One of the easily observed truths of American capitalism and economy, is that the consumer is King. And if the consumer is King, then most of the most successful companies for investors are all in the Consumer Goods industry.
An analysis of the top returning stocks in the S&P 500 in the last 25 years, is like a roll call of consumer goods companies: Phillip Morris, Tootsie Roll, Coca-Cola, Pepsi, Colgate, H.J. Heinz, Procter and Gamble, General Mills.
These are also some of the same companies that fill up Warren Buffet’s stock portfolio. Matter of fact, Warren partnered with private equity firm 3G Capital to buy out Heinz last year, to take it private. And then, Heinz just recently merged with Kraft Foods to go back public, now as Kraft Heinz Inc. Kraft itself was a spinoff of a spinoff of Phillip Morris, above. Put all that together, and you realize that most solid investment portfolios in the US are built on the backs of consumer goods/staples.
Why are they such good investments?
The first reason is simplicity. General Mills makes cereal, pastry, wheat bars, stuff. The inputs are wheat, corn, other grains, sugar, coloring..things that are easy to get, easy to process, stable. There’s nothing complicated about getting those inputs, and churning out boxes of cinnamon rolls, croissants, frosty flakes, pancakes, what have you. It’s easy to see how they make money, and easy to see how they’ll keep making money. Pepsi/Coca-Cola combine water, sugar and their soda mix, bottle and sell. No brainers. It’s almost 1+1=2 easy.
The second reason is stable demand. This isn’t Myspace, where it could be on top of the world one minute, the next minute Facebook comes along and eats its lunch. It’s not Cisco where cloud computing came along and rendered wires and things a little unnecessary. It’s cereal, sweets, soda, soap, detergent, lotion, ice cream, stuff like that. You wanna innovate Coke? Add a couple brix to its sugar content. That’s it. So there’s little needs for reinvestment, research and development and other similar recurring expenses.
Third reason is the brand value and earnings power. Consumer goods companies are built on the backs of brands that are popular and resonate with the masses. Their names stand out in Grocery store aisles. You know Country Crock if you’ve been in Walmart more than twice. You know Irish Spring, or Dove, or Frosted Flakes, or Hollandia, or Hershey’s. You know them as well as you know your family. They’re so well known, their names have replaced categories. Kleenex is a brand, and all other soft tissue paper is Kleenex. Coke or Pepsi are THE soda brands, every other soda is not-Coke, or not-Pepsi. No one goes to buy ‘a different candy that tastes like Hersheys’, they just buy Hersheys. Over time, those brands become wrapped up in our every day life that even when we move and set up our own homes, we want to keep using them. When I came to the US, I made them send me Dettol Blue from home bcos it’s the soap I was used to (I eventually started buying it here, then finally moved on after a year or two). I was willing to pay extra to have the same soap I was used to brought in from Nigeria, rather than just buy a new brand of soap from Walmart. Even when I switched to Dove, it’s cos I knew the brand from home. Consumer goods have that mental staying power.
It’s no mystery that Buffet is all over this space. He understands intimately, what I’ve sort of just broken down. If you want to build long term staying portfolio, you have to include consumer goods.
One of my favorites in this space are Johnson and Johnson and Procter and Gamble. Just for your consideration, not a recommendation. There’s a lot more of them out there, just do your homework.
I wish you great returns, and may the odds be ever in your favor.