Skip to the content

What does the post-Covid consumer want to buy?

17 June 2021

Artemis’ Simon Edelsten looks at the changing nature of consumer preferences and asks how this might change as the world emerges from the coronavirus pandemic.

By Simon Edelsten,

Artemis Fund Managers

Investors believe that consumers are pretty reliable and buy the same things for decades in a predictable way. For this reason, many companies producing consumer products trade on quite high multiples of earnings. Their earnings are expected to vary little even when economies are weak.

Although the lockdowns of the past year have tested this resilience, consumer stocks have again proven stable – if prone to some unexpected underlying changes. For instance, Nestlé sold less bottled water when restaurants were closed, but lots more pet food and litter as the pandemic’s ‘pet boom’ took hold.

These companies may be central to our lives, but we cannot take their resilience for granted. Consumers can change habits quite suddenly at moments of social upheaval.

In the 1950s, for example, housewives – yes, mainly wives – often went to the grocer, baker and butcher daily, as food did not last. This is why tinned goods, developed for troops, became so popular, enabling products for the larder, such as Spam and Ovaltine, to become established. In the 1960s refrigerators became affordable and frozen foods took off – trends that facilitated the rise of supermarkets and the once-a-week shop.

Lockdown’s empty roads suited the home delivery fleet of 2020. From Ocado and Amazon to Riverford Organic, the surge of demand last spring was eventually met by increased capacity to supply. Now households will not easily surrender their delivery slots. If we select our weekly shop online, how might consumer trends change?

 

Changing expectations around sustainability

Online shopping allows many consumers to take their time in selecting their lists of favourites. For those who want to know how their food is sourced or the standards of farms that produce it, for example, an online site can give much more information than is available on packaging.

Information about sustainability may sway some consumers – sometimes steering them to more expensive items – but it needs to be convincing and easily absorbed. This part of the market may be high-margin, but it is important to recognise that the largest share of food shopping is likely to remain very price-sensitive.

Currently, as the price of commodities rises, it may prove difficult for the bulk of food producers to increase prices when consumers can easily compare costs and shop around online. This will, of course, squeeze profitability and returns. Perhaps the older food brands will struggle to pass on cost inflation when it is easy for consumers to shop around. And it may prove difficult for many to adapt to trends such as the growth in veganism, but the larger companies are moving towards more sustainable or recyclable packaging. It takes a long time and considerable investment for food companies to change their production processes; unfortunately, at inflexion points consumer demands can change rather swiftly.

The clothing market faces quite different pressures from shoppers, who expect higher standards of sustainability. We have recently seen Nike and H&M questioned by the BBC about their sourcing of cotton from Xinjiang.

Younger consumers in particular are concerned about where and how their clothes are made. That said, some retailers who target this cohort sell fashionable clothes cheaply that they expect will be rapidly discarded and replaced. Most are price-sensitive buyers, which means producers have to squeeze margins all the way down the supply chain – making them vulnerable to the practices of ‘sweatshop working’.

By contrast, buyers of luxury goods are generally price-tolerant. Companies can charge much higher prices and enjoy larger margins. This means they can stay with their expensive supply chains – even when inflation is squeezing margins – to ensure excellent quality. As a result, they are less susceptible to scandals over working practices and materials.

Personal care companies may enjoy the best of both worlds: the volumes of mass market but fewer concerns about sustainable supply chains. From toothpaste to shampoo to soap, consumers are fairly loyal – and margins for established companies remain healthy. One aspect of online shopping is that new brands can reach a wide market through endorsement and sell direct if they want to avoid the supermarkets. In the personal care area we have seen a number of new entrants, such as Kim Kardashian West selling her cosmetic brand to Coty. However, L’Oréal’s purchase of the Thayer Natural Remedy skincare brands seems more obviously geared to addressing current trends.

Changes in distribution – from market to supermarkets and now to home delivery – often mark a moment where long-lasting brands decline and new forms of consumer goods take their place.

The antique shops of middle England are full of nostalgic Ovaltine tins and Oxo cube boxes.

You don’t want to be invested in companies whose goods are destined to be joining them soon. For investors, there seems less risk in staying with luxury goods and cosmetics manufacturers. Their high margins better equip them to cope with inflation and to ensure production meets consumers’ growing expectations around sustainability.

Simon Edelsten is co-manager of the Artemis Global Select fund and the Mid Wynd International Investment Trust. The views expressed above are his own and should not be taken as investment advice.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.