P&G to test sustainable packaging ​for Olay

P&G to test sustainable packaging ​for Olay

When a company the size of Proctor & Gamble, a company with dozens of trusted brands are trusted in millions of living rooms, kitchens, laundry rooms, and bathrooms, makes a move it can have a pronounced impact. A recent example was the shift from powders and liquids in dish detergent and washing machine usage to pods.

This means when P&G decides to target shedding plastic, a move that is line with our Cleaner Living investing theme, it’s something that could ripple through not only its own product offering (like pods!) but also its competitors. Ah the herd mentality at work, but one that is good for the planet as more companies embrace sustainable packing.

Now to see how this test for Olay Regenerist Whip moisturizer proceeds!

Procter & Gamble hopes to save as much as a million pounds of plastic by offering consumers the opportunity to purchase its bestselling Olay Regenerist Whip moisturizer with a refill pod. A pilot program will begin in October and run through the end of the year.

If the pilot is successful, and the brand shifts a “significant portion” of sales (five million jars’ worth) to refillable pods, it would save more than a million pounds of plastic, the company says.

Consumers will be able to purchase the refillable Olay Regenerist Whip package that contains one full jar of Olay Regenerist Whip and one refill pod of moisturizer that can be placed inside the jar once the jar is emptied. The package will be sold and shipped in a container made of 100% recycled paper and will not contain an outer carton in order to reduce the use of paperboard. The pods themselves are also recyclable.

P&G says its ultimate goal is to adopt many more sustainable packaging solutions, and the test of the Regenerist Whip package is the first step of that journey. “It’s really important for us to get it right because only then can we bring this concept to market at scale,” says Anitra Marsh, associate director of sustainability and brand communications for Skin and Personal Care.

Olay will test its refillable Olay Regenerist Whip moisturizer on Olay.com in the US and UK and select retailers online for a three-month period, then evaluate the learnings to inform future packaging. Olay hopes to learn whether or not consumers like the idea of refillable skincare products and whether or not Olay’s design is intuitive. Over time, the refills could be sold separately, the company says.

Source: P&G Tests Consumer Reaction to Refill Pod for Bestselling Skincare Product – Environmental Leader

The new middle-class boom in the coming decade

The new middle-class boom in the coming decade

Amid the concerns of rising interest rates and what it may do in the near to medium term for Middle-class Squeeze consumers, new research from the Brookings Institute remind us of the positive economic force to be had with our Rise of the New Middle-class investing theme over the coming decade-plus. No wonder Apple CEO Tim Cook has been sharing upbeat thoughts about the coming demographic wave in India. He’s not alone, as other consumer product companies from Starbucks to Mondelez International and Proctor & Gamble are all focused on the sales and profits to be had from meeting this expected demand surge.

According to research from the Brookings Institution, more than half of the planet can now be considered “middle class” or “rich.” It is estimated that some 48 percent of the world’s population earns between $11 and $110 per day in PPP-adjusted dollars—a standard definition of the middle class using absolute (rather than relative) cut-offs—while another 2 percent earns more than $110 per day. According to projections and measures, the middle class will reach 4 billion people worldwide by the end of 2020 and 5.3 billion by 2030. This expansion has been driven by two phenomena: a steep decline in poverty around the world since the 1980s and rising household incomes in Asia.

There should be reasons to cheer this global “tipping” point. For the first time in recorded history, the majority of the world’s population will not consist of impoverished peasants or workers but of wage-earners who can afford to buy cellphones, washing machines and televisions, to go out to restaurants and theaters, and to take vacations with their families.

A growing middle class is supposed to be good for society. Their consumerism is supposed to boost global production of durable goods and make businesses more efficient and innovative in targeting these new customers. The global middle class is also committed to the education of their children. The middle class is more entrepreneurial than either the rich or the poor, and it demands more transparency from policymakers and tolerates less corruption. Because the middle class does not owe its wealth to privileges granted by the state, its members are more likely to support protections for property rights, as well as greater access and representation in decision-making.

Source: Fear and Loathing in the Global Middle Class – Lawfare

Retail’s new growth market – aging baby boomers

Retail’s new growth market – aging baby boomers

Another proof point that our Aging of the Population investing theme will give rise to new products and services to meet the evolving needs of the aging population be it by themselves, their family or friends. For Proctor & Gamble, this represents a strategic decision to cater to different needs of this expanding market while its core shaving business is under attack by the likes of Dollar Shave Club, Harry’s and other companies that are attacking it via our Digital Lifestyle investment theme.

