Benefiting From the Income Gap: The Poor End
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The gap between the rich and poor has been a growing concern in this country, highlighted by the impact of the recent recession. Now the National Intelligence Council reports that this gap is a likely to be an important issue over the next thirty years, potentially driving instability in both developed and developing countries alike. This gap, however, is likely to be highlighted by an upward shift, as the absolute incidence of poverty is expected to decline over time. So, more people are likely to have more opportunity to buy things, even if the rich keep getting richer. How does an investor make money off of this? By purchasing stock in companies that provide the basic necessities of life, such as low cost retailers Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR), retail heavyweight Wal-Mart (NYSE: WMT), and manufacturers of everyday products like Proctor & Gamble (NYSE: PG) and Kimberly-Clark (NYSE: KMB).
Just A Buck
Dollar General and Dollar Tree are two of the largest companies in the dollar store segment, where everything in the store is priced at, or at least close to, a dollar. The target customer for these stores is the low end of the wealth scale. Moreover, their stores tend to be relatively small and often located in areas where rents are likely to be cheap, both factors help to keep costs down. While the product selection in these stores tends to be broad, many items are consumed regularly, leading to frequent customer trips.
The dollar store business model has been a good one over the last decade or so in the United States, leading to expansion and profit growth at both firms. Even as the target customers of these firms continue to struggle with the lingering effect of a weak economy, their core performance has remained decent. Still, recent sales weakness has resulted in the shares of Dollar General and Dollar Tree trading lower of late. That said, if inequality is expected to remain over the long term, these two companies are likely to be important players.
The 800-Pound Gorilla
Wal-Mart is the largest retailer in the world. While some blame the company for destroying the mom and pop retailer and complain that it treats its employees poorly, there is no question that this Dow-30 component has a winning formula. In fact, the company ran into some problems when it tried to shift from its “everyday low price” model a few years back.
The low price shtick is pretty much what the company is known for and why customers are willing to put up with what are generally considered cavernous and impersonal stores. Ultimately, cheap wins. However, one of the benefits of being so large is that Wal-Mart has massive buying power. So, unlike many of the products on dollar stores' shelves, Wal-Mart's product selection tends to be of at least decent quality.
The long-term trend at the company is international expansion. Indeed, Wal-Mart has, pretty much, gone as far as it can in the United States without bringing out new store formats. However, other countries are ripe for expansion. The retailer has had mixed results in its efforts to expand abroad, but it is continuing to pursue this avenue aggressively. Its size suggests it will succeed. Investors looking for a way to reach customers looking for good, but cheap wares would be well served by taking a look at Wal-Mart.
Soap, Toothpaste, Diapers, Etc.
While buying retailers is one way to gain access to the low end of the wealth spectrum, it's important to remember that the retailers don't make the products they sell. So, another way to touch the global trend of inequality is to buy the companies that manufacture everyday items. Two examples are Dow-30 component Procter & Gamble and Kimberly-Clark. There are, of course, plenty of others in this space.
Procter & Gamble has a notable position in the premium side of its sector. While this may make it hard to take on value focused competitors in new markets, a current sticking point for the company, it should position it well for a situation where there remains a large income gap between rich and poor, but where the poor are actually getting less poor. While it's hard to describe toothpaste or soap as an aspirational purchase, there is a certain emotional benefit from upgrading to a name brand from a no-name one. A financially strong company with a huge collection of well-known brands, P&G is likely to find a way to survive and thrive.
Kimberly-Clark, meanwhile, focuses on paper based products like toilet paper, baby diapers, feminine care products, and paper towels. These aren't nearly as exciting as the types of products sold by P&G, but the world needs them just the same. While developed markets are likely to be a problem for the company over both the near- and long-term, upwardly mobile consumers in emerging markets offer great promise. For example, customers in the United States made the shift from cloth diapers to disposable ones years ago but that same shift isn't as pronounced in many emerging markets with still strong birth rates. A financially strong player that has been achieving the goals set out by management, this boring company is worth looking at.
The Other Side
Although only a few examples, the above companies can provide access to the low end of the income scale. However, benefiting from the income gap can also come from looking to the high end of the scale, with such companies as Tiffany & Co (TIF). So it's important not to forget the other side of this important equation.
ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Kimberly-Clark and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!