddle): one of the most beloved Japanese brands that isn’t a brand. Ryohin Keikaku (TSE: 7453) – Stock Price Performance 1995-2015 Vs Nikkei 225 Index
So what is it about MUJI that accounts for its rising success? Often hidden in the seemingly simple designs are functions that make MUJI’s products stand out. Its toilet brush, for example, has a small cover to protect water from splashing while cleaning. Their summer sheets are made of special linen that absorbs moisture better than cotton. But you might argue that many other companies can copy MUJI’s minimalist product concept. After all, wouldn’t MUJI lose its competitive edge in terms of pricing to the fast-fashion outlets such as apparel giant Uniqlo/Fast Retailing (9983 JP), low-priced furniture giant Nitori (9843 JP), and the myriad 100-yen stores that were features of every new mini-mall? And MUJI’s rising success is all the more amazing when we revisit one of Munger’s fascinating insights about brand-based moats. Munger imparted his wisdom that “informational advantage” enables brands to leverage into advantages of scale: Munger: “The informational advantage of brands is hard to beat. And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz’s chewing gum. Well, I know Wrigley is a satisfactory product, whereas I don’t know anything about Glotz’s. So if one is 40 cents and the other is 30 cents, am I going to take something I don’t know and put it in my mouth—which is a pretty personal place, after all, for a lousy dime? So, in effect, Wrigley simply by being so well known, has advantages of scale—which you might call an informational advantage. Everyone is influenced by what others do and approve. Another advantage of scale comes from psychology. The psychologists use the term, ‘social proof’. We are all influenced—subconsciously and to some extent consciously—by what we see others do and approve. Therefore, if everybody’s buying something, we think it is better. We don’t like to be the one guy who is out of step. Again, some of this is at a subconscious level and some if it isn’t. Sometimes we consciously and rationally think, ‘I don’t know much about this. They know more than I do. Therefore, why shouldn’t I follow them?’ The social proof phenomenon which comes right out of psychology gives the huge advantages to scale—for example, with very wide distributions, which of course is hard to get. One advantage of Coca-Cola is that it is available almost everywhere in the world. Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup—which is slowly won by a big enterprise—gets to be a huge advantage….And, if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you. All told, your advantages can add up to one tough moat.” Thus, the “no-name” MUJI products apparently do not emit the “informational advantage” that Munger described – carrying or using a MUJI product is not observable by others and the “social proof” effect seemingly breaks down. While the MUJI products have no brand logo to elicit the psychology-based “social proof”, MUJI is actually perceived as a great brand with thoughtful, innovative products. The design and stories around how these new innovative products came to be developed show the seriousness of MUJI to develop a new unique product – continuously. These designs have also come to MUJI winning more than 100 top-tier design and innovation prizes. Amongst the design “stories” is a pair of “right-angled 90-degree socks” (Chokkaku Kutsuhsita) – the way your foot extends form your leg, rather than a conventional sock at a 120-degree angle. The angle between the heel and sole on the socks is 90 degrees, after research showed that the shape reduced shrinkage and damage. One of the global associates of MUJI sent information that a sock knitted by a grandmother in Czech for her grandchildren has a right angle. MUJI thought it was very MUJI and invited the grandmother to come to Japan. Her knitting was video-recorded and MUJI asked a manufacturer whether it can mass-produce the socks. An immediate response from the manufacturer was, “Please do not joke. We cannot produce such a pair of socks.” The reason dates back to as long as during the Industrial Revolution in England when machines mass-produce socks at 120-degrees, an angle which allows the well-balanced mass-production of socks. MUJI persisted and they found a way to make machines to mass-produce the right-angled sock which was introduced in 2006 and improved in 2011 in partnership with a research center in Nara Prefecture. MUJI also used a more breathable and elastic material in the redesign. MUJI created a hit product selling over 7 million pairs annually. The wide-moat strength of the MUJI brand is the mission, values and unique philosophy the company founders have identified and carefully cultivated:
