Industry Voices

How to Spot the Difference Between Fads and Trends

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Bruce Cohen is a consumer strategist in Kurt Salmon’s Private Equity Practice. He has more than 20 years of consulting experience, including deep experience in food and beverage, consumer products and specialty retail.

How can potential investors tell if a product is more açaí or organic, classic Oreo cookie or three-dollar cupcake? The investment can be profitable either way, but knowing the difference up front will help determine the correct multiple and drive favorable post-deal economics.

In general, there are three key differentiating factors between a fad and a trend.

Fad vs. Trend Framework

Reason for rise. Trends generally have identifiable and explainable rises, driven by consumers’ functional needs and consis­tent with other consumer lifestyle trends. By contrast, fads are driven by an emotional need to purchase, based on hype and idealistic product perceptions. The benefits are ethereal or ill-conceived, and don’t deliver what was promised to consumers.

Incubation period and life span. Trends rise slowly, whereas fads spike—and die out— quickly. For example, demand for multiple fashionable handbags and accessories for each occasion has grown steadily over the years, fueling Coach’s decade-long growth and healthy 11-year compound annual growth rate (CAGR) of 19 percent. Beanie Babies, on the other hand, went from $400 million in sales in 1997 to $1.3 billion in 1999, a CAGR of 77 percent, before dropping to $850 million the next year and steep declines thereafter (see Exhibit 1 chart below).

 

 

 

 

 

 

 

 

 

Scope. A trend usually encompasses sever­al brands or products that are applicable to many different consumer segments, while a fad typically includes only a single brand or product and has limited appeal outside of one narrow consumer segment. A trend possesses some agility and consumers have granted it permission to expand beyond its current platform while maintaining authenticity.

Low carb diets are the perfect illustration of the difference between fad and trend. Healthy eating has been important to a certain part of the population for a long time, but low-carb diets were fads within that trend. Their emphasis on fat and protein went counter to the larger trends at the time — ones that mandated a more balanced approach of lean protein, whole grains, and plenty of fruits and vegetables. Millions of consumers tried various versions of these diets — for example, 15 million purchased Dr. Atkins’ books alone — but the fad soon burned out as those consumers realized that low carb diets were hard to sustain. In this way, a fad experiences rapid adoption among consumers with a weak level of commitment to the concept (or high dropout rate), as many consumers hop onto the bandwagon only to find the product or experience more difficult or less useful or beneficial than they thought it would be. And while the low-carb diet still has a sizeable faction of die-hard supporters, I believe that the fad has largely fizzled, as evidenced by the fact that the broad multiline set of products and categories has vanished from shelves, and the brand that led the pack restructured and is focused primarily in the a nutrition bar category.

We used our fad-trend framework to evalu­ate a recent consumer product opportunity in the gluten-free market segment.

Trend: Gluten-free Delivering Benefits

Most gluten-free products were originally designed for sufferers of celiac disease, which afflicts about 1.8 million Americans. Even with such a small proportion of the population diagnosed with the disease, the gluten-free business is booming. Sales have been rising steadily since 2006 and are expected to sur­pass $5 billion by 2015.

And gluten-free products are becoming more widely available. Mintel data shows that product launches with a gluten-free claim nearly tripled in 2011, to roughly 1,700 products. Walmart has dedicated gluten-free displays in approximately half of its U.S. stores, and gluten-free menu items have also increased 280 percent from Q3 2008 to Q3 2011.

This steady proliferation of products and channels is a good sign that the gluten-free trend has staying power with consumers. Gluten free is also consistent with the healthy eating trend mentioned previously, and many consumers purchase gluten-free products as healthier alternatives, not because of any medical condition. In fact, in a survey of consumers who regularly buy quinoa (a gluten-free grain), more than half said they ate it for its nutritional benefits, not because of a medical condition. But it is important to note that any one gluten-free product could be vulnerable to fad-like run-ups. That the success of gluten-free products does not hinge on one small part of the population or a single product cements its trend classification.

Making the Most of a Fad

Of course, even if something is a fad, it can still be a good long-term investment if it has uses outside of its narrow original purpose. A great illustration, albeit non-food, is Crocs. For many, the iconic rubber clog was clearly a fad as the market value of the company soared, peaking in late 2007 at nearly $70 a share. But once sales started to decline, the stock value plummeted to just over $1 a share by early 2009. Fast-forward to today, Crocs has successfully expanded beyond just clogs and kids’ shoes—clogs make up  only 40 percent of sales now, down from more than 75 percent in past years, and the proportion of adult sales has doubled. As a result, the brand has broadened its reach and now has a market capitalization of $1.37 billion.

But, in any case, it pays to understand whether a product is destined to be a steady, burning success or rise and fall quickly in a blaze of glory before you’re able to make any deal. 2013 promises to include many hot products and brands that could go either way. From Kombucha to juice cleanses, knowing what to look for can help private equity sponsors and corporations invest with confidence.

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