I just make sure to introduce the panel. We've got Scott Galloway here, ladies and gentlemen.
Kory Marchisotto, the CMO of e.l.f. Love it.
K. Boss is in the house. And none other than Rory Sutherland, the one and only.
There we go, ladies and gentlemen. So, let's start with Scott. We need to talk about this—brand era is dead. Do you really believe that?
Yes. Look, first off, I owe you an apology. The last time I was on stage with Rory, I thought it was an interview and I totally dominated the conversation. The YouTube comments were like, 'What a narcissist and a megalomaniac.' He wouldn't let him get a word in edgewise. And I'm both of those things, but I didn't mean to be rude. I genuinely apologize. I didn't realize it was a dialogue, not a monologue. Look, the primary algorithm for creating shareholder value from the end of World War II to the introduction of Google was the following: produce a mediocre product—a mediocre car, salty snack, shoe, mediocre beer—and then wrap it in these amazing brand codes of American toughness, European elegance, hotness, youth, sex, and then use this incredibly cheap vehicle called broadcast advertising, where we could capture literally 80% of America for five hours across three channels. If you think about the efficiency of what you all do, we didn't realize how cheap advertising was when I was a kid. You could reach the majority of America for a couple million bucks. The cost of a 30-second ad on the Academy Awards has quintupled while its audience has been cut by a third, meaning it's lost 94% of its efficiency. So you could produce a mediocre product and create 30 cents of peanut butter paste into $3 of maternal love because choosy moms choose Jif. The most valuable companies in the world produced mediocre products but had amazing media and amazing agencies selling their mediocre food and salty snacks. Then with digital, you had these unbelievable unlocks where you no longer needed to run Toyota ads and spend a lot of money on a Toyota dealership. You could tune up a car wirelessly. Rather than deferring to the brand, I use hotels. My hobbies are hotels. I work out, I walk my dogs. I have no interest in people or anything else. My one hobby is hotels. I go to hotels. I don't go to cities. I used to always stay at the Mandarin Oriental or the Four Seasons when I traveled because one, someone else was paying for it, and two, they always deliver an eight. These were really strong global brands. Now I never stay at these places because I no longer need to defer to the shorthand of a brand between my social graph and these weapons of mass diligence, and now AI. I'll literally type in—this isn't an exaggeration—'I'm in the midst of a midlife crisis. I am totally price insensitive and I want to be the oldest, least wealthy, least attractive person at the hotel,' and it'll tell me, 'Oh, you're in Austin. Stay at the Austin Proper. Oh, you're here. You'll be one of the younger people, but stay at the Driskill.' I no longer need to defer to the brand because of these weapons of mass diligence. Now, that's not to say that brand doesn't matter, but the majority of amazing brands in the top 10 according to most brand indices are really victories of supply chain. Amazon and Netflix are not victories of a great ad campaign or the best media buyers. They have totally reconfigured the industry by disrupting the supply chain. So Don Draper has been drawn and quartered your industry, unless you're working for Google or somewhere else. I'll just finish here. I look at stuff through a shareholder lens. I started a brand agency called Prophet. I'm totally into brand. I've made my living preaching about the value of brand. And I recognized that the sun had passed midday on that. The masters of my industry were Martin Sorrell, Maurice Lévy, and John Wren. Those were the masters of the universe. Those companies combined will lose—Meta and Alphabet will lose the value of all three of those firms within any hour of any trading day. They're insignificant from a shareholder standpoint. They are a pimple on the elephant. They are meaningless. Now, your turn.
Can I ask you a question?
Is Hermes a brand that's built brand equity and value over time?