Executives at Gillette have for decades defined shaving as a rite of passage.

The company famously mails out free razors – with “welcome to manhood” cards – to millions of men a year on their 18th birthdays. Its ads focus on the experience passing from father to son (sometimes with the help of famous faces like quarterbacks Archie and Eli Manning).

But in recent years, executives have begun to see another milestone emerge in their customers’ lives: the moment when sons begin shaving their aging fathers.

“We started seeing it all over social media – men posting about washing, grooming and shaving their fathers,” said Matt Hodgson, a design engineer at Procter and Gamble, which owns Gillette. “It’s a very difficult and emotional thing to do.”

It turned out there are a number of logistical challenges, too. Those who are bedridden don’t have easy access to running water to rinse blades or wash off shaving cream. Traditional blades are quick to nick delicate skin.

“We’re specialists in developing razors and yet all the products we could find were for shaving yourself,” Hodgson said. “When you turn the razor outward, it doesn’t work as well anymore. It was clear we needed to create something completely new.”

After three years of observation, design and testing, Gillette is preparing to release the first razor built for caregivers to shave others. The Gillette Treo has an extra-wide handle and comes with a tube of clear gel that eliminates the need for running water or shaving cream.

The brand, which is losing younger customers to online start-ups like Harry’s, is looking for opportunities to reach the country’s fastest-growing demographic: Americans 65 and older.

The number of senior citizens in the United States is expected to nearly double by 2050, creating a fast-growing niche for retailers and manufacturers.

Source: Retail’s new niche: Aging baby boomers | OregonLive.com

Auto companies spur Africa’s new middle class

Auto companies spur Africa’s new middle class

When most people talk about rising disposable incomes, the knee-jerk reaction tends to be one that involves China or India. While those are natural reactions and are key drivers for our Rise of the New Middle-class investing theme, we are seeing the same begin to unfold in Africa as auto companies invest for what they see as a vibrant market in the coming years. That compares to an auto market in the mature markets that is primarily driven by replacement demand and faces an uncertain volume future longer-term due to prospects associated with autonomous vehicles.

On the flipside, the investments in making North Africa a car manufacturing hub and the better-paying jobs that follow are helping speed the rise of the new middle-class in the region. That bodes well for companies ranging from Colgate Palmolive, Proctor & Gamble, Clorox and the other rising tailwinds associated with our Rise of the New Middle-class investing theme.

Auto manufacturers are betting on Africa as the next growth frontier, and they’re building a new production hub to power it.

In a rare industrialization success story for the continent, some of the largest car makers have been transforming North Africa into the world’s newest car-manufacturing cluster. Volkswagen AG , Renault SA, Peugeot SA, Hyundai Motor Co. and Toyota Motor Corp. have invested billions in Africa in recent years, drawn by growth prospects that maturer auto markets no longer offer. New-car sales in the U.S., China and Europe are ebbing after a bumper decade.

While still a small market, the Middle East and Africa are expected to have 90 million vehicles on the road by 2040, up from 59 million today, according to OPEC forecasts.

Foreign direct investment in North Africa rose from just under $5 billion in 2011 to $12 billion in 2016, largely driven by auto makers’ investment, according to Frost & Sullivan, an industry research group.

Source: Car Makers Turning North Africa Into Auto Hub – WSJ

Procter & Gamble – Not innovating where it counts

Procter & Gamble – Not innovating where it counts

The votes are in … at least the preliminary ones, and they are indicating that activist investor Nelson Peltz lost his bid to win a board seat at Rise & Fall of the Middle-Class contender Procter & Gamble (PG).

As background, Peltz has been calling for further change at Procter, including streamlining its operations and bringing in outside talent. Resistant Procter management has countered, saying doing so would disrupt a turnaround that is already in process and that focuses on strengthening and streamlining the company’s category and brand portfolio. The thing is even in the company’s June 2017 quarter, its organic growth lagged behind underlying end-market growth and its presence in the increasingly consumer-favored online market was a paltry 5% of total sales for the quarter.

Following an expensive proxy fight over the last few months and with the vote ending rather close, it appears Peltz is not going to give in easily. According to reports, Peltz’s firm, Trian Fund Management, is waiting for the proxy vote tally to be certified and then plans to challenge the vote. All in all, this is a process that will extend the story that has taken over the potential fate of Procter & Gamble for at least several days more, if not a few weeks, as the final vote tally is certified.

