Consumers are finding new ways to get in on the latest trends and some of the things they are buying may seem ludicrous to some. Whether it be watches made by former saddle makers, cappuccinos embossed with company logos or even virtual skincare products for their avatars, it seems that despite the cost-of-living crisis, people still have cash to spend on luxuries.
These are but some examples of the new ways in which the younger generations are spending their money according to Swetha Ramachandran, who joined Artemis earlier this month as the latest addition to the asset manager’s new global equities team.
She is aiming to tap into these new themes and opportunities as the newly appointed manager of an upcoming fund dedicated to “leading global consumer brands”.
The strategy, which is currently undergoing regulatory scrutiny before launching, is the first thematic fund in the Artemis stable since Artemis Global Energy was handed over to Guinness Asset Management and became TB Guinness Global Energy in 2019.
Ramachandran, who joined the company from GAM, where she was manager of the Luxury Brands Equity fund, has identified the emergence of the global middle class, led by Asia, and the changing generations, particularly with the growing influence of Gen Z (those born after 1995), as “very exciting opportunities”.
If we look back to a store of the 50s and 60s, you'd go there to buy a product in what was a very transactional experience. Now, brands are stretching themselves from becoming transaction-oriented to more experience-led and even entering the cultural conversation, she explained, citing several examples.
“Who would have thought that in the first ever Metaverse Fashion Week in 2022, which by the way is an annual occurrence now, the most popular product was a virtual skin serum by Estée Lauder? Skincare is the most physical product that you can think of, but actually a virtual skin serum, which allowed people's avatars skin to look better, was the biggest hit,” she said.
“The pop-up cafe at London’s Harrods at the moment is a product café where a lot of money is paid for having a product logo embossed on your cappuccino. Hermes, which started life as a saddle maker for horses and now makes more watches than many independent watchmakers, is a great example of how a strong brand can be successful in new areas that it applies itself to, as long as the desirability for the brand has been cultivated and nurtured.
“Many of these companies are also frequently promoting art exhibitions and there’s some truth in LVHM Bernard Arnault’s quote that ‘LVHM is not a fashion company, it’s a cultural company’.”
Ramachandran’s idea is therefore to conceive a wide universe of consumer brands with strong barriers to entry, low substitutability and high pricing power. From those roughly 150 to 200 global stocks she holds 25 to 35 on a low turnover basis of between 15% to 20% to “benefit from the compounding effect of these long-term secular trends rather than cyclical ones”.
“We will, however, apply the same rigour into defining what a leading brand is. We will not be chasing every faddish new brand that emerges wherever they may be. We want brands to have longevity, durability and high barriers to entry and we remain agnostic about which sub-sector they are to be founded,” she said.
“We could look across cosmetics and skincare, sporting goods, jewellery and soft luxury, because they are typically able to generate very high gross margins and tend to be highly cash generative.”
In terms of geographical distribution, because these structural consumption shifts are happening generationally as well as geographically, the manager is planning to use developed market companies that are exposed to the new consumers, but also over time, “fully expects” to broaden the remit to include emerging market stocks as well. This is particularly important because it’s often the local brands that benefit from these trends.
“In China, 98% of all spirits consumption is made up by a category called baijiu, or fermented rice liquor, and all baijiu companies in China (except for one, which is partly owned by Diageo) are listed locally,” she explained.
“Similarly, in India, the second-largest gold consumer in the world, it isn’t the Western brands, such as Cartier and Tiffany, that are benefiting from the middle-class expansion, but the local brands.”
When it comes to reconciling these spending trends with the cost-of-living crisis that some countries are struggling with, the manager noted a drive for quality across all income spectrums.
“Whether it's an alcoholic beverage, where people are moving towards premium spirits, the idea of ‘less, but better’ has really been taking hold, as well as the idea of looking at objects as a considered purchase rather than a capitalistic purchase,” she said.
“A study from a UK-based charity suggested that the average item bought at a cheap retailer is worn about seven times before it ends up in a landfill. On the other hand, the tagline for Patek Phillipe is that you pass it down from one generation to the other. So it's a very different mindset.
“Finally, trainers are a great category where there's something for everybody and have ended up becoming an entry-level category for those not able to afford a brand’s more expensive offering.”