Yeah, but not with these people. They did it through artisanship and artificial scarcity. They're not running great ad campaigns. They have created artificial scarcity by convincing me I need to get on some list to pay them $40,000 for a bag. These guys are an amazing brand, but they didn't do it through advertising. They did it through an incredible set of movements, glass, and leather that convinces me that I look 59 again and more masculine if I wear a Panerai. But Hermes, which to your point is now worth three times the value of Nike, didn't build it on traditional brand building. They did it on scarcity to a certain extent, going vertical with controlled distribution. You could argue that that's brand. But when we talk about brand—at least I used to talk about it—come up with a brand identity, core associations, hire people who wear black and are better looking than you, and if you spend enough money, we'll invite you to Cannes and give you some stupid award. That era is done.
I would disagree with some of what you said and agree with some of what you said. So I worked at Hermes for 10 years. It has been around for seven generations and is growing more than most other luxury brands, and they do do advertising. It is part of the mix. But what's under that that I think is the most important thing is called storytelling. If your brand has a compelling story that can be told in a compelling way—case in point, so many dicks, and if you haven't seen it, it's all around the pallet—then it is incredibly meaningful. For a very modern brand, which is the brand I work for now, which is e.l.f., we've delivered more shareholder value in the last six and a half years than any other company in our industry. Where's your supply chain? And we did it through brand investment.
Where's your supply chain? I'm not sure what that has to do with the brand investment. Answer the question. Where's your supply chain?
Our supply chain is predominantly in China. 75% of our goods are run through our Shanghai distribution.
You're making an amazing product for less money than your competitors. Shareholder value as a function of supply chain.
Yes. Now, to Scott's point, that got us to about $200 million and it couldn't get us any further. When we went from investing 6% of net revenue into marketing and digital to 10%, our revenue started to rise. Once you start to see that marketing actually works, you do more of it. So now we're at 24% of net sales going into marketing and digital. And we have delivered 25 consecutive quarters of net sales growth and 25 consecutive quarters of market share gains. The only brand who can say that.
I'd add the point that it's difficult to know whether the age of brand building is dead or not until we have more people with the courage to try again, because there seems to be a massive lack of faith. Fundamentally, the whole industry has lost confidence in a formula that worked well. I think Matt Johnson's definition—which is having a great brand means you get to play the game of capitalism on easy mode—is still fundamentally true. Being famous, which takes time and patience and generally pays off nonlinearly, is still insanely valuable. Someone managed to persuade you that a Panerai is a cool watch to wear. Am I right? It's an Italian submariner's watch. They managed to persuade you of that despite the notable lack of success by the Italian Navy in the last 200 years of world history. Somehow they managed to persuade you this was a really cool thing to do. Very good looking. Yes. But what worries me is that many of the examples we're giving—I mean your own case—they're either family-owned or they're founder-led. If you look at the success of brand builders in those two categories who have fundamentally different time horizons to the people who are working for publicly limited companies, I think that's doubly alarming. If you haven't the patience to build brands, you probably haven't got the patience to do R&D either. Consequently, you've created a weird world driven by financialization where every quantum of expenditure has to be justified by a quantum of incremental revenue. Large parts of incredibly valuable activity will never be justified that way. As a consumer, I'm more worried by the death of R&D than I probably am by the death of brand advertising. Most businesses don't seem to have the mentality or the time horizons where they could do it even to begin with, even in cases where it undoubtedly would work. There's a huge difference to being famous. Nassim Taleb would call this effectively increasing your surface area exposure to positive upside optionality. When you become famous, instead of having to find opportunities, people come to you with opportunities. That seems to be a fundamental tipping point. Since attention is scarce, it's undoubtedly worth paying to be famous. The means by which we do it will change—it probably won't be a TV spot at the news at 10 anymore—but the fundamental value of simply being well-known in all kinds of ways seems woefully underestimated, partly because it doesn't pay back in narrow predictable ways. That worries me. The family company thing does worry me—the extent to which family-owned companies and founder-led companies should be less successful, but many of them seem to have qualities of trust and customer focus which have completely disappeared. It was axiomatic that the consumer was your focus as a business owner 50 years ago. When Peter Drucker said, 'Marketing and innovation, everything else is a cost,' the purpose of business is to find and keep a customer. That sentence now would seem outlandish in most board meetings. I think that's worrying.
