Alex Milton, Principal and Co-Portfolio Manager

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The importance of brand positioning and ownership in an online world

Our stock in focus for this quarter, Kathmandu, is one of our key retail exposures in the Smaller Companies Fund.

Kathmandu is a well known retailer of travel and adventure wear and equipment with an emphasis on colder weather gear such as jackets, hoodies, pullovers, footwear as well as travel, camping and hiking gear ranging from tents to luggage. Its heritage (and street cred) is derived from its beginnings in New Zealand where the focus was on product design for the adventurer, traveller and those seeking better quality and functional design but at a lower price point than the premium priced northern hemisphere brands.

Over the journey Kathmandu has been one of our best contributors to fund performance over some periods as well as a detractor at other times. We think this range of experience points to why the company is a topical stock highlighting the challenges all retailers face as the digital technology landscape has evolved over time.

Kathmandu is a good case study of how much more important management execution and a multi-faceted channel to market strategy is to the investment case for a retailer in an age where previous share price drivers haven’t got the same weight as they once did. That’s to say, 20 years ago buoyant consumer confidence levels and a store rollout program went a long way to lifting a retailer’s share price over time.

However, with many consumers going online as the first step in the shopping process, having a well-run store stocking the item you’re after may well be superseded at the outset by a competing online offer (with no bricks and mortar presence) which is positioned to deliver the same product to your home or office at a similar or even lower price.

That in turn raises the question which are the retailers best positioned to face the bigger and more effective online competitors such as Amazon?

Brand positioning more important than ever to stand out in an increasingly crowded market

But first, on the issue of management, a new CEO in place since 2015 has lead a team that has turned around the earnings trajectory through the effective execution of a rejuvenated business plan.

This has included a re-assessment of what the brand stands for, what makes it different and how it should be positioned in the market place. While these factors have always been important, the vast range of choices now available (even on your mobile phone) makes this strategic piece more important than ever. We have visited Kathmandu stores and seen the impact of a revitalised investment in product design, structure and appearance which recent sales performance would suggest has struck a chord with consumers.

In addition, we believe the company’s focus on product sourcing and manufacture of durable, high quality apparel in a sustainable, environmentally conscious and ethical manner is not only a positive for the obvious reasons, it also goes to the company’ brand and reputation with consumers. We would highlight the 2017 Sustainability Report as an indication of Kathmandu’s deep commitment to these issues.

Investment in a well defined strategy and constant focus on operational metrics has restored profitability

Pleasingly, management hasn’t taken a cost cutting route or ramped up discounting to compete. Rather, a re-focus on operational aspects such as store layout, pricing strategies, product sourcing, supply chain and inventory management has seen a material recovery in profitability for the group with recent years margins and earnings exceeding market expectations.

Jul-18E: NovaPort estimates.
Source: NovaPort Capital July 2018

Brand sovereignty is the barrier even Amazon can’t break

And so to the question of the “Amazon” effect, consumers now have a much larger range of options to purchase the same branded product – in effect, gone are the days where buying a certain type of puffer jacket meant going to one or may two stores in the surrounding area. For the last 12 months, Amazon’s entry has added more emphasis than ever to this threat for investors and Kathmandu hasn’t been immune to the sentiment.

However, we think the market has underestimated the competitive advantage of owning your own brand compared to other retailers that rely on reselling another company’s range of products.

While Kathmandu does sell some third party product it has always given priority to its own branded products wherever the opportunity and continues to invest substantial capital. Maybe you can buy a Kathmandu product from a store or website not affiliated with Kathmandu, but you’re only able to do that because they have sold it to them in the first place.

That’s not to discount the threat posed by a larger range of products now available to consumers online that weren’t accessible in the past but for us, to see the market include Kathmandu in the basket of companies that would face significant headwinds as Amazon establishes its local operations presented an opportunity to add to our holding in the fund last year.

Another benefit of brand ownership is the potential to grow international sales through both online channels (theirs and third party) as well as via wholesale agreements with international retailers. We have seen an early foray on this front with agreements currently in place with two European retailers (one based in the UK and one in Germany). While the contribution is minimal at this stage, Kathmandu’s capital commitment (and risk) is very low but importantly the opportunity is there because the company has developed a brand that northern hemisphere retailers are willing to stock and which can only be sourced directly from Kathmandu. 

Having said that, while owning your own brand is clearly a benefit it doesn’t mean you will sell a lot of product if people don’t rate it highly. Ultimately, this comes back to the development and execution of a brand positioning strategy which is customer centric and focused on a specific market segment (travel and adventure).