To put it into investor language, the overhang that has been plaguing the shares over the last several weeks is set to continue a little longer. We’re also soon to face earnings that are likely to see some impact from the September hurricanes that put a crimp in consumer spending. Despite the initial post-hurricane bump to spending that benefitted building materials and auto sales during the month, overall September Retail Sales missed expectations. And before we leave that report, once again the data showed that digital commerce continued to take consumer wallet share as it grew 9.2% year over year vs. overall September Retail Sales excluding food services that rose 4.6% compared to year-ago levels.

Let’s also keep in mind the upward move in oil prices of late, which led to a 5.8% month over month increase and an 11.4% year over year increase in gasoline stations sales in September. That same tick up in oil prices does not help P&G given that one of its key cost items is “certain oil-derived materials.”

This has me cautious on PG shares in the near term, especially with the shares just shy of 23x consensus 2017 expectations vs. the peak P/E valuation over the last several years ranging between 22x-24x. To me, this says a lot of positive expectations have been priced into the shares already, much like we have seen with the overall market over the last several weeks. As we saw this week, even after delivering better than expected bottom line results, shares of Domino’s Pizza (DPZ), Citigroup (C) and JPMorgan Chase (JPM) traded off because the results weren’t “good enough” or there were details in the quarter that raised concerns. We continue to think the upcoming earnings season is bound to add gravity back into the equation and could see expectations reset lower.

Here’s the thing: I think P&G has a bigger issue to contend with. I’ve been thinking about this comment made during the June 2017 quarterly earnings call by Proctor & Gamble’s CEO David Taylor:

“We’re working to accelerate organic sales growth by strengthening and extending the advantages we’ve created with our products and packages, improving the execution of our consumer communication and on-shelf and online presence, and ensuring our brands offer superior consumer value in each price tier we choose to compete.” 

There was the talk of innovation, but it centered on packaging innovation and product innovation of yore, but little on new product innovation. There was also much talk over advertising prowess, but as someone who has watched many a Budweiser (BUD) commercial and chuckled as I drank another adult beverage, I can tell you advertising can only cover for a lack of product innovation for so long.

I’m a bigger fan of companies that are innovating and disrupting like Amazon (AMZN) and Universal Display (OLED) — both of which are the Tematica Investing Select List. In my book, packaging is nice to have on the innovation front but isn’t always needed. Perhaps this lack of innovation and disruptive thought explains why the company has been vulnerable to the Dollar Shave Club as well as Harry’s Razors, both of which have embraced digital commerce as well as cheaper-by-comparison subscription business models while also expanding their product offerings.

If that’s the kind of transformation Nelson Peltz is talking about, that is something to consider. And yes, I get my razors from Dollar Shave Club, not P&G.

Post IPO Thoughts on Snap Shares and the $34.7 Billion Market Cap Question

Post IPO Thoughts on Snap Shares and the $34.7 Billion Market Cap Question

Last Thursday, March 2, shares of Snapchat parent Snap Inc. (SNAP) went public at $17, well above the $14-$16 initial public offering range. The shares hit a high of $29.44 on Friday morning before closing the week out at $27.09. That quick gain of just under 60 percent was great for investors that were involved with the IPO, but it wasn’t quite the same for investors that entered into SNAP shares after the shares started trading on Thursday morning.

With SNAP shares now trading in the secondary market and the buildup of the IPO now behind us, the question to us is are SNAP shares really worth the current $34.7 billion in market capitalization? At that market valuation, the shares are trading at about 37 times EMarketer’s estimate for Snap’s 2017 advertising sales. As spelled to out in the S-1 filing, Snap’s Snapchat is free and the company generates revenue “primarily through advertising,” the same was true of Facebook (FB) and Twitter (TWTR).

Actually, that’s not THE question, but rather one of the key questions as we contemplate if there is enough upside to be had in SNAP shares from current levels to warrant a Buy rating? Odds are the IPO underwriters, which include Morgan Stanley (MS), Goldman Sachs (GS), JPMorgan Chase (JPM), and Deutsche Bank (DB), that made a reported $85 million in fees from the transaction, will have some favorable research comments on SNAP shares in the coming weeks.

While SNAP shares fit within the confines of our Connected Society investing theme and are likely to benefit from the shift in advertising dollars to digital and social media platforms like Facebook and Alphabet’s (GOOGL) Google and YouTube, our charge is to question using our thematic 20/20 foresight to see if enough upside in the shares exists to warrant placing them on the Tematica Select List?

