Our top five consumer picks
Thursday 22 Aug 2019 Author: Ian Conway

Continuing our look at the FTSE 350, this week we consider consumer stocks and pick five of our favourites. Three are
from the FTSE 100 and two are from the FTSE 250. We’ve woven our picks in with some brand-new market research on Britain’s Favourite Brands which came out at the start of the month.

During June and July YouGov (YOU:AIM) surveyed some 9,000 British consumers to find out their favourite brands across a whole range of products and services which touch our everyday lives, from snack foods and dining out to fashion and the broader retail market.

The results are gold-dust for researchers and marketers because unlike many surveys of the biggest or most valuable brands, which are typically compiled by industry experts and topped by names like Amazon, Apple, Coca-Cola or McDonald’s, the responses are from actual consumers.

Those polled were asked a) if they had a positive view of a product, which gave it a ‘popularity’ score, and b) if they had heard of the brand, which gave it a ‘fame’ score. The overall scores were then weighted by age group and region to make them representative of the overall population.

Surprisingly none of the mega-brands mentioned above were even close to getting into the top 10 most popular brands in Britain.

The Top 10 Favourite food and snack brands were:

Having established the list of the most popular products, YouGov mined the data further to show significant statistical correlations.

For example, Heinz was more popular with women than men, but equally popular with Baby Boomers (those born between 1946 and 1964), Generation X (1965 to 1981) and Millenials (1982 to 1999).

Also, statistically speaking, people who ranked Heinz as their favourite food and snack brand tended to like ITV (ITV) shows, singer Stevie Wonder, actor Robert De Niro and the Marie
Curie charity.

On the other hand, people who plumped for second-ranked Kit Kat were statistically more likely to prefer Disney films, 1980s ‘New Romantic’ group Spandau Ballet, actor Anthony Hopkins and Windows software.

MAGNUM FORCE

Given that Cadbury was bought by Mondelez in a heated takeover battle back in 2010, the only listed UK company to make a mark on the Top 10 Food and Beverage lists is Unilever (ULVR) which owns both the Magnum and PG Tips brands.

Unilever also owns another eight of the 100 most popular British snack, food & beverage brands, which are – in order of popularity – Cornetto, Walls, Hellman’s, Ben & Jerry’s, Viennetta, Colman’s, Knorr and Marmite.

Foods & Refreshment make up just under 40% of the firm’s turnover and in the first half of this year all of the growth in underlying revenues came from pushing through price rises. It seems that when it comes to food and drink, we’re willing to pay a little bit extra for brands that we trust.

It’s a similar story abroad, where brands like Magnum are able to command a premium price compared with locally-made products.

Thanks to its large overseas exposure, Unilever’s revenues are mostly in foreign currencies which means that the shares benefit from a weak pound. This can be useful in offsetting some of the risk of holding mostly UK-facing stocks.

The shares aren’t expensive on 14 times this year’s earnings and they pay a 3% dividend yield which is amply covered. They even meet the exacting criteria of Fundsmith Equity (B41YBW7), making Unilever one of only 27 stocks in the world which Terry Smith and his team consider to be sufficiently high-quality with good growth momentum and yet still attractively valued.

Nick Train, manager of the highly-regarded Finsbury Growth & Income Trust (FGT) which owns just 20 stocks, also gives it his seal of approval: ‘Would that we had more boring investments like Unilever’.

EVERY LITTLE HELPS

Unsurprisingly, in the supermarket sector the German discounters scored well with Aldi taking the top spot and Lidl taking third place. Fans liked both brands’ value proposition with Lidl singled
out for the ‘quality and range’ of its fresh produce.

However the discounters were split by the Marks & Spencer (MKS) food brand, which suggests that while we like a bargain we still like ‘a bit of posh’ on the side. Fans described it as ‘classy’ and ‘attractive’, while at the same time ‘accessible’.

Although Sainsbury’s (SBRY) polled well, and its Argos subsidiary came second in the list of Retail Brands, we believe that Tesco (TSCO) is both a better business and a better investment.

Sainsbury’s failed merger with Asda, whose parent WalMart would gladly have offloaded it given the chance, leaves the pair of them in
no-man’s land and at the mercy of the discounters. With its 27% market share, Tesco has enough clout with suppliers to negotiate favourable deals and maintain clear water between it and the German discount duo.

