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How can potentialinvestors tell if a product is more acai 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 consis-tent 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 sever-al brands or products that are...