Odd Lots - How Boring Food and Beverage Companies Turn into Huge Stock Winners Year after Year

Episode Date: February 17, 2021

During the worst of the pandemic, people loaded up on staples from their grocery store. Shelf-stable food items, beverages, canned tuna, canned soup, chips... all that kind of stuff. But the big food and consumer staples companies have been huge winners outside of the pandemic. In fact, as an industry, these companies have some of the best track records in the market. On this episode, we speak with Jonathan Fell, the co-founder of Ash Park, an investment firm that specializes in these companies, to talk about how these companies win year after year.What do you love about Odd Lots? What topics do you want to see on upcoming episodes? Share your feedback about the show by completing our first-ever listener survey.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, you know, back in the spring when the pandemic hit, I did something I had never done before. Do you know what that is? Well, I think you're going to have to narrow it down because I think a lot of people, did stuff they never did before in 2020. But go on. What was it?

That's true. You know, I didn't know what to do. I was like panicking like everyone else. I didn't know what the risks would be. I needed to do something tangible to make myself feel like I had some control over my life. And I went out and bought a few cans of sardine. What, like a prepper? Were you worried about the food supply or?

Yeah. So you started to stop piling. You started stockpiling canned goods. Yeah, basically, I went to the grocery store, like sometime in the middle of March, and I knew that, you know, I was like, I don't know what's going to happen. I don't know if there's going to be disruptions to the food supply. I don't know anything. But I know that, you know, canned sardines have a lot of protein and their shelf stable.

They'll last for a long time. So if everything goes bad, I can at least stay in my apartment and eat can't fish. I have this image now of a post-apocalypse Joe sitting in your East Village apartment eating sardines directly out of the tin. But I got to say, you actually, I don't think you were alone because certainly in Hong Kong, there was a lot of panic buying when the coronavirus crisis started. And the shelves were empty for a long time. Yeah. Incidentally, I never actually opened any of the sardines, but they did bring me some comfort knowing that they were there. And, you know, of course, I bought toilet paper and just all that other stuff.

It was like, you know, just anything that was like on the grocery store shelves, stable, reasonably edible, I thought I should not buy a little bit of it. In 2020, the year that household products found newfound appreciation, I'd say. Yeah, exactly right. So a lot of companies that hadn't done that well or that maybe people hadn't thought about in a while really did see a surge because I wasn't alone. And in fact, I think then there was even an article a few months later in the journal about all these people buying canned fish. But the point is, lots of people were buying stuff on the grocery store shelves, consumer products, consumer staples that would last a long time. That would be safe. That would be predictable.

And the sort of big food and consumer conglomerates, they were among the winners, especially early on during the pandemic. Yeah, I think that's right. And it's also, I would say, different to what a lot of people were expecting, at least early on in the crisis. I don't think a lot of people expected it to manifest itself in a consumption boom. But we did see people going out and snapping up a lot of staples. And I know we're focusing on food and household goods and things like that. But it even extended to consumer discretionary since so many people were stuck at home. They were buying lots of stuff online.

And so I guess we saw a pretty counterintuitive reaction to a pandemic and economic crisis. Yeah, absolutely right. But of course, the question is always, like, can that last? I mean, some companies were winners during the pandemic, but we expect them to have, like, cemented their position. So, for example, Zoom, which we're recording this actually over Zoom right now, they were one of the big stock market winners, everyone conducting meetings. And there is this expectation that Zoom will now be with us for a long time as we sort of do business. And, you know, so the question is, what is the future of these big consumer goods companies? Because pandemic, buying aside, there's been a lot of questions about whether consumers are looking for something new, whether people are going to buy food based on direct-to-consumer brands that advertise to them on Instagram, in which case, shelf space at the grocery store is not as important.