Boiling this down, it all comes down to growth

The question when looking at Snap is, “Can it grow its revenue fast enough and deliver positive earnings per share so we can see at least 20 percent upside in the shares?”

Well, right off the bat the company’s user base of 158 million active daily users was relatively flat in the December quarter and grew just 7 percent between 2Q 2016 and 3Q 2016.  Assuming the company is able to continue to grow its user base, something that has eluded Twitter for the most part, it will still need to capture a disproportionate amount of the mobile advertising market to hit Goldman Sach’s forest that calls for Snap to increase its revenue fivefold by 2018.

Snap recorded $404.5 million in revenue last year, up from $58.7 million in 2015, so a fivefold increase would put 2018 revenue at more than $2 billion. IDC projects that mobile advertising spend will grow nearly 3x from $66 billion in 2016 to $196 billion in 2020, while non-mobile advertising spend will decrease by approximately $15 billion during the same time period.

While a fivefold increase in revenue catches our investing ears, we have to question Snap’s ability to garner such an outsized piece of the mobile advertising market when going head to head with Facebook and its several platforms, Google, Twitter and others. The argument that a rising tide will lift all boats will only go so far when all of those boats are vying for the same position in the monetization river.

There are other reasons to be skeptical, including users migrating to newer social media platforms or ones that have been updated like Facebook’s Instagram that launched Stories to better compete with Snapchat. Snap called this out as a competitive concern in its S-1 filing — “For example, Instagram, a subsidiary of Facebook, recently introduced a “stories” feature that largely mimics our Stories feature and may be directly competitive.” With good reason, because as Instagram Stories reached 150 million daily users in the back half of 2016, Snapchat’s growth in average daily user count slowed substantially. Part of that could be due to Snap’s reliance on the teen demographic, which even the company has noted is not “brand loyal.” We’re not sure anyone has figured out how to model teen fickleness in multi-year revenue forecasts.

 

Making things a tad more complicated is the recent push back on digital advertising by Proctor & Gamble’s (PG) Chief Marketer Marc Pritchard, who publicly expressed his misgivings with today’s digital media practices and, “called on the media buying and selling industry to become transparent in the face of ‘crappy advertising accompanied by even crappier viewing experiences.'” As Pritchard made those and other comments, a survey from the World Federation of Advertisers showed that large brands are reviewing contracts related to almost $3 billion of advertising spend on programmatic advertising, which automates digital ad placement. The question to be answered is whether ads are actually seen and this has led to a call for companies like Snap to follow Facebook, YouTube and have Snapchat’s ad metrics audited by the Media Rating Council.

 

One other wrinkle in the Snap investing story is the company has yet to turn a profit.

In 2016, while Snap’s revenue was just over $400 million, it managed to generate a loss off $514.6 million and per the S-1 it will need to spend a significant amount to attract new users and fend off competition. In reading that, the concern is user growth could be far slower — and expensive — than analysts are forecasting, which would impact advertising revenue growth like we’ve seen at Twitter. The thing is, new user growth for Snapchat already slowed in the back half of 2016 as newer messaging apps like Charge, Confide and Whisper have come to market.

When Snap finally does turn a profit, we could see the outsized P/E ratio lead value and growth at a reasonable price (GARP) investors to balk at buying the shares, which means Snap will be relying on growth investors. It amazes us how some investors love companies even though they are not generating positive net income, but balk at P/E ratio that is too high the minute they start to generate positive albeit rather small earnings per share. We get around that problem by using a multi-pronged valuation approach to determine upside and downside price targets.

 

Is Snap the Next GoPro?

While all those numbers and forecasts are important to one’s investment decision making process (we make that point clear in Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns), we have a more primal issue with Snap. Back in late 2015, we shared our view that GoPro (GPRO) was really a feature, not a product. As we said at the time, we saw Yelp (YELP), Angie’s List (ANGI), Groupon (GRPN) and others as features that over time will be incorporated into other products — like Facebook’s Professional Services, those at Amazon (AMZN) or others from Alphabet’s Google, much the way point-and-shoot cameras were overtaken by camera-enabled smartphones and personal information management functions were first incorporated into mobile phones and later smartphones, obviating the need for the original Palm Pilot and other pocket organizers.

When GoPro shares debuted in June 2014, they were a strong performer over the following months until they peaked near $87, but 15 months after going public GPRO shares fell through the IPO price and have remained underwater ever since.

What happened?

