Should You Buy the Big Brands?

As economic growth has picked up around the world, so too has consumer spending. But has this translated to a jump in profits for the big brands?

Emma Wall 6 March, 2014 | 1:39PM
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Retails sales are booming - clever companies that have innovated to survive are now reaping the rewards of a buoyant economy. The Office of National Statistics declared the most recent festive season as a “strong Christmas” and the Confederation of British Industry has revealed that business investment growth will rise from -3.7% in 2013 to 6.6% this year as companies feel more confident and are able to access cheap cash.

One CEO is so confident in global consumption that he’s announced plans to become the world’s largest retailer. Fast Retailing Company – the owner of Uniqlo is already Asia’s biggest clothing retailer, and chief executive Tadashi Yana thinks he’ll be top of the world stage within six years.

He’ll have to get past Wal-Mart (WMT) first – it is the world’s largest private employer with more than two million staff and shows no sign of slowing.

“Wal-Mart has a wide economic moat [competitive advantage] because of the cost advantages that stem from volume purchasing power and massive scale,” said Morningstar analyst Ken Perkins. “The company is the largest retailer in the world with more than $475 billion in annual global sales, of which more than $300 billion is generated in the United States. So relative to other retailers, Wal-Mart has tremendous leverage to extract the most favourable terms possible from consumer goods suppliers, vendors, and manufacturers.”

Analyst currently rate Wal-Mart as a four-star stock, meaning it is undervalued.

While it is just a minnow compared to Wal-Mart, Tesco (TSCO) is in the top five largest retailers in the world with more than 6,500 stores worldwide. Tesco rapidly expanded in the Noughties, dominating the UK food retailer market before expanding globally and into clothing, furniture, electronics, telecoms and financial products. This expansion proved too steep and the share price took a battering. Now Tesco are focussed on the UK and analysts are confident about its prospects – the stock is currently undervalued.

The first Wal-Mart store opened in 1962 – long before the 1994 launch of Amazon.com (AMZN). This giant of e-commerce had a solid 2013, and shows no sign of easing up growing its active users by 19%.

“Amazon.com has played a prominent role in the structural shift away from brick-and-mortar retail, and it may lay waste to several other retailers in the years to come,” said Morningstar analyst R.J. Hottovy.

The stock is currently three star rated, meaning analysts consider it fairly valued by the market, but Hottovy added: “We still view Amazon as one of the most compelling long-term growth stories in the consumer space today.”

It is companies like Amazon that are changing the way the retail sector operates.

Morningstar analyst Bridget Weishaar said that modern technologies and consumer preferences demand an entirely different skill set from companies than in the past.

“We think current innovations have given companies an unprecedented opportunity to develop direct relationships with their customers to solidify their intangible brand asset, as well as be creative in managing the supply chain to develop unrealized cost efficiencies, both of which are critical to developing an economic moat in this category,” she said.

Despite these challenges the retail market is booming. Weishaar estimates that non-grocery retail sales total approximately $6.8 trillion worldwide, with clothing and footwear specialist retailers accounting for just under $1 trillion.

Within the luxury goods space Burberry (BRBY) has nailed the brand asset challenge. Analyst Paul Swinand said that possessing a brand with recognisable fashion elements such as its iconic plaids and a history of innovations, even patenting the trench coat and creating the fabric "gabardine," the Burberry brand is a source of economic returns, in our view, that is hard for competitors to encroach on.

As a result the stock as a wide economic moat, the stability of which recently lead analyst to up their fair value estimate for the brand.

However, there are some concerns about how reliant the brand is on  emerging-market growth and China. It is currently fairly valued.

Don’t Want to Stock Pick?

JPMorgan Consumer Trends fund seeks to provide long-term capital growth by investing primarily in companies benefiting from consumer driven opportunities. The Morningstar analyst Bronze Rated fund is managed by Peter Kirkman and returned 22% last year.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Amazon.com Inc2,852.86 USD-5.95Rating
Burberry Group PLC1,925.50 GBX0.79Rating
Tesco PLC288.75 GBX0.50Rating
Walmart Inc140.19 USD-0.73Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar