Pavlov Buying

by Tom Gardner

Alexandria, VA (July 2, 1998) -- Tomorrow being a holiday, I'm going to smush my last two reports into one. I want to close out the week on branding by offering up some thoughts about what specifically a consumer brand earns a company like Gap Inc. (NYSE: GPS), and a bit on how it goes about building it. After all, they are going to be spending BILLIONS of dollars on it over the next few decades. As stakeowners, we want to be certain they are getting it right!

In the first two columns, I mentioned that Gap has now fashioned three primary brands, each distinctive. Old Navy, the warehouse offering low-priced casual clothing. The Gap, the main brand selling casual clothing at convenience prices. And Banana Republic, more of a boutique shop offering higher-quality duds at higher-quality prices.

I also mentioned yesterday that Gap has regularly been restructuring itself toward its brands. Rather than paying steep prices to offer a flurry of unique looks every season, Gap Inc. is falling back on the old reliables (jeans, khakis, shorts, t-shirts), while concentrating increasingly more of its resources on promoting its brands, celebrating the experience of shopping at its stores, infusing its threads with a soul.

In other words, Gap's costs are being methodically moved away from new product research & development and distributed instead into marketing & promotion. To master this way of thinking, you might draw up a mental image of that changeless brown bubbly that Coca-Cola has promoted for decades into hundreds of billions of dollars in value today. Gap Inc. appears headed in the same direction.

But besides lowering the costs of a business, how does mass-market branding drive home increasing rewards? The answer was evident back at the turn of the century, in the laboratory of Dr. Ivan Petrovich Pavlov. Studying secretions in animals, Pavlov measured a dog's salivation at the sight of food.

A slice of meat and they drooled. So Pavlov began presenting other stimuli alongside the food. The end result was a strong enough association between the sounding of a bell and the presentation of food that the dogs started drooling when the bell rang. In other words, Dr. Pavlov didn't have to offer meat bits to the hungry dogs anymore -- they were stringing saliva at the sound of the bell.

Now what does that have to do with the Cash-King portfolio's ability to beat the market? Why are you being kept inside by this babble on a brilliant summer evening? What possible value can be taken from this to justify the time away from the whiffle ball game outside or dinner just announced or a short snooze after work?

Enough with the stalling rhetoricals, let's see if there's something here.

Mass-market branding is designed to create physical cravings, not always as powerful as a plate of beef to a dog, but sometimes more so. Fostering that craving can motivate new behavior. And as that behavior turns into habit, and as that habit hardens with age, recurring streams of revenue flow year after year.

To get there, the branding emphasizes the familiarity and consistency of a product. That constant reinforcement is designed to create no-brainer-ish buying of convenience products (stuff you go back to every day or week) by millions of people around the globe. Need to shave? Gillette is there with the Mach3 blade and Foamy. Looking for a laugh? Comedy Central. Searching for casual clothes? __ ____ (fill in the blank).

Let's look at a few examples.

Consider Aaron Spelling, whose magic TV formula of swimming pools, youthful energy, conflict, gossip, and near nudity has raked in hundreds of millions of dollars. Say what you will of Melrose Place, Beverly Hills 90210, and Dynasty, but the consistent associations to gossip and sex have created a mood that wins enough of the time to pay down his losers (cf. Central Park West) with plenty to spare.

Or go even cheesier -- Rupert Murdoch's mix-n-match formula of scandal, speed, danger, and destruction has raked in hundreds of millions as well. Say what you will about Cops, America's Most Wanted, World's Scariest Police Chases, When Animals Attack, and A Current Affair, but they more than fund his losers (cf. I can't think of any failures to this model -- unfortunately!).

The images come, and Pavlov's bell starts ringing. After awhile when we want something, we start thinking of the NAME simultaneous to remembering the product or service. The Gap becomes casual clothing. Fox Television is the home for armchair thrill-seekers. Where's my Foamy? I'll have a Coke. I want McDonald's for dinner. Ah-choo! Kleenex? I'll have two Hershey's and a bag of Doritos.

The names reply to our instincts.

The names become our instincts?