While the grocery business may not be rip-roaring, Kantar Worldpanel shows the supermarkets are passing through average price rises of between 1% and 1.5% this year which has helped make up for static volumes. The British Retail Consortium shows food prices rising slightly faster, by an average of 1.9% in the first half of the year, with like-for-like sales growing modestly.

Meanwhile, Tesco’s 2018 takeover of wholesaler Booker has brought the Budgens, Londis and Premier brands into the fold, positioning Tesco as a major supplier to the convenience store market which is higher-growth than the food-at-home market which is its bread and butter.

On 13 times this year’s earnings and with a dividend yield approaching 4% we think Tesco is a good defensive option in a slowing economy. ‘Food retailing is still competitive but investors like long-term plans that are successfully delivered’ says Scottish Investment Trust’s Alasdair McKinnon.

PILE ‘EM HIGH AND SELL ‘EM CHEAP

The top three Retail Brands are something of a mish-mash but we wholeheartedly agree with the number four choice of B&M European Value (BME). Fans rated it as ‘good value’, ‘for everyone’ and ‘reliable’.

At a time when there is blood on high street, B&M offers a compelling play on the demand for value and convenience. Its low-cost approach and ability to continue rolling out stores in under-served areas means there is plenty of scope to keep growing in fair or foul economic weather.

The bulk of B&M’s revenues come from frequent-visit customers, who flock to its stores to top up on food or fast-moving consumer-goods essentials, or to purchase competitively-priced seasonal, garden and home-ware products.

Much like sixth-placed Poundland, during good times it benefits from higher average transaction values and in bad times it sees rising footfall and volumes.

‘Discount retailing is here to stay and B&M has the ability to take materially greater UK market share’ says Trevor Green, head of UK Equities at Aviva Investors. ‘The combination of a growing market and a company expanding within it make a positive investment case’.

B&M is also rolling out its formula in Europe’s two biggest consumer markets, Germany and France, via the Jawoll and Babou chains respectively.

Considering the growth potential, we don’t think the shares are expensive on 16 times this year’s earnings and 13 times next year’s earnings.

NEW BOOTS AND PANTS

In a turn-up for the books, Somerset-based shoemaker Clark’s tops the list of Britain’s favourite fashion brands showing global giants Adidas and Nike a clean pair of heels. Fans liked the quality of its products and trusted its brand.

Of the high-street brands, Primark may have edged it over Next (NXT) on the basis of value for money and affordability, but the latter was lauded as being ‘reliable’, ‘respected’ and ‘trustworthy’ and makes it onto our list of top consumer stocks.

Despite tough prior-year comparisons the retailer continues to beat revenue forecasts and earlier this month raised its guidance for both full-price full year sales and pre-tax profits.

Having operated a mail-order business alongside its stores for years, Next was one of the first to make the transition to online retailing and is still one of the most successful ‘clicks and mortar’ operators.

Also, as Invesco fund manager Mark Barnett argues, having a large physical store estate is actually not a bad thing. ‘Next combines the best of offline with online’. Many online orders are click and collect, which is driving traffic to its stores, but ‘these stores may not look the same in the future as they do today’ says Barnett.

The shares are inexpensive on 12 times this year’s earnings with a 3% dividend yield and thanks to the company’s prodigious cash generation shareholders are treated to regular share buybacks.


ASHLEY LEFT OUT IN THE COLD

Sports Direct (SPD), the ‘black sheep’ of the retail sector and now out of favour even with the auditing community, is a distant 34th in terms of popularity with the public despite scoring highly in terms of ‘fame’ and winning praise for its ‘value’ offering.

Ironically, although footfall is down across every region and every format this summer, from high streets to retail parks and shopping centres according to retail consultants Springboard, spending on sporting goods this year has been remarkably healthy.

Data from the Office for National Statistics show sales of sporting equipment grew by an average of more than 20% in value terms
over the first seven months, so in theory Sports Direct stores ought to be cleaning up, but there are so many other issues at play that we think investors would be better served avoiding the shares.


