Consumer packaged goods stocks have always featured prominently on investors’ portfolios. The big attraction is their defensive nature. Add to this, the “moats” that CPG companies build around their business franchises, in the form of strong brand equity with strong magnetic fields, then you have a winner, at least, from a steady share price appreciation and dividend pay-out point of view.
Of late though, the operating logic that seem to have powered consumer packaged goods companies, at least on main street, seem to be facing some headwinds, both in fact and appearance. For starters, most CPG companies seem to be struggling to increase their revenue base organically. As a result, most have relied on increasing prices to compensate for the lack of required levels of volume growth.
Pricing up is good in the short term, but in the long term, it is not. It puts the business between the proverbial rock and a hard place. On the one hand, if you price up without increasing the underlying value of the brand, sooner or later, you end up with a bubble. If on the other hand, you keep increasing prices and at the same time, you attempt to increase the underlying value, either through packaging, ingredients changes etc., you then run the risk of what Clayton Christensen calls “over-shooting” your consumers. In other words, you give them more than they want or willing to pay for. Either way, somehow, you leave your door open for insurgent brands.
Asset disposals that my first employer, Procter & Gamble and others undertook in the past few years, are good levers to free up capital and managerial band-with. Equally, M&A, especially for the deep pocketed and private equity outfits who can unlock value by driving out agency costs and through other long term value creation initiatives, is also good. All of these cannot be in lieu of ultimately, diving into spaces where $10 bills are lying on the sidewalks, emerging markets.
Apart from everything that has been written about emerging markets; scale and size of markets, young populations, industrialisation and the burgeoning consuming class, according MSCI – https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd567811, the MSCI Emerging Markets Index outperformed the MSCI World for at least 9 times in the past 14 years to year ended 2017. Surely, this is a place where CPG companies want to be. To be successful though, CPG firms should to go to the bottom of the pyramid, where in most cases, the biggest competitor is non consumption.