Blue Bottle, brands, and market power

Nestle has bought a majority stake in Blue Bottle, the fancy coffee chain. Why? As The New York Times reports:

The rapidly expanding niche accounts for 15 to 20 percent of coffee consumed in the United States, according to the Specialty Coffee Association. Perhaps more important than the sector’s rapid growth is that it commands higher prices and generates bigger profit margins.

So much of the talk of marker power, markups, and concentration has focused on technology and in particular the big tech giants. But what if Blue Bottle is the more representative example?

I don’t mean to knock the product when I say that Blue Bottle’s success is to a large degree about branding:

Although Blue Bottle is one of the most important players in the third-wave coffee sector, it has distinguished itself from its rivals in significant ways. It has spurned many of the hallmarks of high-end shops — barista competitions, lengthy travelogues about journeys to find the perfect small coffee farm — while emphasizing the aesthetics and experience of a well-prepared cup.

The strategy is a reflection of the company’s founder, a soft-spoken, classically trained musician who began roasting coffee as a hobby while on the road with traveling orchestras. Mr. Freeman’s approach has less of the rebellious rock ‘n’ roll attitude displayed by competitors like Stumptown, and more of the quiet calm that one might associate with a slowly but well-brewed cup of coffee.

You can argue over whether some of these differentiators are about product or brand, but the news reminded me of a paper I read recently: a 2016 review paper on branding by Bart J. Bronnenberg and Jean-Pierre Dubé. Some relevant bits:

In the latter part of the twentieth century, the degree of concentration in consumers goods industries grew at a much faster pace than other industries in the US (Caves and Porter, 1980). By the end of the twentieth century, most consumer goods industries were dominated by a small number of brands commanding most of the share of sales (Bronnenberg, Dhar, and Dubé, 2007). Most striking, many of the dominant consumer brands in 1923 were still the dominant brands in their respective categories in 1983 more than half a century later1 , although the findings are predominantly in food categories.2

And:

In general, the sales in these CPG product categories are very concentrated, as summarized in Table 2. On average across categories and Scantrack markets, the top brand commands 46% of equivalent unit sales, which is consistent with the analysis of food categories in Bronnenberg, Dhar, and Dubé (2011). The average four-firm concentration ratio is 79%

And:

The key consistent finding is the persistence in market shares and the advantages to early movers (even if not for the first entrant) that “survive” long-term.

And:

The body of literature and the collection of empirical evidence supports the long-standing notion that established brands constitute important barriers to entry

To recap, branding appears linked to rising industry concentration. Branding should increase markups by the definition used in this recent and widely discussed paper if good branding requires higher up front costs relative to marginal ones. And it represents market power to the extent it deters new entrants. You could imagine digital technology amplifying the importance of branding, but also perhaps creating opportunities for new entrants like Blue Bottle as the ways that companies brand themselves change.

Needless to say, this is all speculative, and not, I think, in tension with other common explanations of market power, like lobbying, network effects, etc. But concentration + market power is a big, complicated trend, likely with many partial explanations. Perhaps the rise of branding is one.

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