grocery stores themselves are a changing business, all kinds of changes to the sort of consumer products business. So we don't really know for sure of those early winners, like whether they'll be able to consolidate those gains or whether that was sort of a one-time blip for a bunch of companies whose fortunes don't look as great in the future. Right. Can consumer goods companies keep up the momentum both in the short term as, you know, the pandemic sort of normalizes or the situation around the pandemic normalizes as vaccines get rolled out and we all go back to work hopefully and start doing stuff. And can it keep up momentum in the long term as they face new forms of unexpected disruption? So we're going to be talking about

that question today. And a key fact, and we'll get into this with our guest, which is that if you go back to 1972, if you look at the basket of big global staples companies, they've never had a negative five-year period of returns in the stock market. So as a sector, they've done phenomenally well, way better than most other sectors over time. And so the question is, can that continue? So I'm very excited, pleased to be speaking with our guest today. We'll be talking to Jonathan Fell. He's a fund manager and founder of Ash Park Financial, which was founded in 2013, and it invests in the consumer staples category. So Jonathan will be talking to us about this sector and why he believes in it so much and why the returns have been so strong. So Jonathan, thank you so much for joining us.

Hi, Joe and Tracy. Thank you very much for having me on. So where to begin? I mean, what Tracy and I, or I guess what I did in the spring, Lots of people rediscovered big consumer staples brands this year, or in the last year. That's right. And these brands have been around for a very, very long time. Whatever new trends there are around in different industries, different sectors, people always need to eat and drink and wash themselves.

And some people even need to use nicotine. And so you find there's a base of companies in the world that have a very, very resilient, base of consumption. And I think what happened in 2020 with COVID just highlighted that. So I have a really basic question at the outset of our conversation. But how do you distinguish between a consumer staple and a consumer discretionary? Because I feel like as trends change, that sometimes the distinction becomes a little bit muddled. So for instance, I think Amazon is still classified as consumer discretionary, but certainly in 2020, a lot of people would have been relying on that service to get basic goods. So what's the difference there?

Well, we define consumer staples as branded food, drink, household and personal care, and tobacco businesses. Amazon for us is a retailer. So it's in a very related area, obviously, in some areas, it's selling private label brands that compete with consumer staples companies, but it's not in our definition of the sector. I think you're right, though, Tracy, that the line between staples and discretionary is not completely bright. It's a gray area in some portions of the portfolios. So for instance, we own things that sell makeup and to some makeup, which is low cost and every day purchase.

but some of that is almost like a luxury good. And you could say the same about some of the spirits companies. There are everyday bottles of spirits, but then there are things you can pay a couple of hundred dollars for, and that is more at the discretionary end. But the bulk of what we own in Staples is everyday products that people are buying weekly or monthly. And as I mentioned at the start,

you have to buy a change. chunk of these products just to stay alive, to eat and drink and feed yourself. So just so we're clear for people listening at home, everyone's heard of these companies, whether it's L'Oreal, Coca-Cola, Clorox, which had a really great year because people were buying bleach to clean things, smuckers, Heineken. I mean, these are names that have global footprints all over the world. Everybody is more or less familiar with these type of brands. That's exactly right.

Many of them are really quite international businesses now. And, you know, as well as the US and develop markets, they also have a growing footprint in emerging and developing markets as well. So people around the world are using these products. So Joe mentioned this in the intro, but you've pointed out that over a period of time, a long period of time, these consumer staple companies have actually been tremendously good

at generating consistent cash. flow. Can you dive into that a little bit more and explain why that's happened? Because I think a lot of people when they hear consumer staple, you know, they think probably boring, not that exciting, and maybe not even that good at performance. So what is it that the market is missing here? I think you've hit on something there, Tracy. They are boring, but we regard that as a good kind of boring. I think it's easiest to think about this, or it helps if you think about it, in terms of the old tortoise and the hair fable.

So at any point in time, there's always going to be something miles more exciting in the stock market to invest in than consumer staples businesses. They will hardly ever be the fastest growing things in the market, unless the market's going through a disaster and we're in some sort of terrible economic situation. But their secret is it's the same companies that tend to... to win year after year after year and decade after decade. They're quite good at adapting, gradually shifting their portfolio to modern tastes. But if you look at the large staples companies now,

they're the same things that were large 20, 30, 40, 50 years ago. And you can't actually say that about many other industries. We'll probably talk about this in more detail and disruption, something that people talk about a lot in the world. sure, Staples are open to disruption as well. But compared to the disruption you see in most other industries, the disruption in Staples is really quite tame and manageable for most businesses. So why is that? I mean, let's talk about how they adapt to disruption. Obviously, we see the proliferation of direct-to-consumer brands. Anyone can come up with a package good or a new form of

Seltzer, quickly marketed on Instagram, get a lot of attention, or bombarded with new things. Intuitively, it would feel like this is a really big problem for these companies. Many of these companies are popular, but they're not exactly cool, per se. They're not exactly hip. They're not trendy. You know, you can think of, say, like a traditional Seltzer, like Schweps has sold for a long time, versus whatever, La Cros, that got really popular for a few years. How do these companies adapt and stay ahead of these types of threats?

