The consumer goods industry consists of two major categories: consumer staples (such as food and beverage and daily consumables) and consumer luxury (such as luxury handbags, watches, and shoes).
Consumer goods form the bulk of business-to-consumer (B2C) transactions and involve a wide range of goods from daily necessities (toothpaste, toiletries) to discretionary items (sports cars, jewelry). Understanding the industry may seem like an easy task as most people have purchased many of these items during some point in their lives; however, the dynamics across each product category can differ substantially based on many factors. Investors need to be equipped with the right knowledge in order to spot trends or be careful of risks on the horizon.
Consumer staples — a necessity with low barriers to entry
Consumer staples companies see consistent demand for their products since they are daily essentials people purchase on a regular basis. The problem is not the demand side of the equation, rather it’s that supply itself can grow without bounds. Low barriers to entry mean any one company might struggle to differentiate itself from the rest.
Pricing often suffers, too, since such products are a dime a dozen and are typically viewed as commodities (examples would be salt, sugar, and the like). Customers normally buy based on price and product features, paying little attention to brand or corporate reputation. If the return on equity for such companies is dismally low, it may make sense to look elsewhere for good investment ideas.
Consumer luxury — discretionary and fickle demand
Consumer luxury is ensconced in its own secure cocoon, and many brands enjoy a strong and loyal following that enables them to continue selling their products even through economic down-cycles. However, as of late, some luxury-goods industries have witnessed the impact of declining demand as the bulk of their customers are concentrated in certain countries or regions (e.g., China).
Demand has also been more volatile as of late as the rise of social media has resulted in new fast-fashion and affordable luxury brands gaining quicker acceptance and exposure. Investors need to carefully assess if demand for a brand stays consistent through good and bad times, or if demand fluctuates significantly depending on competitor moves. Admittedly, it’s not an easy industry to analyse and often requires more reading and due diligence.
Trends in consumption patterns
Investors interested in both industries (staples and discretionary) should read up on trends in consumption and also behavioural patterns. Consumers may have increasingly fickle tastes, which may make brand loyalty fleeting. Daily staples may also see the introduction of substitute products that render existing ones obsolete, hence threatening well-established business models.
Though the luxury goods industry has yet to face major disruption, the advent of information sharing and social media may continue to affect the industry in new, unpredictable ways. Investors need to be mindful of such risks and seek to purchase companies with a good margin of safety.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.