While it is impossible to generalize, this theory seems to apply well to trademarks. Take, for example, the Coca-Cola brand, which has been around for over 130 years. Having survived a multitude of economic and political contexts, its long existence increases its potential for survival. Other examples include brands like Colgate(1806), Hershey (1894), and Rolex (1905).
The Lindy Effect came to mind when I re-examined the stock of Lululemon (“LULU”) after its recent drop in the stock market. In my analysis, one of the elements I find difficult to evaluate is the long-term appeal of its brand. Today, consumers love Lululemon products, but will this brand be equally appreciated in the future? Companies in the clothing and fashion industry are generally subject to cycles of popularity.
Considering the Lindy Effect and cycles of popularity, it becomes difficult to evaluate the Lululemon brand. The company was founded in 1998, making it a relatively young brand. According to this theory, the brand of Nike (“NKE”), founded in 1964, would have a better chance of long-term survival than that of Lululemon.
Another example of a relatively young brand is Under Armour (“UA”). Founded in 1996, the brand saw growing popularity between 2005 and 2016. However, since 2017, sales growth has slowed significantly. Is this due to poor execution by the management team or a loss of consumer interest in the brand? Determining the precise cause is not always evident.
It is normal for some companies to experience downturns. Satya Nadella, the CEO of Microsoft, asserts in his book Hit Refresh that all companies will, at some point, need to reorganize or reinvent themselves. Long-established brands will also need to undertake this exercise.
Nike experienced significant difficulties in the late 1990s, primarily due to the controversial working conditions of its employees abroad. During this period, Adidas and Under Armour became increasingly competitive. Then, in 2006, Nike underwent a transformation led by Mark Parker, where innovation and better social practices enabled its brand to make a strong comeback. This example somewhat confirms the Lindy Effect. Having survived downturns and multiple economic and political contexts, its probability of survival increases with each passing year.
Be careful, the mere fact of having existed for a long time does not necessarily make a brand a good stock investment. Execution, growth, profitability, and the price paid for a stock must be present. However, longevity reduces the risk of seeing the brand disappear.
Will the Lululemon brand still be as popular in a few years? If you believe it will, the stock price seems attractive at around 18 times the expected earnings. As for me, I am still pondering, but I have yet to discover the elements that will allow me to answer confidently. In the meantime, every passing day improves its chances of survival.
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Jean-Philippe Legault’s Blog is published in
