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Investor's Edge - "Industries you already Understand"

Not that I intentionally planned it but this site is starting to cover lots of Food & Beverage related counters. In the words of Peter Lynch,


From : https://www.azquotes.com/quote/722829


One of the most important thing about investing is understanding the industry that you're in. I guess thats really one of the advantages I have having worked in the Fnb industry since my poly days.


Buy into industries you know. For example, whats the industry average for labour cost in the fnb industry? I know this and like any professional out there, you'll likely know whats the industry average cost for your own respective industries.


It is paramount that we use this knowledge to our advantage when we choose our investments.


Here are some of my thoughts in general about food related companies.


Advantages


- Restaurant Businesses, food company etc. these are all ESSENTIAL services. This means that they would have taken a beating during lockdown but IF they survived, they will recover much faster than Hotels, Airline or Cruiseships as they have less dependence on Tourist Arrivals.


- Elasticity & Consumer Spending. I'm no economist so disclaimer here this is just how I rationalize with myself. I have a brief understanding of the relationship between consumer spending and elasticity. I refer to theory behind how changes in degree of consumer spending affects the demand of a product. In the case of food industries, as a basic need for survival, I would consider food products relatively inelastic when consumer spending decreases. In extremely basic terms, this means that even your salary cut in half, you will still go out and buy food and eat.


Disadvantages


- High COGS. In every business model we have key costs such as rent and manpower. For most service related business such as Propnex etc, their COGS is relatively non existent as they do not build the properties that they sell. Unfortunately in a food business, food cost is usually one of the largest COGS involved and its is something which can easily overwhlem any food business if not managed properly.


- Rent. If you're a food supplier, your rent would probably kill you even if you have a warehouse in an industrial area as if you are dealing with chilled or frozen food, those cooler rooms will need to be switched on 24/7. If you're a restaurant business, rent would kill as well as you need to be in a bustling area with high foot traffic. (Not even including things like turnover rent, and other tenant payable nonsense)


All in all I'm still pretty bullish about food companies at this time simply because of their capacity to recover faster than any other industries out there. If we make a comparison on hospitality sectors we have industries such as,

  1. Hotels

  2. Restaurants

  3. Food Essentials

  4. Supermarkets

  5. Cruise ships

  6. Airlines

If we had to list these industries in order of which would recover first, we all know which will be the last but I'ld definitely put food essentials and restaurants in the top 3 simple because of their lack of dependence on tourist arrivals.


At the time of writing, I am vested in.

  1. ST Food Group SGX: DRX (Will cover this company in my next post)

  2. Koufu SGX: VL6 (https://www.makingcentsandsense.com/post/only-foodcourts-think-again-koufu-group-limited-sgx-vl6)

  3. Wilmar SGX: F34 (Too complicated, lol)

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