We recall hearing plans for a video network of user channels at GoPro as well as the management team touting the company as an “end to end storytelling solution,” but over the last few quarters, we’ve heard far more about new product issues, layoffs, facility closures and falling unit sales.  In 2016, GoPro saw camera unit sell-through fall 12 percent year-over-year to 5.3 million units from approximately 6 million units in 2015.

In our view, what happened can be summed up rather easily — GoPro was and is a feature, not a standalone product. It just took the stock market some time to figure it out once the IPO blitz and glory subsided. While we could be wrong, we have a strong suspicion that Snap is more likely to resemble GoPro than Facebook, which is monetizing multiple platforms as it extends its presence with new solutions deeper into the lives of its users and has changed the way people communicate.

As investors, we at Tematica would much rather own innovators of new products and solutions that are addressing pain points or benefitting from disruptive forces and changing economics, demographics, and psychographics in the marketplace than companies that offer features that will soon be co-opted by other companies and their products. Following that focus on 20/20 foresight, we avoided GoPro shares that fell from $19.50 in December 2015 to the recent share price of $8.84.

GoPro 2-year Share Price Performance

 

And then there’s this . . . 

There is another consideration which is not specific to Snap, but is rather an issue that all newly public companies must contend with — the lock-up expiration. For those unfamiliar with it, the lock-up period is a contractual restriction that prevents insiders who are holding a company’s stock, before it goes public, from selling the stock for a period usually between 90 to 180 days after the company goes public. Per Snap’s S-1, its lock-up expiration is 150 days, which puts it in 3Q 2017. Given the potential that insider selling could hit the shares, and be potentially disruptive to the share price, we tend to wait until the lock-up expiration comes and goes before putting the shares under the full Tematica telescope. This isn’t specific to Snap shares, but rather it’s one of our rules of thumb.

We have a strong suspicion that Snap is more likely to resemble GoPro than Facebook, but we’ll keep an open mind during the SNAP shares lock-up period, after all, companies are living entities that can move forward and backward depending on the market environment and leadership team. Let’s remember too that it took Facebook some time to figure out mobile.

Finally, we aren’t so thrilled that none of the 200 million shares floated came with voting rights, leaving the two founders Evan Spiegel and Robert Murphy with total control of the company. We prefer seeing more direct shareholder accountability… but hey, that’s us.

 

Hitting Connected Society and Cash-Strapped Consumer Headwinds, P&G’s Gillette Slashes Razor Prices 

Hitting Connected Society and Cash-Strapped Consumer Headwinds, P&G’s Gillette Slashes Razor Prices 

For those of us men that have not fallen in line with the current beard trend, we’ve been bemoaning what have been the escalating price of razor blades for some time. We suspect many women feel our pain as well. As we point out in Cocktail Investing, where there’s a pain point there tends to be a company or two with a solution. Those solutions to high priced razors have included Harry’s and Dollar Shave Club, which have dealt a market share blow to consumer product giant Proctor & Gamble. With consumer fleeing Gillette to lower priced alternatives, P&G has been forced to alter its business model and slash prices. We see this as a classic example of one company hitting a thematic headwind because it did not respond to prevailing thematic tailwinds. In this case, those tailwinds were our Connected Society and Cash-strapped Consumer investing themes.

In the face of increasingly stiff competition, Procter & Gamble will reduce the price of some of its Gillette shave products.

The average reduction will hover in the double-digit range, but some products will be reduced a full 20%. Other products’ prices will remain completely unchanged.

Gillette once claimed a 71% market share in North America, but it now only maintains 59% as of last year, according to Fortune. Startups like Harry’s and Dollar Shave Club — which was acquired last year by Unilever for $1 billion — have steadily chipped away at that dominance with similar razor cartridges at a lower price.

Source: Gillette is cutting the price of its razors by up to 20% – Business Insider

L’Oréal buys Valeant brands to improve its Fountain of Youth positioning

Several of our investment themes have tailwinds that can be polar opposites, while others are complimentary like our Aging of the Population and Fountain of Youth themes. As more people age, more of them try to fight the effects of aging and look younger. That’s been a boon for skin-care products and unsurprisinlgy they’ve been growing faster than the overall personal care products long dominated by Proctor & Gamble, Colgate Palmolive and Church & Dwight. Growth attracts buyers and that is what we have with L’Oréal buying skin-care brands from Valeant Pharmaceuticals.

L’Oréal SA plans to buy CeraVe and two other skin-care brands from Valeant Pharmaceuticals Inc. for $1.3 billion, expanding the French cosmetics firm’s U.S. presence and deepening its portfolio in a product segment that has become the beauty industry’s largest.

Companies across multiple industries—beauty, consumer goods and pharmaceuticals—are battling to stake a claim in the skin-care business, which is highly coveted because of its crossover appeal as both a medical and beauty product. In 2015, Unilever purchased four skin-care brands, including Ren and Murad, while Nestlé last year formed a joint venture with the maker of Proactiv, one of the world’s top-selling acne treatments.

For nearly a decade, skin care has outgrown the wider beauty and personal-care market, according to data tracker Euromonitor International. Skin care is now the beauty industry’s largest category, accounting for a quarter of the market, but growth has begun to cool in recent years.

Source: L’Oréal Looks to Gain U.S. Share by Buying Valeant Brands – WSJ

Oral-B focuses on China’s rising middle class

Oral-B focuses on China’s rising middle class

A quick, but important reminder there are many aspects to our Rise & Fall of the Middle Class investing theme, many of which we in more developed regions of the world tend to take for granted. The basics, like health and dental care, are as big a driver for companies like P&G or Colgate-Palmolive as a new iPhone in China can be for Apple. Think about it –  we in the US (hopefully) brush our teeth at least 14 times per week if not more. The real incremental demand is where people are going from brushing just a handful of times per week to more than double that.

American oral hygiene brand Oral-B, a sub-brand of P&G, said it is bullish on the growth potential of the electric toothbrush market in China, as a rising middle class and an increased awareness of oral care are set to drive the sales of various high-quality products.

The company recently launched a new intelligent electric toothbrush. The product set is priced at 2,099 yuan ($302), which buyers can tailor their names, constellations and catch lines on the toothbrush. One thousand sets were sold within three hours after it launched on Alibaba Group Holding’s Tmall.com, one of China’s largest e-commerce shopping websites.

The emerging middle-class consumers are increasingly paying attention to the quality of life, and they are more willing to spend money on those health-related products,” she said.”

We sell most of our products through e-commerce websites. This year, we keep a double-digit sales increase year-on-year, and I expect a similar growth rate in the next few years, as the market penetration rate of electric toothbrush in China is still very low.”

Overall, two percent of Chinese residents use electric toothbrushes, and the proportion is 10 percent among those families with higher incomes. In the United States and Europe, the penetration rate is around 35 to 40 percent, according to the company.

Source: Oral-B focuses sales on China’s rising middle class – Business – Chinadaily.com.cn

Why the On-Demand Economy Doesn’t Make the Thematic Cut

Why the On-Demand Economy Doesn’t Make the Thematic Cut

We keep hearing that thematic investing is gaining significant popularity in investing circles, especially when it comes to Exchange Traded Funds (ETFs). For more than a decade, we’ve viewed the markets and economy through a thematic lens and have developed more than a dozen of our own investing themes that focus on several evolving landscapes. As such, we have some thoughts on this that build on chapters 4-8 in our book Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns

One of the dangers that we’ve seen others make when attempting to look at the world thematically as we do, is that they often confuse a trend — or a “flash in the pan”  — for a sustainable shift that forces companies to respond. Examples include ETFs that invest solely in smartphones, social media or battery technologies. Aside from the question of whether there are enough companies poised to benefit from the thematic tailwind to power an ETF or other bundled security around the trend, the reality is that those are outcomes — smartphones, drones and battery technologies — are beneficiaries of the thematic shift, not the shift itself.

At Tematica Research, we have talked with several firms that are interested in incorporating Environmental, Social and Governance — or ESG — factors as part of their investment strategy. Some even have expressed the interest in developing an ETF based entirely on an ESG strategy alone. We see the merits of such an endeavor from a marketing aspect and can certainly understand the desire among socially conscious investors to ferret out companies that have adopted that strategy. But in our view and ESG strategy hacks a sustainable differentiator given that more and more companies are complying. In other words, if everyone is doing it, it’s not a differentiating theme that generates a competitive advantage that will provide investors with a significant beta from the market.

But there is a larger issue. A company’s compliance with an ESG movement is not likely to alter the long-term demand dynamics of an industry or company, even if certain businesses enjoy a short-term surge in revenues or increased investor interest based on a sense of goodwill.

For example, does the fact that Alphabet (GOOGL) targets using 100 percent renewable energy by 2018 alter the playing field or improve the competitive advantage of its core search and advertising business? Does it do either of those for YouTube?

No and no.

At the risk of offending those sensitive about their fitness acumen, it makes as much sense as investing in an ETF that only invests in companies with CEOs who wear fitness trackers. Make no mistake, our own Tematica Research Chief Macro Strategist Lenore Hawkins, a fitness tracker aficionado herself, would love to see more fitness trackers across the corporate landscape, but an ETF based on such a strategy means investing in companies across different industries with no cohesive tailwind powering their businesses, likely facing very different market forces that overshadow the impact of the one thing they have in common. To us, that misses one of the key tenants of thematic investing.

The result is a trend that is likely to be medium-lived, if not short lived. Said another way, it looks to us to be more like an investing fad, rather than a pronounced thematic driven shift that has legs.

Subscribers to our Tematica Investing newsletter know we are constantly turning over data points, looking for confirmation for our thematic lens, as well as early warning flags that a tailwind might be fading or worse, turning into a headwind. As we collect those data points, we mine the observations that bubble up to our frontal lobes and at times, ask if perhaps we have a new investing theme on our hands. Sometimes the answer is yes, but more often than not, the answer comes up “no”.

Now you’re in for a treat! Some behind the scenes action if you will on how we think about new themes and why one may not make the cut…

 

The On-Demand Economy:  Enough to become a new investing theme?

 Recently we received a question from a newsletter subscriber asking if the number of “on-demand” services and business emerging were enough to substantiate the addition of a new investment theme to go along with the other 17 themes we currently track.

By on-demand, we’re talking about those services where you can rent a car, (Lyft or Uber) or find private lodging (AirBnB) with the click of a button for only the time you need it rather than rent an apartment or studio for a week or month. It also refers to the many services that will deliver all the ingredients you need to prepare a gourmet meal in your own kitchen, such as the popular service Blue Apron or HelloFresh.

It was an interesting question because we have been debating this at Tematica Research for quite some time. We’re more than fans of On Demand music and streaming video services like those offered by Amazon (AMZN), Netflix (NFLX), Pandora (P), Spotify and Apple (AAPL).  Ultimately, we came to the conclusion that the real driver behind the on-demand economy is businesses stepping into fill the void created by a combination of multiple themes, rather than a new theme in of itself. Here’s what we mean . . .

Take the meal kit delivery services like Blue Apron, what’s driving the popularity of this service? We would argue that it’s not the fact that people like seeing their UPS driver more. Rather it is the result of underlying movement towards more healthy and natural foods that omit chemicals and preservatives — something we have discussed as the driver behind our Foods with Integrity theme — on top of a bigger Asset Light investment theme in which consumers and businesses outsource services, rather than accumulating assets and then performing the service themselves. The on-demand component of Blue Apron is not driving the theme, but is a beneficiary of what we call the thematic tailwind.

The challenge with the shift towards healthier cooking, that sits within our Foods with Integrity thematic, is the amount of work, and in many cases equipment, it takes to cook such foods — the shopping, the measuring, the cutting, special cooking utensils and preparation time, not to mention the cost. Recognizing this pain point, Blue Apron saw opportunity and consumers have flocked to it. As we see it, the meal delivery services are an enabler that addresses a pain point associated with our Foods with Integrity theme, rather than an independent theme unto itself.

There is also a clear element of the Connected Society investment theme behind these services, given how customers order the ingredients to prepare the meals – via an app or online – as well as our Cashless Consumption theme, given the method of payment does not involve cash or check and Asset Light whereby consumers pay for the end product, rather than investing in assets so that they can make it themselves. So that we are clear, the primary theme at play here is Foods with Integrity, but we love to see the added oomph when more than one theme is involved.

 

 Let’s look at Uber, the on-demand private taxi service. 

We’re big users of the service, particularly when traveling, and we love the ease of use. To us, while the service offered by Uber is very much On-Demand, from the customer perspective, it fits into our Asset Light theme, as it removes the need to own a car. If you think about, what’s?  the amount of time you spend using your car compared to the amount of time it spends parked at home, at work or in a parking lot? The monthly cost to own and maintain that vehicle vs. the actual number of hours it is used offers a convincing argument to embrace an Asset Light alternative like Uber.

We also like the payment experience — or the lack of an experience. We’re talking about having the ride fee automatically charged. No cash, no credit card swiping or inserting, no awkward “how much do I tip?” moments. It’s our Cashless Consumption theme in all of its glory, walking hand-in-hand with Asset Light — and the only thing better than a strong thematic tailwind behind a company is two!

