There are two primary investment themes that I am obsessing over at the moment. The first one is the "Aging of America," where there is set to be a large number of boomers physically and mentally breaking down so as to spur sales of related products and services. Think anything from Kimberly-Clark (KMB)-owned Depend seat protectors to adjustable beds from Tempur-Pedic (TPX) to over-the-counter drugs of choice at CVS (CVS). And no, those aren't three stock picks.
The second theme is the need to consolidate market share on supermarket sales floors. I call this the "Great Food Consolidation."
Traditional supermarkets such as Kroger (KR) and Safeway (SWY) are no longer really opening new units due to competitive pressures and tattered balance sheets, while the relatively new concept of selling food at Walmart (WMT) and Target (TGT) will focus on mass appeal brands. As regards Whole Foods (WFM), it will stay true to itself and not jump at products for the sake of satisfying the average folks.
Like never before, food companies have to join forces to take the fight to supermarkets and discount retailers, which are currently dominating at the negotiating tables for supply.
Here are the basic factors behind the "Great Food Consolidation:"
- The race to introduce new products (imagine yummy Greek yogurt, 100 calorie packs) is causing upheavals in supply chains, from scarcity at farms to increased costs of production. With sales prices hyper-competitive as a result of a rising number of new choices on shelves, supply chains must be consolidated. A consolidated supply chain could boost efficiencies in production and shipping, helping to offset what grocers are doing to manufacturers on the sales and product margin lines.
- Slow-growing products, i.e. Campbell's chicken noodle soup, are not disappearing from store shelves anytime soon. That prevents upstart brands and new variations from semi-established companies from gaining key shelf space. The blockers buy the upstarts so that their own sales benefit from where the new brands and products get positioned elsewhere in the store.
- If you ponder it for a second, mobile consumption of fresh and dry groceries has not truly reached our smartphones. When it does happen to reach them, it's the supermarket promoting a product via a location-based service, not the manufacturer creating an intimate relationship with the customer. I believe traditional marketing budgets on the part of food companies must be consolidated so as to free up funds to invest in the tech infrastructure (big data specifically) needed to facilitate real-time awareness and buyer information.
What to look for in the next great food acquisition:
A brand so well-known for one product, that it could be leveraged to new categories. Dannon (its ADR trading under the DA stock symbol on NYSE) is now selling Greek yogurt for kids. Chobani is testing dips to steal the limelight from Sabra hummus. Sure, there is always going to be a possibility of a Warren Buffett or his successors buying a Hershey (HSY) or Campbell (CPB) and gutting operations. But those types of deals are rare, exposing the investors to disappointingly sluggish near-term sales and earnings growth as they hold out hope.
The best option is to find a food (or consumer products, let's not forget them here) brand with a sub-$10 billion market cap that could be purchased by a Campbell's or Hershey. The target company has products in prime shelf space, doing battle with more established players.
The brand is not relegated solely to supermarkets. For instance, Jack's Link beef jerky is sold in supermarkets, convenience stores, Walmart, and Amazon.
This Week: Stock Market and the Fed
The S&P 500 kicks off the week trading at 16.4x its component earnings compared to 14.8x in February -- seems rather fair, considering Intel's (INTC) recent guidance raise and host of companies jacking up dividends intra-quarter by eye-catching amounts -- and shy of its June 9 all-time high.
A surprise from the Fed could finally bring about the 5% pullback in the market that newsletter writers have been saying is imminent for the last five years. That unfortunate surprise could come in the form of a bit more hawkish tone from the Yellen Fed than the last time around, given the strengthening in labor markets and a secret desire by the Fed to perhaps squash speculative excess in the markets.
The wildcard in this logic is how the Fed views the latest disappointments in consumer confidence, retail sales, as well as the lame quality behind the unemployment rate improvement.