The way they adapt is typically to copy or buy. And I think there's a perception that this is a recent phenomenon, the rise of growth or challenger brands. But it's not really. It's been around forever. I was reading something about the old Heinz CEO, Tony O'Reilly the other day, from the 70s. And there's a great quote.

he said the best way to get into new product development is to steal the other guy's ideas. You buy the company. And that's what you find. You know, big businesses typically are not greater innovation. It's not what they're specialising. They're very good at scaling and growing things which someone else has discovered. It's not really their job necessarily to innovate. I mean, we like to see companies come up with new concepts and innovate.

but it doesn't have to be their idea, it can be someone else's. If you think about it, then going and buying a startup business that's proved itself is essentially a kind of outsourced R&D, and they could do it themselves, and they could tip a big pile of money into a hole in the floor, and nothing might come out of it. The alternative is to wait for lots of other people to destroy their own piles of money and see who's left at the end. Buy that business because it's proved itself in the market.

It's proved itself in terms of being something that consumers want to buy. And then, rather than just sell it in the channels or markets it's in, you take it into new markets, new channels, and 10, 20, 30 years on, it's a much bigger business than when you bought it. And that's the way that the disruption, innovation dynamic, tends to work for successful large staples businesses. So you mentioned this idea that the big consumer staples companies of today tend to be the same ones that dominated, you know, decades ago.

How important is first mover advantage when it comes to the dynamic that you just described? So I imagine if you're a big company and suddenly a disruptor comes along, one of the reasons you might be able to buy them is because, you have a lot of sales, you have profit, you are able to tap the market for additional financing, you have a good starting position to build on. So I guess what I'm trying to get at is how important is it for you to be an incumbent in the consumer stable space? I think incumbents in staples gives you a really important advantage because you've got the production scale, you've got the relationships with retailers, you've got the relationships with consumers that

allows you to maximise the benefits of a new brand in your portfolio. And I think when we're talking about, you know, first movers in Staples categories, I think you have to ask yourself, how new is this product really? So if I think about directed consumer brands, you know, Dollar Shave Club would be the classic that made a lot of headlines. What's new about it is the price and the way it's sold. It's not a new product. In fact, it's a fairly standard razor that's probably a little bit technologically behind

the thing that was the leader at the time, Gillette. And you find that with a lot of staples disruptions. You're not actually inventing a completely new product in the way that you are in many other, many other industries. If I think about what's happening in autos or in, you know, in retail with the internet or with finance or banking, then, you know, you've really got utterly different offerings to what the incumbents had or have. But in Staples, it tends to be a more subtle wrinkle.

And it's easier for the incumbents to latch on to encompass. if they want to and decide that's a trend that is going to continue. On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, we did this to you. What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing, The Killing of Bob's

Lee, beginning April 16. So one way I imagine that the staples incumbent hold on to their dominant position is through shelf space at grocery stores. And I presume, but maybe it'll fill me in about those relationships are very powerful and they dominate space and that continues to be a place where they sell. How does that change and how much of a threat is that to that source of incumpancy that moat in a world? of online grocery store, online grocery shopping, where presumably shelf space is just not nearly as much of a thing. Well, you've hit on another really important point there, Joe, which is that if you're going to be a successful big staples company, you've got to adapt to changing channel dynamics,

and you've seen through history that the successful guys have done that. when I think about the internet in particular, there's a lot of chat about infinite shelf space and how suddenly the advantage of incumbents might not be what it was in a Walmart or a Target or whatever or a Tesco. I'm not convinced that's true. I mean, in some ways you could argue

it's even more an advantage to be a big player in that environment because if you think about how many times you search for a product on the internet, and go to the second, third or fourth search pages, it's pretty rare. I mean, most people buy the thing that comes up first. What comes up first? It's the stuff that sells or the stuff that has more money to pay in order that it comes up first in searches. Right. So I think the difference is maybe not as big as you might imagine. Incumbencies and advantage in the new retail world, as well as the old.

