A high-conviction play on the emerging consumer

Jeremy Gibson

Munro Partners

We believe that the emerging consumer is a key source of structural growth. Structural growth is important to our fund, because we believe structural growth is worth more than cyclical growth and will ultimately win against macro and political swings and pressures.

This area of interest is all about the rising wealth effects in the emerging markets, particularly China and the shift to digital, which is driving direct-to-consumer sales and creating a few winners and a lot of losers.

This chart is showing you what our key sub-trends are within the emerging consumer, and some examples of stocks that are applicable from our investment universe.

Sub-trends include:

Luxury. This is all about the Chinese consumer, which is growing in size and tends to hold up better in a downturn than mass-market consumer goods companies, with the high net worth individuals still able to afford high-quality goods.

Cosmetics are very much focused around the Chinese consumer as well, and the lack of penetration there.

Travel is multifaceted, including the aerospace industry which is benefiting from a consistent 6% compound annual growth rate in the global demand for air travel.

Global brands. Over the past six months I've travelled to London, Singapore, Canada and New York – it's amazing to see just how many people are walking around wearing Nike or Adidas runners, listening to their Apple iPhones via their Apple Air Pods and drinking their Starbucks coffee.

These global power brands have the ability to go direct to the consumer and they are also at the forefront of the digital transformation within their industries.

The losers and source of potential shorts include weak brands that won't be able to drive enough traffic to go direct to consumer and therefore still rely on the wholesale channel, which is struggling.

The key message is that the emerging consumer is a key structural growth area driven by Chinese luxury consumers and digital-savvy businesses.

The next series of charts focus on luxury goods, which we think is an attractive sub-trend and a way to play this area of interest. It gives you a snapshot of the Chinese consumer, in this case, how they are taking over the world's travel market.

In 1997, there were only 5 million Chinese people travelling internationally per annum. By 2007, that number had jumped to 41 million. Fast forward another 10 years to 2017, and the number stands at 143 million Chinese people travelling internationally for that year.

So is this the peak in Chinese travel and consumption? We don't believe so. Despite this large number of Chinese travellers, only 9% of the Chinese population currently have a passport. The Chinese government has stated that they expect this to go to 20% in the next few years.

The key message here is we believe that the Chinese consumer provides a long runway for growth, for luxury goods. So what is the best way to play the luxury consumer? We believe the best way to play the luxury consumer is the brand that has strong brand heat and is digitally savvy and innovative and can sell directly to the consumer.

Digital is revolutionising the luxury goods market. The pie chart below shows that 78% of luxury goods sales are influenced by online, with 70% of sales that come from online research into products and 8% of sales that were directly bought online.

The key takeaway is that digital capabilities and innovation are winning in the new world of luxury. And at the vanguard of this change is our focus stock Moncler, a holding in the Munro Global Growth Fund.

Moncler is the Italian-domiciled designer manufacturer of high-end outerwear. Think posh puffer jackets. We think they are best placed to take advantage of these key structural growth factors on the next chart.

Looking at Moncler in more detail through the lens of our proprietary investment process that follows five qualitative tests.

Growth: Is the company growing above market? Moncler is growing same-store sales in the mid-single digits. They are also opening new doors at a healthy clip as well. This is generating low double-digit sales growth, which is more than double the industry growth rate.

Operating leverage: Are profits growing faster than sales? Moncler is scalable and operating margins are expanding as the top line grows. The company also enjoys positive mix shift with ecommerce sales, the groups fastest growing and most profitable channel resulting in mid-teens profit growth.

Sustainability: Is the growth sustainable? Moncler is very under-penetrated as a luxury brand versus other more well-established brands. So we believe that they can continue to open new doors and that there is a long runway ahead for them.

Now referring back to the Chinese consumer, in 2022 Beijing will host the Winter Olympics, the first time China has hosted the Winter Olympics and it doesn't take a vivid imagination to picture many Chinese people watching the event in their Moncler puffer jackets.

Control: Is the business founder-led or are management incentives well aligned with shareholders? Moncler is managed by Remo Ruffini, who owns 20% of shares outstanding. He is regarded in the upper echelon of managers in the luxury goods industry. One might even call him a genius.

Customer perception: A Moncler puffer jacket is akin to a Ferrari. They are the highest quality product and they limit the supply. This leads to very good customer perception and even scarcity value. Moncler is a key holding in our fund at a 2.5% position.

To conclude, Munro Partners thinks that the emerging consumer is a key area of structural growth, with luxury goods being the key sub-trend and Moncler a high-conviction stock.

To watch a video presentation on the above investment theme or to read the Munro Global Growth Fund presentation, please click here.


The views expressed may change at any time. There can be no guarantee that any projection, forecast or opinion in these materials will be realised. To the extent that this contains any advice, this is limited to general advice only.

Jeremy Gibson
Portfolio Manager
Munro Partners

Jeremy Gibson joined Munro Partners as Portfolio Manager in September 2017 after 10 years at Pictet Asset Management in London. Jeremy is responsible for championing stock ideas and managing these positions within the portfolio.

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