Benefiting From the Income Gap: The Rich 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. How does an investor make money off of this? By buying companies that cater to the rich. For example, the rich like their trinkets and toys, which companies like Tiffany & Co. (NYSE: TIF), LVMH Moet Hennessy Louis Vuitton (NASDAQOTH: LVMUY), and Harley Davidson (NYSE: HOG) are happy to sell.

The Little Blue Box
There's something about that little blue box from Tiffany & Co that sets a woman's heart a flutter. The brand has stood for quality and traditional style for well over a century. While best known for its silver jewelry and diamonds, the high-end retailer also sells fine china, watches, and other assorted housewares and gifts. Tiffany even sells perfume. It has over 200 stores around the world, a catalog business, and a retail website.

Tiffany has an interesting position in the high-end market. A significant portion of its wares are very expensive and only likely to be sold to the affluent. However, it holds a niche in what many call the aspirational purchase area. So while a premium priced Tiffany diamond may be out of the reach of most consumers, a silver Tiffany bracelet may be attainable. The later purchase allows the customer to have the high end name without breaking the bank. While this allows the company to reach down for customers, it can also increase the impact of economic weakness. That said, the core customer will remain.

Financially strong, Tiffany is an interesting option for investors looking to benefit from the high end of the market. The benefit of aspirational purchases, however, adds significant allure, since along with the growing inequality is likely to be an expanding middle class.

A Mouthful of Rich
LVMH Moet Hennessy Luis Vuitton's name is a mess of well-known brands all mashed into one. The company is wildly diverse, selling everything from alcohol to cosmetics to watches. In fact, one of the company's best known brands in the United States is probably Sephora, a large and pretty universally loved make-up store. However, the company's reach is global.

Some of the company's best known brands include Louis Vuitton, Fendi, Tag Heuer, and Hennessy. It operates over 3,000 stores throughout the world and sells its wares through other retailers. LVMH is financially strong and well positioned in the luxury market. However, unlike Tiffany, it doesn't have much of a presence in other segments of the market, so it will feel a pinch if the rich stop buying its products. This probably won't be a major issue for some of its product categories, but could be an issue in fashion related products. Indeed, missing a fashion trend could be a near-term hindrance.

Overall, LVMH has such a massive and diverse collection of well-known, high-end brands that it should be able to survive even the most difficult market environment. Moreover, it has been able to add new brands, like the relatively recent acquisition of Bulgari, to expand its high-end empire.

It's a Lifestyle Thing
At one point, it seemed like every male baby boomer wanted a Hog. As much as I'd like to deny it, there's something about a Harley Davidson motorcycle that just sets it apart from the newer, speed oriented bikes, let alone a boring old car. There's a class and style to a Hog that brings to mind classic movies and cool characters.

Of course, the bikes aren't cheap. That said, they aren't as obnoxiously expensive as some of the high-end car models either. This was a huge benefit to the company when the economy was booming because it allowed the middle class to step up for a ride. However, that boost to the top and bottom line ended abruptly when economic weakness hit. The company has retrenched, cutting costs and refocusing on the products that it has been building for over 100 years.

Although the company has a large dealer network and exposure to important markets around the world, it faces demographic challenges (its target age group is set to start shrinking) and it has a notable amount of debt (its finance arm materially supports sales). While these headwinds are important issues, it has also been outperforming in its core markets of late. Moreover, the brand may have more staying power than some expect because, at its core, riding a Harley is more of a lifestyle decision than a whim.

What About The “Poor”
While these names offer a way to reach the high-end of the income disparity, it doesn't make sense to avoid the low end. For that demographic, it probably makes the most sense to hit the companies that make and sell everyday items.

Yours,


ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Tiffany & Co. 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!

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