America’s biggest Consumer Packaged Goods (CPG) companies are losing market share. Across consumer goods industries, brand loyalty is dying. The percentage of affluent consumers in the top 5% of household income who can identify their favorite brand is in sharp decline (see Figure 1).
The reason is simple: brands are about trust and signaling. They’re a substitute for incomplete information. When information is scarce and asymmetric, consumers flock to trusted brands. But in many parts of the economy, when consumers have reviews at their fingertips, they no longer defer to brands when they make a purchasing decision.
To be sure, the internet has made some brands stronger, particularly in domains of incomplete information where people don’t know each other very well. The more an industry is about signaling, the more brand matters. That’s why brands matter so much in industries like fashion and beauty. Signaling brands are context-dependent. Signaling brands thrive in environments with high geographic and social mobility. When mobility is high, information asymmetry is the norm. As a result, we use heuristics such as brand associations to gauge strangers. Just consider the differences in behavior between big cities and small towns. Big cities are full of strangers, but small towns are brightened by hugs and handshakes all the way down. In small cities, where everybody already knows each other, the utility of signaling brands is diminished.
One can see the tension playing out in school choice: the battle of legacy, taxpayer supported institutions vs. upstarts offering new models.