Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
This report argues that the belief in brand 'moats' is a bubble. Since 2017, the author has bet against big brands (like Nestle, Unilever, Diageo) and for retailers (Costco, Kroger, Walmart, Tesco). Social media has made brand advertising 10-200x more expensive, while retailers are undervalued. His retailer basket is up 245% vs. 0% for brands. Coca-Cola, after a 40x P/E peak in 1998, underperformed the S&P 500 by over 3% annually for 18 years.
One-sentence summary: The author argues that "brand as a moat" is a cognitive bubble, and capital cycle dynamics will cause brand companies to underperform over the long term, recommending going long on retailers and short on brand companies. [Bearish]
The article opens by stating its core thesis: a decade ago, the author publicly challenged the dogma that "brand equals moat," arguing that a cognitive bubble had formed around the durability of returns for so-called "quality compound growth stocks." The author recalls delivering a speech titled "The Death of Brand: A Cognitive Bubble in Quality Compound Growth Stocks" in 2017 at the QEII Conference Centre before an audience of 600, directly targeting what was then a near-religious investment creed. The author's original words: "The central argument was that a cognitive bubble had formed around the durability of returns for many franchise stocks." The author names Kraft Heinz, Anheuser-Busch, and Clorox as the most extreme cases, while European peers such as Diageo, Unilever, and Nestle were also deeply entrenched. This stood in stark contrast to the views of well-known "buy-and-hold" fund managers at the time, who believed that "arrows" (long-term trend extrapolation) were the key to stock selection, while "wheels" (cyclical thinking) would cause value investors to underperform over the long term.
The author points out that the law of the capital cycle applies equally to "quality" companies: high returns, once capitalized, trigger competition and mean reversion, setting the stage for multi-decade underperformance. The author emphasizes that the stock market's valuation of profits itself catalyzes agency behavior. The author's original words: "Quality companies are not immune to these Capital Cycle 'wheels', which can set the stage for multi-decade underperformance." Using Coca-Cola as an example, the author notes that this "most inevitable" stock peaked in 1998 when its P/E ratio exceeded 40 times, and then remained essentially flat for nearly 20 years, underperforming the S&P 500 by more than 3% annually over 18 years.
The author argues that the brand moat investment belief is flawed on three levels: analytically, it ignores the seismic shift in the media landscape; behaviorally, it blindly follows Warren Buffett; and commercially, it becomes self-reinforcing due to marketing convenience. Specifically:
1. Analytical Level: Traditional TV advertising held a monopoly for roughly 70 years, providing a massive tailwind for branded consumer goods companies, but this was ended by social media. Brand owners overpriced their products, creating a profit margin gap of 1.0 to 2.5 times for private labels compared to branded goods. The author points out that end consumers of ketchup, beer, and soap do not care about the 15% EPS compound growth rate that "quality investors" seek.
2. Behavioral Level: Investment thinking is outsourced to idols. The author cites psychologist Kahneman, noting that people often hold beliefs without evidence because of "those they love and trust." Warren Buffett is precisely such an idol. However, the author's colleague Omar Malik points out that the environment in which Buffett made his brand investments is no longer replicable, and the disaster of the Kraft Heinz merger (accounting scandal + over $15 billion in write-downs) proves that even the Buffett halo does not guarantee success.
3. Commercial Level: The story of quality compound growth stocks is simple, repeatable, and easy to sell. Combined with "high conviction" concentrated positions, it becomes an attractive antidote to passive investing. But the author quotes Charlie Munger: "Any year that you don't destroy one of your best-loved ideas is probably a wasted year."
The article provides a clear, actionable conclusion: when brand owners are in a valuation bubble, buy undervalued retailers, whose valuations are only one-tenth of brand owners, and whose customers get a better "deal" through private labels. The author's team's analysis focuses on the enterprise value-to-sales ratio (EV/Sales). Anheuser-Busch and Kraft Heinz both peaked at over 7.0x EV/Sales in July 2017, implying profit margins more akin to software companies than beer and cheese companies. The author instead bought a basket of retailers — Costco, Kroger, Walmart, Tesco — with EV/Sales of only 0.5-0.8x, roughly one-tenth of the brand owners. Since July 2017, this retailer basket has risen 245%, while the brand owner basket comprising Nestle, Unilever, Diageo, Kraft Heinz, Anheuser-Busch, and Clorox has delivered an average return of 0%.