 

EAT TO THE BEAT

In the out-of-home (OOH) dining market the hands-down winner, scoring top with two out of three demographics and as popular with women as with men, was pasty- and sausage roll-purveyor Greggs (GRG) which was praised for its bakery, ‘tasty snacks’ and ‘good value’.

We think the shares are worth buying too despite what looks like a premium rating of 24 times current year earnings. With alternatives Wetherspoons (JDW) and Domino’s Pizza (DOM) both trading on 23 times earnings and both with  issues – Domino’s more than ‘Spoons, in fairness – we would rather ‘keep calm and plough on’ with Greggs’ tried and tested formula.

Sales continue to exceed expectations thanks to innovations, if they can be called that, such as adding lighter lunches of salads and soups to the menu, and the now-legendary vegan-friendly sausage roll.

While we expect sales growth to moderate and input costs to rise going forward, the firm’s continued investment in its food offering (more
hot dishes), its store estate (longer opening hours) and its digital platform (trials are running with Uber Eats, Deliveroo and Just Eat (JE.) should improve the customer proposition further.

The current yield of 2.2% is below the market average but dividends are growing by double digits and there is a special dividend of 35p per share or 1.75% later this year.

 


THE FUTURE OF CONSUMPTION

Consumer-facing companies wondering who their customer base will be in 10 or 20 years’ time need look no further than today’s Millenials, who will soon make up 40% of all consumers globally influencing annual sales of around $40bn according to research by consultants Deloitte.

In terms of food, for now Millenials are still big buyers of brands owned by multi-nationals as the table shows but they are increasingly willing to try new brands. The popularity of vegetarian and vegan diets is also growing, with the success of Beyond Meat and Impossible Burger paving the way for new brands.

In the ‘dining out’ market, Millenials are the biggest users of digital solutions and food delivery apps such as Just Eat, Deliveroo and Uber Eats to bring products and services to them, making it increasingly a ‘dining in’ market.

Similarly, in the fashion and clothing market, a growing proportion of sales are being driven by customers shopping online, with ‘connected’ brands like ASOS (ASC:AIM) and Boohoo (BOO:AIM) continuing to take market share from established players.

According to the latest data from the Office for National Statistics, online retail clothing sales are growing by more than 10% a year in value terms while in-store sales keep falling. Companies who haven’t properly developed their online offering, such as M&S, are at risk
of losing their relevance and being left behind.


 


M&S NEEDS TO STRIP DOWN

Marks & Spencer (MKS) is one of the most iconic British brands yet the YouGov survey finds a huge disparity between the popularity of its food and clothing offerings.

Food was ranked second, even if its fans admitted it was somewhat pricey, but the mainstream clothing brand didn’t even register. Only Per Una made the list of popular fashion and clothing brands, in a lowly 79th place.

Even more of a slap in the face, budget supermarket clothing brands George (part of Asda), Tu (Sainsbury’s) and F&F (Tesco) were in the top 30.

Successive management teams have spent years trying to grow the appeal of the clothing business and failed dismally. In the financial year to 30 March, M&S Food sales were £5.9bn, down 0.6% on 2018 (due to Easter falling in April this year) but up 39% on a decade ago. Clothing & Home sales were £3.5bn, down 3.6% on 2018 and incredibly down 10% on a decade ago.

This summer Jill McDonald became the latest head of Clothing & Home to move on, after just two years, leaving chief executive Steve Rowe to take charge yet again.

M&S claims it has identified the problems: its range is too wide, the shops are hard to navigate, the sizing doesn’t appeal to the ‘contemporary family age customer’ they want and there are still problems with the supply chain.

Also its ‘Sparks’ loyalty card has been a total dud. Management’s solution is to re-position and re-launch it next year, which is yet another distraction and mis-allocation of capital in our view.

In contrast the online food joint venture with Ocado (OCDO) which starts next year looks promising. YouGov data suggests that M&S and Ocado customers spend similar amounts on their weekly shop and are more willing to pay extra for good quality products than the average consumer.

Also, partnering with Ocado should help M&S connect with a younger customer base as well as ‘foodies’ who are looking for premium convenience, a part of the grocery delivery market which is generally under-served.

If management don’t take the bull by the horns and split the business in two with a view to ditching Clothing & Home, we can see activist investors coming on board and forcing their hand.


 

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