Risk Points In Various Industries-Consumer Goods Industry
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Risk Points In Various Industries-Consumer Goods Industry

Consumer goods industry risk point (investor must have industry knowledge)


Food industry, beverage industry, household and personal products industry and tobacco industry.

2. Growth strategy

a. Usually steal market share from competitors by introducing new products: this strategy may be a very expensive method, and unfortunately, the road to success of new products is also full of failures. 

b. By acquiring other consumer goods companies to achieve growth, the success of this strategy depends on the strength of the company and the cost of the cost. 

c. Reduce operating expenses: Manufacturers of consumer goods must have a slimming production organization structure, and the way to lose weight is to carry out large-scale restructuring. This may cost a lot in the short term, but it can make the company profit from long-term efficiency, but it is a bit overdone if it has jeopardized the company's long-term performance. 

d. Overseas sales of products: In the face of the domestic low-speed growth market, many consumer goods manufacturers have chosen to expand the international market to compensate for the slow growth of the domestic market. Overseas sales may introduce currency risk, and most consumer goods companies use hedging to mitigate this risk.

3. Risk

a. The growth of retailers' strength will gradually weaken the pricing power of consumer goods manufacturers.

b. Litigation risk: This risk mainly involves tobacco companies, and this is a big risk. 

c. Foreign currency exchange risk: The strength of the domestic currency is negatively correlated with the company's overseas sales performance. 

d. Expensive stocks: Investors may push up the stock price of consumer goods stocks during the economic downturn, making stock prices much more expensive than their fair value. When stocks in the consumer goods industry have 20-30% marginal trading, they can look for buying opportunities.

4. Competitive advantage

a. Economies of scale: A few giant companies that dominate the consumer goods industry enjoy the economies of scale that small companies entering the industry cannot catch up with. 

b. Strong brand: A strong brand pays attention to cultivating contacts with consumers for several years. This is an obvious threshold for new entrants, and it takes time, money and market to cultivate contact with consumers. Comprehension. 

c. Distribution channels and relationships: The sales network that manufacturers make products appear on store shelves is a competitive advantage that competitors can hardly replicate from the beginning. Exclusivity is a feature of a distribution system that enhances a company's competitive advantage.

5. Characteristics of successful consumer goods companies

a. Market share: Companies whose brands have an advantage in market share are more likely to maintain their current status. Therefore, any company is now ranked first and may continue to be number one in the next few years (excluding special events, Such as product pollution, etc.).

b. Free cash flow: These mature companies can generate a lot of free cash flow, so it is important to confirm how management uses these cash wisely. Examine how much of this cash is paid back to investors in the form of dividends or stock buybacks.

c. Building confidence in the brand: Check if the company is constantly advertising to support its brand. If the company continues to promote products at a low price, it may exhaust the value of the brand – just for the short-term gains in the value of the brand.

d. Innovation: The company's level of innovation is critical, paying attention to companies that continue to successfully introduce new products into the market and take advantage of these new products to gain a competitive advantage. It is best for the company to launch one or two “home run” revolutionary new products (the market share of innovative products reaches the market first) while launching a series of successful products and extending the product line.

6. Summary

The consumer goods industry is a typical defensive industry, an ideal long-term investment. Despite the slow growth, it has fairly stable performance, strong competitive advantage and a large amount of free cash flow. Look for companies that have a monopoly scale, low cost and strong brand advantages, and can conduct a competitive intelligence survey to analyze their strengths and weakness. In addition, the consumer goods sector has exceptional stability, while the non-essential consumer sector often faces fierce competition. The boundaries between the two departments are not very clear.

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