Thursday, 13 October 2016

The 'bond proxies' - love 'em or hate 'em?

Whilst supermarket shareholders took a bath in 2013/2014, investors in branded consumable goods maker Unilever have doubled their money in the last five years.  Depressed margins from fierce competition have been widely blamed for the poor performance of the likes of Tesco.  Yet blue chip consumer non-cyclical companies - investments people are calling "bond proxies" in a word of 0% rates - just don't appear to be affected.  Unilever, and companies like it, trade on 25 times gross earnings, much like 'bricks and mortar' in London.

Given that the Lidl and Aldi sell very little branded produce, and consumers are switching to them in droves, it always struck me branded goods companys' margins would be next in line for a haircut.  So it comes as little surprise that troubled retailer Tesco have fallen out with the maker of Marmite:

"Reports suggest that Unilever ... has demanded steep price increases of around 10 per cent to offset the increased costs [from the fall in sterling] ... Products have disappeared from Tesco's website after the supermarket chain refused to accept the price increase ..."

Now if everyone refuses to accept the new price, and simply substitutes Colman's with a supermarket English mustard on their shelves - on sale at a third of the cost or less - how does this help Unilever?

Of course another reason the likes of Unilever became a darling stock of the big fund managers was the fall in the price of oil. If consumers are spending less at the pumps they can afford more branded ice creams went the thesis. With petrol prices in pounds on the up again the reverse must be true surely?

So do we dare sell short the 'bond proxies' or are they really going to the moon in a world of negative interest rates and fed up savers?

NOTE: This is a not financial advice or a solicitation to buy or sell securities but an article for academic interest and discussion.


Shiney said...


My (small) company supplies EDLP (every day low price) non-food lines into the major supermarkets.... mostly own label.

We've taken the margin cut as competition has increased and watched while P&G, Unilver, Reckitts etc haven't. They've squeezed the supermarkets hard and increased shelf space v smaller brands as supermarkets have sought to trim ranges to cut logistics costs. Basically its now a straight fight between own label and big brands on most shelves.

People are habit forming - they pick up Coleman's, Persil, Flash etc out of habit. If they try the own label alternative, and its the same quality (which invariably it is) at a third of the price, they'll conclude they've been being ripped off. Just like the switch to Aldi and Lidl - people thought their quality was crap and it isn't. When they tried them, they were pleasantly surprised.... and look how that played out for the incumbents.

A stock-out on the brand will force people to try own label.... so my prediction is Unilver et al will cave on this. They have no choice.

Bayard said...

There's something missing at the end of the first paragraph.

Mark Wadsworth said...

I read the article this morning and I assume that Unilever will blink first.

Mark Wadsworth said...

Re substitutability, you can swap one washing powder for another no problems, but is there a substitute for Marmite? Not counting Bovril and Vegemite is much weaker.

Rich Tee said...

Good points. Conglomerates have come unstuck in the past because they just become too big to be manageable and can't adapt to changed market conditions as nimbly as small companies, that was the lesson from the 1970s/1980s.

I don't agree that own brands are *always* better, nor do I agree that Aldi and Lidl are just as good on quality, this is not what I experienced.

Curtis said...

I buy branded goods about 90% of the time, but I wait until they are on sale and cheaper than the own brands, which does happen often enough that I am not just letting the supermarket use my home rent-free to store its excess stock.

Lola said...

I prefer Co-op own brand English mustard to Colman's anyway. It has more flavour, more bite and it's less money.

Shiney said...


I didn't say own label were always better, I said they were the same.... most of the time. And I also didn't say Aldi and Lidl quality was the same as brands (although it sometimes is), I said that people found it wasn't crap. Having given them a try they made a value decision - a quality v price trade-off. A & L's growth has relied on the swing towards price, and at other times Waitrose has relied on a swing towards (perceived) quality.

DBC Reed said...

Why are all the media saying the problem's down to Brexit crashing the pound's exchange rate?

Sean Vosper said...

Although this blog is called the Young People's Party - I am in fact something of a coffin dodger. As such I can remember when private label became a thing a good few years ago. I think this is one of these things whereby in truth branded goods have held up quite well - it's also a bit like how the supers have their value range. They're quite happy for you to tell yourselves that "advertising doesn't affect me, oh no". Tim Harford gives a great description of the economic principle of price discrimination in his book. You're so virtuous as to absolutely insist upon a fairtrade product - then please come this way sir, we have a wide variety of (more expensive) fairtrade products for our more, er, discerning customers. Heck I even worked for a distributor and we had a metric tonne of private label, value goods, available - turns out people like their branded and known goods for the most part (austerity, right? and entrenched poverty - uh, huh.). I always lose the will to live when I'm being a virtuous shopper - feverishly running around comparing price per 100g, etc. Sheesh, life's too short.
Retailers have huge power - look what they did to agriculture once the farm gate prices cartel was broken. And, sorry dairy farmers but I like my cheap milk thanks - apologies if your Range Rover is now 3 years old. In fact they can charge their suppliers for any promotions and campaigns - never mind just shelf space. Did you read that story about Halfords writing that letter to their suppliers about their XMAS push - that the suppliers were going to pay for?
I'm pretty much rambling now - it's an sage thing.

Shiney said...


Just a thought....
"is there a substitute for Marmite?"

Am I the only person who spreads Bovril on toast?... most people see it as a hot drink

I can feel a fun poll coming on.

Bayard said...

"Why are all the media saying the problem's down to Brexit crashing the pound's exchange rate?"

I thought Marmite was made in the UK.

Mark Wadsworth said...

SV, yes, retailers own the best sites so have the upper hand, to some extent they are charging manufacturers a toll or rent for shelf space, it's a land thing as usual.

S, I said "not counting Bovril" because even though I can barely tell the difference (and would be happy with either on toast or in a hot drink), they are both made by Unilever.

There used to be Oxo in jars, same as Bovril and not made by Unilever, but I think not made any more. I bet those Oxo stockpots work out pretty pricey.

Fun Online Poll on Marmite coming up, unless there's something more important.

Steven_L said...

Thanks for all the comments! I've done 800 miles or so (car, plane, train, tube, train, taxi, car) to collect my new car and not had a chance to respond thus far :(

But I reckon this story has defo spurred me on to try to buy less branded supermarket produce.

Lola said...

As food constitutes only about 11% of the average consumers budget it's not surprising people don't shop around. Mostly

Lola said...

As food constitutes only about 11% of the average consumers budget it's not surprising people don't shop around. Mostly

DBC Reed said...

Food prices will just edge steadily up, as do house prices, and the racists whom May takes her lead from (why?) will think its the price to pay for throwing Europeans out .As we will then be cast as the pariah of Europe in a rebranding exercise that takes us from being its selfless saviours from Nazis to neo-nazis who deport people who have a right to live here, our trade and other contacts will shrivel.
Do not forget that we have a long history of fascism as Nicola Sturgeon said yesterday, but some European countries have extant fascist parties who will happily bash seven shades of shit out of us from sheer nationalist malice.
Foreign European holidays will become dodgy as our welcome will be uncertain. There will be some interesting football internationals in Poland.

DBC Reed said...

Read Raedwald all those who believed the Brexit vote would be helped by a soupcon of anti-immigrant prejudice.He believes we are now at war!

Matt said...

I also eat Bovril on toast - have done since a child.