Is going global the best way to defend in uncertain times?
This article first appeared on Octomembers on 18th July 2022 At the start of the year, I said we’d...
According to Forbes Magazine, 8 out 10 new businesses fold in the first 18 months. But the ones that survive average a 50-year life span. To last that long a company needs a great product and visionary leadership to help survive the ups and downs of the economic cycle.
A strong brand has also been a defining factor for many. The likes of Stella Artois, Twinings Tea, Coca-Cola, Bass Ale and Levi Strauss have all been around for a hundred or more years and a quick look at the Global 500 2021 ranking for brands shows companies that have been around since the early-mid 1900s, like Mercedes Benz, Samsung and Disney, are still in the top 20.
But with changing customer spending patterns and behaviour – especially among younger generations – is brand loyalty being challenged today? And how are brands adapting?
Millennials were the first generation that grew up with the internet. Generation Z grew up in an entirely digital world. They don’t remember a time before WIFI and smartphones and process information at lightning-fast speed, seeking instant gratification. They have more options for where to spend their money and are therefore more likely to shop around for goods and services. They are also socially conscious.
Rathbones, who conducted a study on brands, says that branded consumer goods companies have tended to be successful investments over the long term because they enjoy fairly stable and predictable returns, gently rising demand and little in terms of earnings volatility through the economic cycle. This is particularly the case in the area of consumer ‘staples’, where you find products that consumers need to buy no matter how poor they feel.
But companies selling branded goods are under threat in this brave new world of mobile internet, where information on product quality and supply chains can be easily conveyed through user reviews. Reputations are online and on the line.
A great example of this was last year, when it emerged that workers in Leicester linked with making clothes for the highly ESG-rated online fashion giant Boohoo were being paid just £3.50 an hour — nearly 60% less than the minimum wage. Social media lit up with shoppers promising to boycott the company, and its shares lost nearly half their value in the space of a week.
“This generational shift presents both challenges and opportunities for traditional brands,” commented Sanjiv Tumkar, head of equity research at Rathbones. “While there has been some evidence that these consumers may be less loyal to established brands than older generations, we are confident that many of today’s major consumer goods companies — which form such an important part of many investment portfolios —can survive and even thrive by recognising and adapting to the rapidly changing consumer landscape. Indeed, since the COVID crisis struck, incumbent brands in general appear to be gaining ground.
In a recent podcast, Laura Bottega, lead portfolio specialist on Morgan Stanley Global Brands fund, highlighted that, during the pandemic, some big-brand companies used the time to invest in their digital offerings, to expand e-commerce and social media and to advance the new trend of hyper-personalisation. She also discussed potential future opportunities in ‘regional champions’ such as those emerging in China.
“Companies are having to innovate and evolve in order to engage with the shifting attitudes – as well as the changing spending habits – of a new generation of customers,” concluded Sanjiv Tumkar. “But survey data indicates that when they find a brand that resonates with them and works hard to engage and retain them, they will be loyal.”
Manager Job Curtis focuses on companies which have the ability to pay and increase their dividends over time. He particularly likes companies with a competitive advantage and has historically favoured multi-national brands with stable earnings and growth prospects. He has a bias towards large caps, with 60% of the portfolio typically held in companies which sit in the FTSE 100.
This fund’s investment philosophy is based on the premise that a company’s intrinsic value is determined by its growth, returns on capital, sustainable competitive advantage and pricing power – typically consumer goods companies because they have strong brands. The manager looks to get an understanding of the industry in which a firm operates, the competitive landscape that the firm is facing and the actions it is taking to improve its positioning.
The manager of this fund seeks companies with competitive advantages in areas such as brands or technology – characteristics that he thinks are often undervalued by the market. These companies will usually fall into one of two categories: durable growers that benefit from the current economic climate or transformational stories about to undergo some form of restructuring.
This trust targets high quality businesses that can outperform over a prolonged period of time and the average company is held in the portfolio for 10 years or more. The manager believes emerging markets are becoming more like developed markets – citing the growth of digitisation and the development of internet-based solutions in the region. The portfolio is largely invested in the likes of software services, internet services, gaming and consumer brands.
Stock selection for this fund is based on a four-stage process. Step one filters out companies with low revenue visibility. Step two is to search for desirable factors such as natural monopolies, cost leadership, strong brands, intellectual property or high barriers to competition. Step three involves fundamental analysis to calculate a company’s intrinsic value. This then drives which stocks are added to the portfolio and at what weights in the fourth and final step.
Innovation, unique brands and intellectual property are the sort of features that can give companies a competitive advantage, helping them grow into market leaders. These kinds of stories are what manager Steve Kelly and his team hope to uncover for this fund in their quest for growth stocks in the US market.