Food for Thought

If there's one singular change that the new market environment has foisted on Internet stocks, it's this: A brand is of little value, but cash is king. And yet the value of brands was all over the business news last week. Brand powerhouse Procter & Gamble (PG) admitted that it had moved too aggressively into new brands, while not paying enough attention to its key brands like Tide and Crest. And last week also saw one of the biggest recent brand deals: Dutch conglomerate Unilever (UN) agreed to buy Bestfoods (BFO) for $20.3 billion.

So Unilver is going to shell out serious money for brands like Hellmann's mayonnaise (sold as Bestfoods' mayonnaise on the West Coast) and Knorr soup bullion. Shares of other brand names like Campbell Soup (CMP) and Hain Celestial (HAIN) have shown some life thanks to recent takeover talks.

So a real brand carries real value. Here's why:

"The definition of brand is the ability to charge a certain gross margin over the cost of a commodity," says Scott Galloway, chief executive of Brand Farm, a New York-based Internet incubator. "Customers have to demonstrate a willingness to spend more on your brand, just because you're the one selling it. What you have in most Internet brands are things with a lot of potential. But you haven't seen that monetized in margin."

No Free Refills

In other words, Starbucks (SBUX) is a brand because people are willing to pay more for one of its cups of coffee because of its name. But e-tailers such as Drugstore.com (DSCM) and Fogdog.com (FOGD) haven't shown that same customer commitment, so Wall Street has figured out that most new Internet companies aren't real brands like Starbucks, they're just well-known names.

What makes a well-known name a brand? One of the biggest factors is time.

Not too long ago, there seemed to be time to build brands on the Internet. The mantra among Internet companies -- e-tailers in particular -- was "build brand now, make money later." After all, there was plenty of money. Last year alone, Internet companies received $21.6 billion in venture financing, according to Ventureone. And if companies ran out of cash before the brand worked, it seemed as if the codependent public markets would always be there to pony up more money in the form of IPOs and secondary offerings. Private companies were able to take their newly popular brands to the IPO market, where clueless investors would pile on, thinking they were buying the Heinz ketchup of the Web.

The problem was, these companies might have developed brand awareness, but they didn't have the time to develop real brands of value. It was the George Hamilton syndrome; the Internet brands were famous for being famous -- but they couldn't do anything with that fame. And now the markets have dried up, the cash is incinerating and the brands haven't reached true brand status.

To Brand Farm's Galloway, the real brands among Internet stocks are few. "Ask Jeeves (ASKJ) is a strong brand that has been developed in the past two years," he says. "But it's taken a lot of work. Building brands is a careful, exhausting business. You have to approach it seriously. You don't see Tiffany (TIF) shooting hamsters out of a cannon."

It Takes Time

"What's being left out of this entire equation is time," agrees Bonnie Kramer Tonneson, retail analyst with Chase H&Q. "Look at Unilever's last acquisition, Ben & Jerry's (BJICA). Ben & Jerry's has been around since the '70s. And Bestfoods owned and stewarded their brands for a long, long time."

And over time a true brand begins to demonstrate that it can bring back customers. "The test of the brand over time is not just the premium that you get over a commodity price," says Tonneson, "It's how long you keep the customer that you get."

Food brands, and, for that matter, P&G's famous brands, might be cheap, low-margin businesses, but they bring back customers again and again and again. "There are lessons for the Internet in the food business," says Tonneson. "Brands might be hot, but if they don't stick, they fail. SmartFood came on strong, where are they? Snapple came on strong, where are they? I will agree that Internet-time things happen at a much faster pace. You can have immediate, full penetration of awareness than you couldn't have had 20 years ago. Yes, you can get your story out, but is it going to stick?"

But in this new environment, it's starting to look like plenty of Internet brands won't be around long enough to find out.

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