Well, I think the part we're not talking about is culture. And to your point—and yours also—a lot of shitty work gets done and goes to market, and it's pretty mediocre, and people scroll by it. That's a giant waste of money. I don't know where the fear is happening, but companies have to ask themselves what is happening in their culture that is making the output shitty work. We don't let shitty work out of the door. It is not how we operate. Instead, we create the cultural conditions necessary for innovation to thrive. For example, agency partners—all the teams are lined up to work on the e.l.f. account even if we're not their business because we have a lot of 'yes' energy. We don't say, 'No, that's not going to deliver the ROI.' We don't shoot down really good ideas because we don't have the metrics to prove it yet. You've got to establish the cultural conditions inside an organization where people feel comfortable experimenting, trying things out, giving it a shot, seeing what happens, and doing real creative work. Most of what you see coming out of our brand, no other brand could do it because they don't have the balls to sell it to their C-suite. But great work: shoot a three-point shot, show that it works, and you'll get more money to do more of it.
Adam Morgan over there and I did a talk last year called 'The Extraordinary Cost of Dull.' I just wonder whether the issue—alluding to your point that advertising is just no good anymore—is that actually we need to make better advertising. Scott.
Look, I'm not here with a message of hope. Advertising is a tax that the poor and the digitally illiterate have to pay. How do you know your life isn't going very well? You're watching a lot of advertising. There's a regulator in Paris that makes sure you can't see any advertising from a green space because it's a modern, wealthy society. Go to a poor, shitty country and ads are everywhere. The most successful people are only watching media that doesn't have advertising.
Victorian Britain was a pretty successful country and it was coated in advertisements. You couldn't move.
It was in the 1880s. I'm simply saying I don't think they're automatic. David Ogilvy was opposed to billboards, but we'll park that argument. You could argue that they don't pay back to the consumer in the way that other forms of paid content do. But what worries me is that it's very difficult for marketing—never mind advertising, never mind brand building—to function unless it wins the argument that marketing is fat-tailed like innovation and research and development. By which I mean 10% of what you do delivers about 80% of the value. It's probabilistic, not deterministic. The interesting thing is that nearly every time you read of an extraordinary marketing breakthrough or a product breakthrough—they're often both—it was generally opposed by most of the sane people in the organization. I was just listening recently about the Pumpkin Spice Latte, which I think makes Starbucks half a billion dollars a year. That came in something like the bottom third of the research in terms of appealing drinks, and someone took a bold step because they just believed in it. Nearly every case you get—Dove was true, in Ogilvy—of a real breakthrough brand campaign, someone broke the rules client-side, they broke the rules agency-side, they broke out of the process. Why haven't we empirically taken from this the fact that maybe our rules and our processes are completely wrong if you have to deviate from them to produce something brilliant? Once you understand it's fat-tailed, what you realize is a bunch of consultants and a bunch of tech people don't want client businesses to believe in the power of brand building because it's in their interest to sell marketing as a form of opencast mining, when in reality it's a form of treasure hunting. What you're looking for is the 10% of freak things—the Pumpkin Spice Latte which makes an absolutely monumental difference. It's very similar to pharmaceutical development, very similar to filmmaking, in that your 10% of successes basically justify the rest of your existence. But we're now being put into this opencast mining thing: 'How much ore did you mine today? How efficiently are you processing it?' Which is fundamentally the wrong mindset and the wrong paradigm. If you want to do great marketing, it's treasure hunting. You're better digging in the right place with a trowel than you are digging up a whole field with an excavator. Fundamentally deterministic-minded, left-brain people want the world to be proportionate. I worked on American Express for about 10 years. Only when you're 40 do you realize that in that 10 years, three things you did basically contributed about 80% of the value. I think it will always be like that—a process of discovery. Instead of fighting that fight, we've kind of bowed down to the temple of attribution and accountability when we should have been saying you can't use that infantile math to measure and judge and direct an uncertain process. Does that seem fair?
