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Global Consumer Franchises – Pricing Power

By March 16, 2023Blog

Inflation has taken hold in developed economies – 6.0% in the US and 8.5% in the EU – and many companies have been struggling to deal with rising input costs.

The key to being able to raise prices without losing customers is to offer a product or service that is irreplaceable in customers’ minds – perhaps an everyday essential item, or a small luxury that customers are unwilling to cut back on.

This is one of several reasons that we introduced our Global Consumer Franchise Stocks Theme over 10 years ago. This basket of fifteen companies have world-class brands and global distribution, allowing them to more easily pass on rising input costs to consumers.

Overall, across the past 6-12 months, this basket of companies has increased prices by 8.9% on average while also managing to increase volumes by 1.8%. Results have varied from company to company, suggesting that a diversified basket is important.

This basket of companies performed well in 2022, producing total returns of c. 0%, a very attractive return in a period when equities declined 12% and Eurozone government bonds lost 18%. Going forward, we continue to find the basket of Global Consumer Franchise Stocks attractive. Offering a starting dividend yield of 2.7%, and growth in that yield (through earnings growth) of perhaps 3-4%, these companies hold out the prospect of 6-7% annual total returns from here, and still well in excess of the likely returns available from government bonds.

Furthermore, the companies’ brands and global distribution give them a competitive edge, defensiveness in recession, and the ability to pass on rising input costs to consumers. None of these qualities are available from government bonds, whose yields to maturity are fixed at the point of investment and, thus, offer no growth in that income.