Looking for ideas here.
Basically, my current portfolio is made up of fast-growing luxury or semi-luxury consumer brands that sell direct + eCommerce retailers. Obviously these are great companies to own when the economy is doing well (which it is), but I'm worried about performance during a recession as I don't expect them to stay on track when shit hits the fan.
What types of companies/assets typically perform well in a recession?
Right now I'm in the middle of purchasing a company that showed an uptick in sales in the last recession but I want to buy more of these companies while they are cheap. Looking for specific businesses to buy into where knowledge of eComm/D2C would be useful as that's how I usually improve an asset when I get involved.
Look at companies/industries with inelastic demand, tobacco is one of them. Pretty sure energy must be the same.
I can't afford to own a tangible portion of a tobacco or energy business. Plus my area of expertise is useless/null in those areas.
Dollarama, commodities, everyone still needs to buy food, cheap clothes, gas, and pay for hydro/utilities. Just think about what broke people spend their money on no matter what. Then narrow it down to the more intelligent companies and purchase their stock.
Commodities are tough to compete in since it's typically a race to the bottom on pricing and pricing is a game only huge companies play. My biggest holding right now will do almost $10M this year in revenue which makes it pretty easy for a big boi to wipe us out if they want to and we try competing on price.
In the context of a recession, you are looking for either 1) a counter cyclical business or 2) a business that sells products with inelastic demand.
Layering in your preference for businesses that you have some level of domain expertise (DTC, E-commerce), there are a few areas that could be interesting. I would also like to note that even in an economic downturn, e-commerce is likely to continue growing as a result of secular growth but I digress.
Category 1: - Liquidation oriented retailers (Gilt, Ruelala) - Private label (Brandless) - Alcohol (Drizly)
Category 2: - Food (Everyone needs to eat) - Consumer staples (toilet paper, toothpaste etc.) - Healthcare products (Nobody wants to die)
Hope this provides a helpful framework.
Good starting point. A couple of additional considerations: FMCGs are easier to attract the attention of larger online retailers in the next few years. This of course is a coin with 2 sides: it might mean having a trade buyer as well as being blown out of the water from the big player that goes all in with a build strategy (or buying a competitor). A more defensible niche could be something with lower volumes (and likely higher margins). Drugs is the easiest guess, which in the waves of “amazon-ification” of trade world could represent at least a 2nd/3rd one, giving you the time to exit the investment, ideally at a higher multiple. I’d explore the B2B side of the drug industry, which might be a bit untapped and hence offer attractive entry points.
Good idea, and yes, trying to compete on pricing is a dumb game to play when you're not a big company with billions in funding which is why my current co's are all high end products.
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