Its growing cult-like customers come to identify and associate with the MUJI values, much in the same way Buffett-Munger described the power of association in See’s and Coca-Cola, brands associated with people being happy around the world. MUJI customer is more about the lifestyle of the MUJI brand promise and values. Its core, core customer is really core. They don’t think about which furniture or stationary or household product store they should visit. MUJI is more about regular shopping, lifestyle shopping. MUJI has also improved its excellent customer service with a revamped store environment offering detailed lifestyle suggestions and the experience of discovery, in which product advisors and specialty sale staff (styling advisors, interior advisors, tasting advisors) help tailor choices for customers, offering suggestions for living, and customers can also see, touch and feel to discover their own original style at the Fragrance Studio, Stamp and Gifts Corner, Wood Environment Play Area. MUJI’s online sales has also been growing steadily and now accounts for around 6.5% of sales. MUJI was launched in 1980 by the late Seiji Tsutsumi (photo, left), the chairman of the Saison retail group, as an inexpensive house brand and line of merchandise for his Seiyu chain of supermarkets under the slogan “Cheap for a reason” (Wake Atte Yasui). Tsutsumi was the son of Yasujirō Tsutsumi, founder of the Seibu Railway. Following the death of his father in 1964, he led the spin-off of its logistics business to form the Saison Group, which eventually included the Seibu department stores, Seiyu supermarkets, Wave (a music shop), Parco (shopping complex), and the Muji and Loft variety store chains. MUJI no-name products soon garnered a following thanks to its iconoclastic simplicity designed by Ikko Tanaka (photo, right), a leading graphic designer, Kazuko Koike, who was MUJI’s creative director, and three other founding members. Tsutsumi-san and Tanaka-san observed that companies sell their products using highly manipulative marketing techniques and engage in meaningless branding. Tanaka had deep thoughts on how a man should be and live, and found it necessary to concretize his thoughts into products, expressing his antithesis to consumptive society. Thus, MUJI was born with a goal to produce products really valuable to consumers, instead of inducing them to purchase those with valueless brand names. To concretize these values and concepts into products is not easy, which is why many imitators of MUJI did not go far. MUJI operationalize three processes: (1)… <ARTICLE SNIPPED> The systematic use of external designers and the crowdsourcing projects is an exemplification of the “open innovation” business model that characterized the “Bamboo Innovator”, as explained in earlier articles in how we systematically identify overlooked, underappreciated and misunderstood innovators. MUJI’s information system also ensures the escalation of management reform. The sophisticated IT system can track with precise accuracy the movement of even a single pen throughout the country. MUJI also introduced an innovative business process support system for better decision-making in relation to customer information, automatic ordering to enable more accurate long-term demand forecasts and product planning. The logistics system was designed to coordinate every aspect of distribution from merchandise procurement to retail outlet supply (to ensure stable support of products), reduction of physical distribution costs, aggregation and transmission of product distribution information, and improvement of stores’ efficiency. The evolution of MUJI also bears instructive lessons for value investors in looking beyond numbers to assess the erosion or widening of the economic moat. MUJI was very successful in the 1990s and they grew complacent. MUJI started to… <ARTICLE SNIPPED> The rise and fall and rise again of MUJI remind us of what the late American writer Carl Sandburg once said: “When an institution goes down or a society perishes, one condition may always be found. It forgot where it came from. They lost sight of what had brought them along” We observe the Sandburg effect in different companies. For instance, whenever McDonald’s was embroiled in controversies that were the result of its neglect of the core values, such as the usage of low-quality or unhealthy ingredients, it flounders. When the Golden Arches went back to rediscover the core values, it rises back up, like it did when it created a healthier and higher-quality image since 2003, although McDonald’s had neglected its core values to stumble again. Without the workable intangible culture and core values, the tangible assets, such as its vast retail property assets, would amount to a dark-cloud-like ominous liability, particularly when leverage is involved. At MUJI, the innovative designer spirit of the founders that include Tsutsumi-san and Tanaka-san has lived on and endured. Through MUJI, value investors get to experience the role of design and designers in brand-based moats. A designer always approaches his or her work from the viewpoint of the consumer. Designers characteristically begin with the necessities in the life of the typical consumer. Design has the power to show consumers the future in a very tangible way. We believe that companies can use this power to communicate corporate vision, as well as to create new businesses and services that let consumers dream about future lifestyles while creating demand by society. Today, companies need to create new products and services over a shorter lifecycle