Best in breed: Scott Phillips
Whether it’s milk or wine, the future looks promising for trusted Australian products
Consumer staples ... it almost evokes images of getting your flour measured out by the scoop at the corner store of old. The idea, of course, is to separate these companies from more optional purchases at the “discretionary retail” companies that we covered last month. Which it does. Sort of.
Within the official classification of consumer staples, we find the companies you’d expect: Woolworths (ASX: WOW), the newly relisted Coles (COL) and the grocery and liquor wholesaler Metcash (MTS), which you’d know more for its IGA franchise and its Cellarbrations, Duncan’s and Thirsty Camel brands (among others).
The ASX also counts winemaker and marketer Treasury Wine Estates (TWE) among this group, seemingly considering good Australian wine more of a staple need than a discretionary purchase. No comment. Ditto Blackmores (BKL) and Coca-Cola Amatil (CCL).
The description of consumer staples is probably best recast as “weekly shopping”, including, as it does, the above plus infant formula makers, grain producers and even a salmon farmer.
Which makes for an interesting decision set. After all, it’s hard to compare a mature, dominant Australian grocer and a highpriced, international-growth-focused, single-protein-based milk company. There are very few investors who would look at their portfolio and weigh up those two options as direct alternatives. Either you want slow growth with a focus on income, or you’re happy to pay up for a ride that, while likely to be volatile, hopefully has a happy ending with multiples of your starting capital – even if there’s a real chance of serious loss.
For our purposes, then, we’re going to set as our goal long-term total return, including capital gains and dividends but be agnostic as to which delivers the bulk of our profit. In one fell swoop that rules out the grocers: Metcash because I think it’s structurally challenged and overpriced, and Woolies and Coles because they’re likely reasonably priced but unlikely to be market beaters from here, save in a big downturn, when they might fall less than the overall market because of perceived “safety”.
Bega is interesting, with its strategy of reshaping itself as a modern food conglomerate. Tassal is trying to harness salmon farming and rising incomes, while Elders and GrainCorp each hope that a continuing rural renaissance and international demand for our products will drive sales.
It’s to that trend – the growing international demand for “brand Australia” – that I think the biggest opportunities will accrue for ASX-listed consumer staples businesses. Asia in general, and China in particular, are likely to drive growing con- sumption of known and trusted Australian products, something that I expect to be a multi-decade tailwind. I don’t tend to be a top-down investor, preferring to start by looking for great companies rather than trends that may or may not play out. But in this case I think we can arrive at the same place, starting from each end, resulting in promising opportunities in this category.
The finalists, then, are Treasury Wine Estates, Blackmores, Bellamy’s and A2 Milk. The latter two probably have the most raw upside. But they are “narrow” businesses relying on a single category and protein, respectively, making them higher risk. Of the former two, the broad diversification, reach and execution of Treasury means it wins by a nose.