So you were a long-time consumer staples cell side analyst before you founded Ash Park. I'm curious, did you ever come across an example of a major consumer staple being disrupted in that period? Well, I mean, actually, I started my career in the early 90s and pretty much the first thing that happened was Marlborough Friday. That was April 93 when Philip Morris USA cut the price of Marlborough due to the growth of newer, smaller brands. And in those days, it was private label. And it was an enormous amount

of talk then about big brands being under siege and they're, you know, they're about to perish or they'll never be as profitable again. So this, this story comes and goes in in cycles. And for all I've talked about staples being resilient over the long run, that can sound complacent maybe. And of course, there are examples of companies who get it wrong and do get disrupted. And normally, you can see the seeds of their own disruption in that company or that brand's behavior. So to come back to Dollar Shave Club, one of the reasons why, that found a really good market niche was because the leader Gillette had really taken

its eye off the ball for quite a long time. You know, they added another blade and another blade onto the razor until you probably couldn't do much more. And then they kept taking the price up. And in the end, consumers got fed up and said, you know, why am I paying all this money for a product which doesn't really do that much of a greater job than something a bit more basic? And Gillette created for itself that vulnerability. There's another example I was looking at this morning, slightly more before my time, but in the 70s, there was a big US brewer called Schlitz, which was going neck and neck with Anheuser-Busch for ages in market leadership, and the family that owned it wanted to get that leadership back, but they tried to do that

by cutting corners. So they tried to shorten the production process, made it cheaper, and that had the unfortunate result of people spotting quite obvious product deficiencies, and they lost further market share and eventually kind of disappeared from the market. That's why I say it's normally a company's own behaviour that causes their downfall. And the businesses that continue to market and innovate and excite their consumers. Don't try and grow too fast. Don't try and cut corners are the ones which tend to survive and prosper. Tracy, I feel like we need to do a crossover razor semiconductor episode.

You can compare squeezing more blades onto a cartridge to shrinking nanometer size. But I actually want to go back to something, what you said, about how they sort of took their eye off the ball, and they kept putting all these extra blades in the cartridge, even know nobody needed it. It's easy to say now or in retrospect or with the rise of Dollar Shave Club, you're like, oh, okay, Gillette took their eye off the ball. Could one have known prior to the rise of Dollar Shave Club and identified that flaw that this doesn't,

they're on a strategy? Or is it one of those things where it's really hard to say, okay, this company is making some strategic errors before it's too late? Do you know what I'm saying? Like it's easy to say in retrospect, oh, they created this space for the incumbent. That seems harder to do in real time. It's hard, but not impossible.

And we have a sort of heuristic that we use, which is that companies have to be growing volume and market share. If you're relying on pricing as the thing which grows your top line, then you're going to cause trouble for yourself at some point. Because if you think about it, as I keep saying, these are everyday products. And the great thing about them, the reason they make big margins and big returns on invested capital is because the branding they have allows them to charge a few more pennies or a few more dollars per pack than you'd pay for a generic product. But you can't stretch that elastic forever. So if you keep pushing the gap to generics higher and higher and higher, then you,

sooner or later, you're creating an umbrella that somebody will come in and exploit. You never know quite when that's going to happen, but we try very, very hard to avoid those situations because we know that they do have a habit of going wrong in the end. You can be a year or too early and look slightly silly, but in the end, that almost always happens. And, you know, USB would be a good example, actually. Some fantastically successful companies, Anheuser-Busch, for ages and ages. but their own behavior kind of created, I think, the room for all this explosion of craft brewers.

And I'm not just saying that as a Brit who's... Well, what, is there a specific thing that they did that allowed that, allowed that to happen? Well, I think they didn't pay enough attention to the fact that people's tastes might change and become more sophisticated. they focus for too long on selling the same quite basic product to people. And in the end, people wanted more variety. And when they wanted that, the leaders didn't really have the products to offer. So that gap was filled by somebody else instead. Actually, again, because of the pricing strategy, other companies could match them and actually sell a better product.

