Thematic Investing Part-3!

“The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you've got a terrible business. I've been in both, and I know the difference.”- Warren Buffett. (emphasis added by the author)

One of the most fundamental concepts in economics is the law of demand. The law of demand states that:

“As the price of the given good increases, the quantity demanded decreases as long as all else is equal”.

Nevertheless, there is a specific section of goods that defy the law of demand and whose demand “increases” with an increase in “price”. These are known as “Veblen” Goods.

One of the noteworthy reasons to focus on these goods is that the post-pandemic world is witnessing a K-shaped economic recovery. You will be amazed to learn there is a mad rush globally among the aspirational upper middle class to upgrade to “luxury” goods as they elevate their “social status”.

Post covid, social media has demonstrated tremendous growth and thus has become a household phenomenon. Furthermore, apps like Instagram have become a tool to flaunt one’s wealth. As a result, “certain” luxury goods have benefitted disproportionately from the K-shaped economic recovery.

Furthermore, higher inflation is a tailwind for these companies as they can seamlessly increase the prices of their goods, which in turn stimulates demand. Thus supporting both volume and value growth.

One of the best examples of the craze is the “higher” replacement demand for the recently released iPhone 15 Pro Max, the costliest version of the just-released iPhone. While the demand for the primary/lower version is subdued or in line with expectations, the demand for the topmost version has exceeded the company’s forecasts in multiple regions.

Furthermore, some of the other tailwinds for luxury goods are:

• Customers' loyalty is one of the most significant contributors to the exponential rise in sales for these companies.

• Higher interest rates are a boon for savers as the interest income boost gives an impetus to the wealthy to spend on high-value purchases.

• Since these companies hike prices without affecting sales, this helps drive earnings higher without making incremental investments in capacity, plant and machinery and other capital investments.

• Some luxury products are also bought as an “investment” (collectables), which gives an added advantage for the topline growth.

• These companies are known for priceless Brands, aesthetics, quality materials, superior craftsmanship and for transforming everyday objects into “status symbols”.

Due to the above reasons, the luxury goods theme is a must-own in one’s portfolio.

Today, we will focus on the companies that produce “Veben Goods” and have the potential to outperform all other index constituents if we remain in an inflationary environment for the years to come.

Let’s dig deeper into some of the companies!

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