Wednesday, March 7, 2018

A Tale of Two Markets


It was the best of times, it was the worst of times...the NASDAQ's heavy tech components roared to new 52-week highs on almost a daily basis, while iconic global consumer brands struggled to keep their heads above water. What happened?

I have noticed a massive decoupling in the stock market over the past 5 years, and over the past year in particular. Typically defensive consumer staple stocks have gotten hammered...and we're talking Bear Market territory for many of the largest brands in the world (a Correction is a 10% selloff from a stock's high, while a Bear Market is defined as a 20% or more fall.)

How could this happen when rates are still at historic lows, unemployment is low, the global population continues to grow, and the economy is booming? Not so fast. The economy IS booming, BUT in CERTAIN sectors. Consumer staples (think toothpaste, diapers, soap, hot dogs, macaroni & cheese, bleach, tissues, paper towels, etc.) have for decades relied upon BRANDING to charge a massive premium over a similar generically produced product. Who ever orders just a "cola" from a restaurant? Or asks for carbonated water and sugar? No one. Consumers have been steered towards brands since birth. An interesting thing is happening though, and it seems to be accelerating.

The oft-cited force of "tech disruption" has uniquely impacted classic brands in a singular way; consumers can now price shop globally and have orders filled at signifiant discounts to traditional full retail prices. Rather than laser-focusing on innovation, distribution, and consumer satisfaction what I've seen are major brands saddling up with lean manufacturing to such an extent that employees have to justify ordering pens or toilet paper. This is a race to the bottom.

The flip side of the coin are the tech innovators who leverage their massive economies of scale and state-of-the-art logistics to provide an unrivaled consumer experience. Many of them are pure software companies, some are not, but the result seems to be the same: extremely satisfied customers who have developed TRUST in the brand. So much trust, that these tech innovators can repeatedly launch offshoots of their core brands into a captive consumer market that actually embraces the new product or service. And many of these products or services directly compete with established legacy brands.

The game plan needs to change for legacy brands to thrive; the old vertical mindset of acquiring lowest cost raw commodities, manufacturing with razor thin margins, spending billions on marketing, and capturing the global consumer from birth is giving way mightily to logistical systems offering consumers ease...and better prices.