Institutional Perspective Bias Note: The article uses its own successful case (long retailers, short brand owners) to argue for the effectiveness of its "capital cycle" framework. Readers should note that this is a position-holder's perspective, and the performance benchmark is the MSCI ACWI. The excess returns over the past decade may be partially attributable to this specific style.
The report notes that over the past two decades, the profit share captured by branded manufacturers relative to retailers and distributors ballooned from 2.5:1 to 10:1, but this trend has recently begun to reverse and is far from over. The author states: "Over the two decades preceding the publication of our piece, the share of profit captured by branded manufacturers, relative to the retailers and distributors, ballooned from 2.5:1 to 10:1. More recently Big Brands have started to cede profitability to retailers, but this pool reversion arguably has further to run." This means: "In the twenty years before our article was published, the profit share captured by branded manufacturers relative to retailers and distributors expanded from 2.5:1 to 10:1. Recently, large brands have begun to cede profitability to retailers, but this reversion to the mean in the profit pool likely still has a long way to go."
The social media era has fundamentally altered the advertising efficiency of brands, forcing them to shift from updating TV commercials 1–4 times a year to generating 10–200 times as much social media content. The author quotes P&G's Chief Information Officer Seth Cohen, noting that the company previously needed to update TV ads only 1–4 times a year, but now must generate 10–200 times as many social media updates. This data, sourced from Bernstein Research, vividly illustrates the sharp rise in costs for brands to maintain consumer mindshare.
The report compares brands with tech giants in terms of valuation, suggesting that the market is reassessing the value of brand moats. The author mentions: "At the same point Alphabet was valued at 5.5x EV/Sales." This data appears in the context of the discussion on brand profit pools, implying that as brand profit margins come under pressure, their valuation premiums (relative to tech platforms) may face compression.
Involved positions and stance:
| Ticker | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Costco | Add | As a core holding in the retailer basket, bullish on its valuation being only one-tenth that of brand companies | EV/Sales 0.5-0.8x |
| Kroger | Add | Same as above, an undervalued retailer representative | EV/Sales 0.5-0.8x |
| Walmart | Add | Same as above, member of the retailer basket | EV/Sales 0.5-0.8x |
| Tesco | Add | Same as above, member of the retailer basket | EV/Sales 0.5-0.8x |
| Kraft Heinz | Short | The most extreme case of brand moat bubble; accounting scandal and over $15 billion in write-downs post-merger | EV/Sales over 7.0x in July 2017 |
| Anheuser-Busch | Short | The most extreme case of brand moat bubble; implied margins resemble a software company rather than a brewer | EV/Sales over 7.0x in July 2017 |
| Clorox | Short | One of the most extreme cases of brand moat bubble | Specific data not disclosed |
| Diageo | Hold & Watch | Representative of European brand companies, deeply mired in a perception bubble | Average return of brand company basket: 0% |
| Unilever | Hold & Watch | Same as above | Average return of brand company basket: 0% |
| Nestle | Hold & Watch | Same as above | Average return of brand company basket: 0% |
| Coca-Cola | Not explicitly stated | Used as a case study to show that even quality companies are not immune to capital cycles; peaked in 1998 and underperformed long-term | P/E over 40x in 1998; underperformed the S&P 500 by over 3% annually for 18 years |
| P&G | Not explicitly stated | Used as a case study to highlight rising marketing cost risks for brand companies | CIO stated social media content demand grew 10-200x |
| Alphabet | Not explicitly stated | Appears as a valuation benchmark, implying tech platforms are more advantageous in the advertising ecosystem | EV/Sales 5.5x over the same period |