How does this apply to Gap? Well, it is now more focused on building our default relationship with its brands than it is on guessing the next hot trend. It infuses denim with spirit. It gives energy to a colored shirt. It broadcasts a roomful of young Americans jumping around in khakis. And by hammering home casual clothing through magazine advertisement snapshots of corporate executives in Gap attire, it legitimizes the product in a critical market.

It wins the staple categories.

And by becoming our casual clothing default, it no longer has to compete on the trends. The cost of being there then, of timeliness, fades. And instead, Gap only needs to continue reinforcing the default to its staple, while making the purchasing points as convenient as possible (from block to block in a city, in malls and superstore chains, via the Internet). The triumvirate of brand, convenience, and volume pricing puts Gap in a mightily powerful position.

Then one quality drops out. As buyers return to the name-brand time and again, at each purchase point, they temporarily (and then permanently) lose their focus on the price.

"I just want a Coke." Not caring if it costs 25 cents more.

"Campbell's tomato soup." Not caring if it costs 50 cents more.

"Starbucks latte." Yah, $3 for ten ounces is fine.

"I'm cruising to The Gap for three pairs of jeans." I guess I'll need somewhere between $75 and $125.

The mass-market brands that can inspire this automatic buying of convenience products have been making managers, employees, and individual investors thousands, millions, tens of millions of dollars throughout the 20th century. And I think the logic still holds -- it'll prove true again in the next century.

Have a great July 4th, Fools.

Tom Gardner

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FoolWatch -- It's what's going on at the Fool today.

07/02/98 Close

Stock  Change    Bid 
 AXP   -  3/8   111.63 
 CHV   +  3/16  85.13 
 CSCO  -1 15/16 92.56 
 KO    -  1/2   85.25 
 GPS   +  5/8   63.56 
 EK    +  1/8   73.31 
 XON   -  1/16  72.88 
 GM    +  3/8   68.88 
 INTC  -1 15/16 73.19 
 MSFT  -2 1/8   107.19 
 PFE   +  1/2   107.50 
 TROW  -  1/4   37.63 
                  Day   Month    Year  History 
         C-K      -0.56%   0.26%  14.35%  14.35% 
         S&P:     -0.19%   1.11%  14.49%  14.49% 
         NASDAQ:  -1.07%  -0.04%  14.59%  14.59% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    107.19    36.95% 
     2/3/98   22 Pfizer        82.30    107.50    30.62% 
     5/1/98   37 Gap Inc.      51.09     63.56    24.41% 
    2/27/98   27 Coca-Cola     69.11     85.25    23.36% 
     2/6/98   56 T. Rowe Pr    33.67     37.63    11.74% 
    5/26/98   18 American E   104.07    111.63     7.26% 
    6/23/98   23 Cisco Syst    86.35     92.56     7.20% 
    2/13/98   22 Intel         84.67     73.19   -13.57% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     73.31    16.10% 
    3/12/98   20 Exxon         64.34     72.88    13.27% 
    3/12/98   15 Chevron       83.34     85.13     2.14% 
    3/12/98   17 General Mo    72.41     68.88    -4.88% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
    5/26/98   18 American E  1873.20   2009.25   $136.05 
     2/3/98   24 Microsoft   1878.45   2572.50   $694.05 
     2/3/98   22 Pfizer      1810.58   2365.00   $554.42 
     5/1/98   37 Gap Inc.    1890.33   2351.81   $461.48 
    2/27/98   27 Coca-Cola   1865.89   2301.75   $435.86 
     2/6/98   56 T. Rowe Pr  1885.70   2107.00   $221.30 
    6/23/98   23 Cisco Syst  1985.95   2128.94   $142.99 
    2/13/98   22 Intel       1862.83   1610.13  -$252.71 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   15 Chevron     1250.14   1276.88    $26.73 
    3/12/98   20 Eastman Ko  1262.95   1466.25   $203.30 
    3/12/98   20 Exxon       1286.70   1457.50   $170.80 
    3/12/98   17 General Mo  1230.89   1170.88   -$60.02 
                               CASH     $51.68 
                              TOTAL  $22869.56 
 *The year for the S&P and Nasdaq will be as of 02/03/98