So this is a related question, but when it comes to consumer-staple companies, what are the signs of a good one? What is it that you look out for? So you mentioned growing volume and market share, not at the expense of pricing. What else are you looking for? Because, again, we're talking about sort of intangible things like strength of brand, being able to recognize shifting consumer taste, things like that. Are there any markers of a company that might be doing that well or examining those things quite carefully? Well, I mean, it's something of an art as much as a science. And it's difficult to have really hard and fast rules.

But in addition to that volume and market sharepoint, we pay a lot of attention to culture. You know, we watch what's going on in the world and in the industry. some companies get a reputation for being very good places to hire people from and those people do well in the businesses they join and that gives you signals about which companies have good cultures and you can spot the less good ones by seeing where there's high management churn and we like to see as well companies behaving the right way in terms of innovation and marketing spend which is like a leading indicator for volume and market share. We know that not all innovation and not all marketing will work, but if you're trying hard, if you're coming up with new ideas every year and spending

a decent amount of money, then that gives you a good margin of safety. And it also helps protect your profit and loss and the earnings that can drop to the bottom line. Well, that's interesting. So what does that look like innovation in marketing? What are some things that you have seen in your career recently that struck you as, okay, this is a company investing innovatively and smartly in marketing? Well, it might be a little bit counterintuitive to bring up the tobacco sector at this point. But if you look at what Philip Morris International has done with its tobacco heating product, ICOS, disrupting themselves, they have done a brilliant job. They've managed to create a multi-billion

dollar selling brand in just a few years of being in the market. And they took a very bold bet by spending very large sums of money on both research and development, clinical trials, marketing, and they've used that as an opportunity almost to try and reinvent the whole company. And they're in the early days of that, but they have done a tremendous job. And the opposite, really, of a milking strategy where they could have sat back and just watched the cash cow business that they have churn out the dollars year after year. I have a weird question, but since you mentioned this idea of churning out dollars year after year, can staples grow indefinitely or is there a saturation point?

And what I mean by that is there's probably a limit to how much food we're going to eat or how much beer we're going to consume in any given day. Is there a limit on staples growth? There is a limit, I think, in that. You don't really see the overall category growing faster than GDP. I mean, it can't for the reasons you said, Tracy. You can't just shut ever more food and drink down your gullet, although you can pay for better experiences and pay for a more premium type of product.

So, I mean, this is, if you like, one of the paradoxes of the sector. It doesn't grow faster than GDP, yet. the sector tends to outperform the market. And it goes back to that consistent winners point, that the companies that do well tend to continue doing well, whereas in other industries and sectors, you know, the whole business could be gone in 20 years' time and there could be a completely new winner that does something totally different.

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It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your podcasts. So, Jonathan, I actually came across your work because you did an interview with Lawrence Hamtel,

who was previously on the podcast, talking about tobacco specifically. Obviously, you broaden it out, but include tobacco. So I, and one of the things that I took away from that conversation, our conversation with Lawrence, is part of the, part of the reason these companies do well historically as stocks is, it seems to me in part because they're never sexy, so they never really get too overvalued so that if you buy them today, or if you buy them five years from now or buy them five years ago,

there's a good chance that you're never really. really buying a bubble. There's never euphoria in tobacco stocks. There's never euphoria in Clorox or Pepsi or Heineken. How much of the strong forward returns that this company has seen year after year after year going back decades can be explained in part by the fact that the starting point is rarely in a period of euphoria? Well, I think it's helpful because it means that at whatever a point you have invested in these stocks, you tend not to have had a big headwind from multiple compression. Actually, if you get to the bottom of what has driven the superior turns versus the market over the long run, not surprisingly, it's because the earnings growth has been better

and the dividend and dividend growth has been better than the average. But one of the big risks, of course, in investing in any stock that is growing better than the market, is that you just pay the wrong multiple for it in the first place. And other than perhaps arguably the very early 70s, that has never really been the case for the group as a whole, which is not to say it's never happened to individual stocks from time to time. So, for instance, if you look at Coke in the late 90s, it got to, again, a very stretch multiple. And that really is. And that really held its returns back over the next 10, 15 years. But you're correct that as a group overall, these things have very rarely been in bubble territory. And that makes investing in them easier as

well. And it's, you know, I think for what it's worth, it's still the case today. You said very rarely in bubble territory. Has there ever been a moment when they were overvalued or maybe when they came close to it? Well, outside that example of Coke that I just went through, if you go back to the early 70s at the time of the nifty 50, some of these stocks were on pretty punchy multiples, 30, 40, 50 times. But actually, you know, even then, if you held them for long enough, that still didn't dent your returns too badly.

