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Inflation & Consumer Franchises

By June 9, 2022June 10th, 2022Blog

Inflation in the US and Europe is now running at over 8% annually. For investors, this begs the question: how is this impacting the companies we invest in?

As the previous Disney example highlights, companies with strong competitive advantages tend to have pricing power – which is hugely beneficial in a rising inflationary environment, as it allows such companies to pass on input cost inflation through price increases without significantly impacting volumes or demand.

Our US & European Defensive Global Consumer Franchise Stocks Theme offers exposure to a basket of sixteen companies with pricing power – reflecting a competitive advantage in the form of either a strong consumer brand or low-cost advantage, with global reach, and products that are purchased regularly as low-ticket everyday essentials or affordable luxuries.

The chart on the right provides a breakdown of the price increases in the most recent quarter for some of the companies in the Defensive Global Consumer Franchise Stocks Theme (those who report price increases separately). The figures are for the first quarter of 2022 (ending March), except for Diageo and Heineken (six months to December 2021).

The chart shows that all ten of the companies in the theme (who have reported and break out price increases) are currently passing on rising input costs to consumers, with an average price increase of 7% (although in some cases with a lag). Furthermore, although we don’t show it on the chart, the majority of these companies have been able to do this without impacting volumes or demand (and even where volumes have been impacted, it has been minor).

The theme remains a good way to earn equity-like returns while taking less risk than general equities. Furthermore, these companies offer an element of inflation protection for investors: highly attractive in this environment. We provide an annual update on the success or otherwise of this simple, low-risk equity theme on an annual basis to subscribers to our newsletter. Click the link if interested.