and we live in a time where companies have to move beyond the question of process efficiency and “branding” through marketing, creating something to sell that is something more to do with commercialism rather than the essential nature of the product itself. The creativity of design can help companies make enormous leaps forward in developing new ideas. Today, there aren’t many business leaders in the world today who have embraced design as a way to create business. MUJI has embraced and exemplified this idea from its earliest days. The MUJI approach takes design beyond an approach to management, incorporating it into every business and product as an inseparable part of the whole. MUJI was essentially founded by designers, not businessmen with retailing backgrounds. Tsutsumi-san brought Ikko Tanaka and a number of other designers and creators to create MUJI in a single generation. Ikko Tanaka was the first MUJI art director, and he was famous for saying that they created MUJI as a way to find the best consumers in Japan. Normally, a business says that they want to offer the best products to the consumer. MUJI’s approach was the opposite, which is very refreshing. Retail companies will normally sell anything that the consumer will buy. But, MUJI refuses to sell anything that won’t lead to better living on the part of the consumer. MUJI is looking for the best consumers to offer them a more fulfilled, conscientious lifestyle. Ikko Tanaka and the other designers-creators believed that design would be able to elevate the lifestyles of Japan’s regular citizens, rather than be something just for Japan’s noble or feudal class. They refused to accept the form and ornamentation of Japan’s traditional authoritarianism. MUJI communicated the message that living well and enjoying a quality lifestyle didn’t mean buying the expensive brands and luxury items that were so popular. MUJI chose to pioneer a completely new path during a time when the markets were controlled by short-term popular trends. MUJI concept remains valid even as they expand globally. There’s a Japanese culture, spirit, and way of thinking that are inseparably connected with the MUJI philosophy. MUJI’s values meant that they didn’t have to focus on going out and selling products. The instant you focus on selling, you start to resort to flattery. The moment you focus on complex financing engineering schemes to generate short-term profits, you start to neglect the core business of serving customers and value investors can find this salient information in the footnotes on segmental performance that inevitably report the profit erosion in the core business. MUJI is a resilient Bamboo Innovator with a scalable open innovation business model that is embraced by employees, designers and consumers who share the same values and recognize not only the outward design, but also the underlying philosophies. Above all, MUJI believe that corporate longevity depends on two principles: Flexibility and Conscience. Flexibility to respond to the fast environmental changes. Responding to these changes by asking two questions: “What brings happiness?” and “What will a fulfilled lifestyle look like for people in the future?” The second is the degree to which Japan values the principles of gratitude and service. MUJI does not believe in enriching ourselves at the expense of others. MUJI calls this value their “conscience.” Flexibility and Conscience. This is the ultimate success factor behind Buffett-Munger when investing in consumer brands, viewing companies beyond the screens, checklist and numbers to assess both supply-side economics (network effect of distribution and IT system to scale up) and demand-side economics (psychology advantage in association with consumer happiness to sustain the competitive advantage period runway) in brand-based moats. Have you shopped at MUJI to fully appreciate Buffett-Munger’s wisdom of brand-based moat to identify the next consumer-brand compounder? Brand it like Buffett-Munger at MUJI and other Asian innovators with Flexibility and Conscience! Warm regards, KB The Moat Report Asia PS: The Weekly will be back on 30 June with the Monthly Riddle to the monthly Moat Report Asia for the month of July. A new monthly issue of The Moat Report Asia is now available! Access the in-depth idea presentation: http://www.moatreport.com/members/ In the month of June, we investigate the #1 ice cream and pasta maker in its domestic market in an Asian country. It is also the main supplier of buns to McDonald’s in its home market. Its high-speed bun production business has expanded to serve other quick-serve restaurants, including Wendy’s and KFC. The firm has nurtured a corporate culture and deep know-how in branding to establish an impressive track record in acquiring and turning small heritage brands into market leaders in different food and beverage categories. Its share price is down 37+% in the past year. This is despite resilient results announced in May. The company was incorporated in 1957 by a group of entrepreneurial families and is now led by an outstanding down-to-earth third-generation business leader. |
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