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Big brands are in danger from cheap competition: Shares to avoid

For many decades brand power was enough to win customers. Everyone watched TV, so if you advertised long enough then potential customers would associate cereal, washing powder or whatever product it was with the advertising business, making it more likely to win when customers were at the shops.

Gillette, Kellogg’s and every other household product name you can imagine won their place in our consciousness.

Brand power means that the company can raise prices faster than inflation. However, over many years these branded products are now far more expensive and low-price store brand products are winning market share. If the product is the same – why spend more for the same (or inferior) product?

You can see this battle playing out across the country in Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES) supermarkets. Aldi is almost an entire building of store-owned brands.

Simply having a brand name isn’t enough if a low-price competitor can offer essentially the same product.

The problem is that this affects vast swathes of the economy. From Coca-Cola Amatil Ltd (ASX: CCL) to Telstra Corporation Ltd (ASX: TLS) to Commonwealth Bank of Australia (ASX: CBA).

A business relying on brand power has to offer a product that is (or seen as) genuinely better quality or different. Head & Shoulders, Colgate, Vegemite, Nutella, a2 Milk Company Ltd (ASX: A2M), Apple, Cochlear Limited (ASX: COH) and REA Group Limited (ASX: REA) are hard to displace.

Foolish takeaway

As investors it’s important to choose businesses that not only have been good investments but will continue to offer economic moat power. Amazon-branded products will become increasingly available and competitive in Australia. Australian brands will have to work hard to remain relevant, competitively-priced and profitable.

One business that could be perfect to tackle the Amazon threat is this homegrown ASX growth stock.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Coca-Cola Amatil Limited, Cochlear Ltd., and REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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