Twilight of the luxury brands?

Today's Journal was filled with interesting stuff, but perhaps the most heartening was a little note about an unexpected way the food and beverage value chain is being disrupted. Specifically, how German discount grocer Aldi has produced a scotch that won a rating in a taste-test by liquor industry professionals that exceeded that of some Chivas Regal premium label, but costs half as much.

I love this stuff. The guy through the wall from me at my last office, a CEO at a medical devices company, and I were always comparing the quality of cheap K-cups of coffee from places like Aldi and Costco to Starbucks. Starbucks is still better, to my mind, but doesn't necessarily justify a 40-cent unit-cost premium for everyday drinking.

The important thing is this: if companies can make great stuff cheaper and challenge incumbent brands, that is just awesome. It means people's return on an hour of labor -- measured in quantity/quality of goods purchased, gets better. It's all good.

Buffett liked to call out See's Candies as an example of a really successful business that was not capital-intensive, and therefore had high margins. The flipside of it is that these businesses are therefore dependent on the quality of their brands, which ultimately consists in a few of things: dependable and consistent quality of product, metonymy with economic class association (i.e. you feel affluent because you buy it), and perhaps some quasi-Proustian connection to an earlier-in-life experience on the part of the consumer. Most of the price may be built into the second two, which in some cases may afford the producing firms a surplus margin which lets them focus on culture within their firms, which lets them focus on product quality.

If great product development and execution can nail the product quality question, and marketing and social networks can get the word out, it will exert pricing pressure on all producers and ultimately result in a better unit cost of quality for everybody. I for one would rather not pay more for a brand.