Have you held those stocks for the next 20, 30, 40 years? You still did okay. You know, we've been talking about disruption from direct-to-consumer companies. The other sort of like one of the big phenomenons in retailing these days is just how powerful the house brands at, you know, the generic brands and some major retailers are lots of stories out there about Amazon basics and the speed with which they, can come up with a with a competitive product based on when they see that something is popular also like at Costco the kirkland brand that has a cult following in its own right and in fact there are all kinds of stories about how often the kirkland brand is say like better than the incumbent chocolate company and that it might even come from the same plant and might be better to what extent is that

a new thing in competition that's worrisome or is it just yes the There's always been generic brands and these companies know how to deal with them. I think there always has been generic competition, Joe. Although in the US, maybe it's a newer phenomenon in Europe. I think if you look at some food retailer data, you can see that private labels typically been a larger portion of the sales of big European grocers for quite a lot longer. It's always been there and it always will. And yes, it's a threat and it helps keep the branded companies honest and helps keep them on their toes.

But, you know, I think what's important about consumer behavior is that, yes, there's a some people, some of the time, will want to pay a good value price for fairly basic products. But people want variety and they like the little bit of interest. an excitement that brands and new product lines that the big companies launch, and also that the smaller disruptive companies launch as well, bring to their lives and their shopping baskets. So I think if you saw a retailer switch, you know, nearly all of its business to its own private label brand, that might go down very well with a certain portion of its consumers.

But there might be, a larger, more important part of the consumer base that didn't come through the door anymore because they weren't finding that the brands that they loved in that shop and they go somewhere else. Right. You talked about this idea that by definition, consumption of consumer staples can't really outpace GDP. What does 2021 look like for you in that case? So we still have GDP growth, I mean, pretty stagnant. in a lot of major economies, probably contracting in a few of them as well. And at the same time, we might have people returning to work, maybe getting out of their houses

as the vaccine gets rolled out. So you have these sort of push-pull factors. How do you see that playing out for consumer staples this year? I mean, it's going to be complicated dynamics in 2021. And what we try to do as a business is look through the mid long term and try and look through the short term disruption to consumption trends that's happening because of COVID. But, you know, I think you'll see some businesses that were big beneficiaries last year, like the cleaning product companies and the food companies see their sales settle down because you had, you know, a big spike in consumption of those products with people staying

at home, washing more. As people start to go out again, you know, they won't need to eat so much food in their house, and that consumption will shift to restaurants and cafes. And then you'll see, you know, other bits of our business have suffered, or other bits of Stables businesses have suffered quite a lot because people aren't going out. So Coke, for instance, as a soft drink companies, have lost a lot of sales in the entree in bars and cafes. people have almost the same amount of volume at home, but that typically is lower margin. So those guys, the brewers, ought to see something of a recovery as we go through 2021.

And then you've got the beauty companies as well suffered in developed markets, again, because they weren't going out as much. You don't need to wear as much makeup if you've got a mask on. There's not much point if you're in your house as well. So that consumption should come back in developed markets through this year. Although in China and Asia, through the second half of last year, certainly, you've already seen quite a strong resumption of growth trends in those product lines. We talked a lot about food and beverages. How does that compare to, say, the makeup industry? I mean, I forget, wasn't there like a Kardashian or a Jenner who like out of nowhere,

a few years, they saw Instagram account, created a billion dollar, multi-billion dollar makeup company. Like, how much of, you know, how many of, how many more of those mega brands could bubble up? And how do the incumbents deal with that threat? If you look at a category like makeup, novelty has always been a very big part of that business. And we always point to L'Oreal, which started ages and ages ago with the L'Oreal of Paris brand. but they have bought absolutely masses of things over the last 30, 40 years. They haven't all worked, but they have a very, very big staple of brands, most of which they've bought and are now much bigger than when they acquired them,

exactly the same at Estee Lauder and the other large beauty companies. So I think you won't see that trend die, but obviously what is quite likely is that the brands that are novelties last year and this year and next year, they might not be the same things that are around in 10, 15 years time. There might be a different intrancer that's famous and has made their brand and seen that rocket-like growth. Before we conclude, so big picture, I mean, we talk about, and, you know, the stats talk about consumer staples in general. that as a basket going back for decades. Actually, before we get to the big picture,

I want to just ask, you know, there's a lot of people, your stats go back to the 70s. And there's a lot of people these days who think that like, oh, the inflation is coming. The bouts of, you know, it's finally going to come maybe because of all this like fiscal stimulus and so forth.