The biggest users of the Uber and Lyft services, and the ones driving the firms’ valuations to stratospheric levels, are the Millennials who are opting to just “Uber “ around town — it’s become a verb — or use a car-sharing service like a ZipCar (ZIP) or the like.

Sure, Millennials have the reputation of being a more thrifty, frugal group compared to previous generations. But we have to wonder is it them being thrifty or just coming to grips with reality?

With crushing costs of college and student loans, as well as stagnant wage growth, many young workers are forced to cobble together part-time and contractor jobs rather than enjoying a full-time salaried position, so what choice do they have? Why buy a car and pay for it to sit there 95% of the time when you can just pay for it when you need it?

We call that the Cash-strapped Consumer theme meets Asset Light, and many businesses have also stepped in to service this rising demand for what has become known as the “sharing economy.”

 

Finally, what is the underlying function of all these on-demand services?

As we mentioned earlier, it’s the ability to connect and customize the services that consumers want through a smartphone app or desktop website, or from our thematic perspective, the Connected Society.

One of the key words in the previous sentence was “service.” According to data published by the Bureau of Economic Analysis in December 2015 and the World Bank, the service sector accounted for 78 percent of U.S. private-sector GDP in 2014 and service sector jobs made up more than 76 percent of U.S. private-sector employment in 2014 up from 72.7% in 2004. Since then, we’ve seen several thematic tailwinds ranging from Connected Society and Cash-strapped Consumer to Asset Light and Disruptive Technologies to Foods with Integrity that either on their own, or in combination, have fostered the growth of the US service sector. Given the strength of those tailwinds, we see the services sector driving a greater portion of the US economy. What this means is folks that have relied heavily on the US manufacturing economy to power their investing playbook might want to broaden that approach.

Now let’s tackle the thematic headwinds here

Headwinds involve those companies that are not able to capitalize on the thematic tailwind. A great example is how Dollar Shave Club beat Gillette, owned by Proctor & Gamble (PG), and Schick, owned by Edgewell Personal Care (EPC), by addressing the pain point of the ever-increasing cost of razor blades with online shopping. Boom — Cash-strapped Consumer meets Connected Society.

While Gillette has flirted with its own online shave club, the price of its razor are still significantly higher, and as far as we’ve been able to tell, Schick has no such offering. As Dollar Shave Club grew and expanded its product set past razors to other personal care products, Unilever (UL) stepped in and snapped it up for $1 billion.

Going back to the beginning and the impact of the food delivery services like Blue Apron — are we likely to see food companies build their own online shopping network? Most likely not, but they are likely to partner with online grocery ordering from Kroger (KR) and other such food retailers. That still doesn’t address the shift toward healthy, prepared meals and it’s requiring a major rethink among Tyson Foods (TF), Campbell Soup (CPB), The Hershey Company (HSY), General Mills (GIS) and many others. Fortunately, we’ve seen some of these companies take actions, such as Hershey buying Krave Pure Foods and Danone SA (DANOY) acquiring WhiteWave Foods, to better position themselves within the thematic slipstream.

The key takeaway from all of this is that a thematic tailwind can be thought of as a market shift that shapes and impacts consumer behavior, forcing companies to make fundamental changes to their business model to succeed. If they don’t, or for some reason can’t, odds are their business will suffer as they fly straight into an oncoming headwind.

Recall how long Kodak was the gold standard for family photographs, yet today it is nowhere to be seen, killed by forces that emerged completely from outside its industry. As digital cameras became ubiquitous with the advent of the smartphone and the cost of data transmission and storage continually fell, the capture and sharing of images was revolutionized. Kodak didn’t keep up, thinking that film would forever be the preferred medium, and paid the ultimate price.

As thematic investors, we want to own those companies with a thematic tailwind at their back — or maybe even two or three! — and avoid those that either seem oblivious to the headwind or won’t be able to reposition themselves, like a hiker who finds he or she has already gone way too far down the wrong path and is so utterly lost, needs to be helicoptered to safety.

Of course, when it comes to these “On-Demand Economy” darlings — Uber, Dollar Shave Club, Airbnb —few if any of them are publicly traded, which frustrates us so, since most of them are tapping into more than one thematic tailwind at once. If and when they do turn to the public markets for some added capital and we get a look into the economics of these business models, then we’ll also get to see the key performance metrics and financials behind these businesses.

In the meantime, stay tuned as we will be discussing more readily investable thematics next.