Damian Fernandes, Portfolio Manager, TD Asset Management, talks to Sara D’Elia about which “goods consumption” retail stocks could move higher in 2018. Previously he discussed changing demographics and shopping patterns, then identified some examples of “experiential” retail stocks for next year. Click here to see Part 1 of the show and find out which stocks were highlighted.
- Thanks, Sara.
- We're never going to let you leave. We're going to kick things off with your chart. You look at returns over the last five years for three names and what you call goods consumption companies. The first is Nike, which is shown by the red line and has returned 264%. The second is Tiffany, and they have returned 177% over five years. And finally, the third and best performing is Sherwin-Williams. And since 2012, they have returned 276%. Now, when you and I chatted, you said selling a good just isn't good enough. What do you mean by that?
- That's a great point, Sara. From the chart, you can see that those companies, similar to the ones that were selling experiences, have outperformed both the retail sector and the market at large. And it's because they're catering to this need to actually go beyond selling the good. And what I mean by selling the good is not good enough before-- we think about the traditional channel of a good, where they have a marketing campaign, and then they sell their good through the third-party retailer. It's not captivating imagination.
These three companies-- and I know there's not much difference between paint or running shoes or high-end jewelry at first pass, but they actually have a few things that are very in common in the sense that it's not running shoes, athletic gear. It is healthier lifestyles. It's not high-end jewelry. It's happiness in a box. It's not paint. It's improving your-- it's actually making your home environment better.
So that's what these companies are trying to market. And that's what I mean. It's not good to just sell the good anymore. You have to sell that experience that good is facilitating.
- Now, there are some commonalities I know you mentioned. So Sherwin-Williams specializes in paint. Nike, it's athletics. And Tiffany, it's the experience in a box. What's common amongst these three names?
- So besides being on this trend of actually catering to an experience as opposed to the underlying good, what's common is that they own the value chain. What do I mean by this? What I really mean is that from the manufacturing of these goods right out to the end point of the consumer of selling them, they own all the distribution points.
So for example, Tiffany in the late '90s decided to stop selling its jewelry through third-party retailers. You couldn't buy Tiffany goods any more through high-end mall anchors or through specialty retail stores. They chose to put their distribution in-house, because they wanted to control their message, their marketing message. And that's why now you see uniformity across Tiffany stores. You see consistent ad campaigns.
And what that allows really to do is to create this experience for the customer where they associate a certain image with Tiffany, and it leads to repeatable purchases. And the obvious thing is that if you own all points of the value chain, you don't have to share those profits or that margin with anyone else. So that's why.
- If we talk about the future of retail, where do you think it's heading? Where do you think-- in terms of the winners and the losers in this space, how do you think we'll see that play out?
- I think we can't just differentiate between experiences and goods anymore, because I think it's all tying to those experiences. If you're selling a good, it cannot be generic. Or if it is generic, it has to cater to some need or some want in most circumstances.
So for example, if it's an experience you're trying to sell, for example, if it's Nike and you are trying to sell a healthier lifestyle, that's why you have the Nike app that tracks your running where you can share in social media with your friends. And then if you use Nike to actually buy shoes directly from nike.com, they will send you coupons or promotions three months later when they know you've probably worn out your running shoes. This whole community where you can share this personalized service leads to a much better and closer relationship with the customer.
- It's not the once and done.
- It's not the once and done, and it's not let's go to Foot Locker. It is like, no, this is how I identify with. And so I guess what I'm trying to say is that if a company is trying to sell-- and I'm not trying to be very vague about this. What I really want to try to say is that if a company's trying to sell a product, it has to go beyond thinking about what that product is-- thinking about what that product is trying to achieve and then cater to that. Because I think that's what will separate the winners from the losers going forward.
- Damian, as always, thanks for being here.