How much do you see consumer staples specifically poised in the event of a inflationary episode or in the event that we reverse this four-decade trend of lower inflation, as being companies particularly well positioned to handle a such an environment? Yeah, if we get a return to inflation, and I think that's going to be probably tough for a lot of things in the stock market, but Staples companies should be okay. I mean, the fact that they make good margins, high returns on invested capital,

that a lot of their real capital is intangible. That's where the real value comes from, should insulate them somewhat from the worst inflationary pressures. When I looked at this for the 70s and the 80s, which is the last time, you know, we had a more inflationary period. Staples earnings growth did beat the broader market quite handsomely. And I don't see any reason that that's, should be different this time around if that happens. So, you know, I'd rather inflation

didn't rear its ugly head. But if it does, I think in terms of the overall stock market performance, staples should be fine. Well, Jonathan, it is a fascinating topic and really appreciate you coming up. Thank you very much. Joan Tracy. That was a great discussion. Thanks for your questions and interest. That was great. Thank you. Thanks, Jonathan. Cheers. Tracy, I'm really like sort of fascinated by this idea that like these unsexy industries just historically are like are just such a workhorses of the market for year after year because we never like talk about them the way we talk about Zoom or software as a service companies or you know exercise bikes or anything like that. But this idea that because no one really thinks they're sexy, they just perform year after year. Right. I think in the market, we tend to talk a lot more about stocks or companies with a really compelling story or a narrative around them.

And the thing about all these companies is that they don't have a story. They don't really have a narrative. They're just things that people need and steadily buy in their day-to-day lives. And that's actually the enticing thing about them. Yeah, I also think it's sort of interesting, like the flip side is like you look at these companies. like, oh, they can't innovate. Or they don't really, they're not sexy. They're not cool.

None of the brands are really that trendy. They have to buy competitors or buy upstarts when they take off. But I guess the question in the way he put is like, it's not clear that that's really a problem. Like if you have the infrastructure to market and distribute and then you could sort of like wait and opportunistically buy brands when you see that they have traction and then plug them into our infrastructure, maybe it's not a problem that they can't really, that they're not very good at innovating. Yeah, exactly. I think this is really where the difference with tech stands out. So tech, you think, like, well, you can't necessarily just replicate a product that's out in the

market because you need to develop your own expertise and there's probably intellectual property rights and things like that that go with it. But in consumer staples, I think imitation and the sort of barriers to launching a new product are probably much, much lower. So it becomes easier, especially if you're an incumbent, as we mentioned. So, Joe, are you going to be building up your store of canned goods in 2021, or is that behind you? I think I'm good. I'm going to, I'm going to draw down my inventory over the coming months and years, I think. I don't see any big canned good the shopping binges in my future. So maybe 2021 sales will be a little bit down for some of these companies. Yeah. I guess we'll wait and see. That reminds me, didn't there used to be like a canned

soup economic indicator or am I making that up? Maybe I imagined it. It probably is. I mean, there is the lipstick indicator, right? Yeah. Yeah, that's a good one. Although, isn't that a thing? It is. It's supposed to, when lipstick sales go up, it's supposed to indicate a recession or that consumer spending is down. Right. Because people are spending on like a little product that makes them feel slightly better in uncertain times. However, I would say that indicator is probably out of whack in the COVID era when we're all

wearing face masks and probably not wearing lipstick. Yeah, I think it's definitely busted. Okay. On the note of the busted lipstick indicator, shall we leave it there? Let's see for there. All right. This has been another episode of the Odd Thoughts podcast. I'm Tracy Allaway.

You can find me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at The Stallwart. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg, under the handle, at podcasts. Thanks for listening.

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