Diversification of our portfolio is essential to ensure a well-rounded growth of asset value. This can be done by investing in different sectors and countries. Over the past year, many retail investors tend to only invest in the technology sector since stock prices of technology companies have risen significantly compared to other sectors. However, we must have a good balanced of stocks across different sectors, such as F&B, financial, and so on. In this blog post, I will be mainly using the examples of McDonald's (MCD) and Starbucks (SBUX) to highlight the true value of investing in the F&B sector.

Invest in F&B companies not because of the food they sell

In our daily lifestyle, it may seem that companies like McDonald's and Starbucks earn revenue from the burgers and coffees they produce respectively. However, these successful F&B companies earn most of their revenue from other means. The main feature that ensures continuous revenue for these companies is the brand loyalty of the customers. In the case of Starbucks, it creates a community of coffee lovers by connecting between the "Starbucks partners" (employees) and the customers. The emotional attachment between the two parties is further enhanced by various gestures such as remembering and writing down the names of regular customers, the aesthetic design of the stores, and merchandise such as the Tumblr cups.

Our (Starbucks) Aspiration: To become an enduring, great company with one of the most recognised and respected brands in the world, known for inspiring and nurturing the human spirit.

Onward: How Starbucks Fought for Its Life Without Losing Its Soul - Howard Schultz

Similarly to companies like Apple and Lululemon, Starbucks can earn increasing profits consistently over the years due to the large brand loyalty.

The close relationship between food and inflation

In the context of Singapore, the price of one McChicken ala carte had increased from $2 in the year 2000 to $4.60 in the year 2021, which is more than a 100% increase, as a result of inflation. This highlights the fact that food manufacturers will choose to pass on the higher cost of production to consumers. Additionally, companies with high quality of food served will choose to further increase the prices of food, given that the majority of consumers will still choose to consume them despite higher prices.

Sector rotation is the movement of money invested in stocks from one industry to another as investors and traders anticipate the next stage of the economic cycle.

Investopedia Definition

The F&B sector is known to be a great beneficiary in the late stage of an economic cycle. This is known as the sector rotation, where investors and traders shift the majority of their positions from riskier sectors such as technology to safer sectors such as consumer staples, which include the F&B sector. This is evident in the early quarters of 2021, where the prices of value stocks rise more than that of growth stocks due to the rising 10-Year US Treasury Yield.

Starbucks works like a bank

The Starbucks Loyalty Program works in a way that is beneficial for both the company and the customers. For the customers, we can enjoy rewards and promotions on occasions such as birthday rewards. For the company, customers are constantly lending money to Starbucks at zero interest rates. Hence, the program creates free cash flow for Starbucks's operating expenses.

The property business in McDonald

McDonald's can obtain free cash flow by leasing properties to other franchisees. This business model generates a high profit margin for the company due to stable revenue from the rental income and lower operating costs. As a result, McDonald's can outperform other restaurants in terms of profit margins, such as Domino's Pizza.

Conclusion

Investing in the food industry, especially among innovative companies, is a good strategy for long-term investing. As the stock prices of F&B companies increase at a relatively slower rate than technology companies, investors should buy into these companies when they are overly undervalued in the cases of full recession. Otherwise, they can invest in these companies to maintain their portfolio value by obtaining relatively high dividends.

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