Ash Park

Ash Ash
ParkPark
Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Ash Park on dealing with disruption

Abundant financing, outsourced manufacturing, cheap digital marketing and online distribution have all contributed to a collapse in barriers
to entry for new disruptive Consumer Staples brands. Large companies are under attack and younger consumers – preferring smaller, more
local, craft, organic and natural products – no longer trust the large brands of the 20th century. In a sign of things to come, with a funny viral
marketing campaign, no manufacturing assets and an online direct-to-consumer strategy, Dollar Shave Club created a $1bn business in just
five years. Although some incumbents may still prosper, a Consumer Staples-led franchise strategy is now broadly redundant…….isn’t it?
Business models that suck in large amounts of capital to subsidise novel consumption habits are particularly fashionable at present, but we
prefer companies that are highly profitable and have the ability to deliver steady growth by satisfying ingrained consumption habits. That
approach might not always be on-trend, but we think it will continue to produce attractive returns long after some of the more ephemeral
business models have fallen by the wayside.

The Ash Park Global Consumer Franchise Strategy Global Staples have never lost money in any 5yr period

 Concentrated portfolio of high-quality businesses . . .

40%

 . . . seeking to sustain high returns on capital, underpinned 35%

by much-loved everyday consumer brands 30%

25%
 A smart way to access the EM consumer growth opportunity
20%

 No benchmark constraint, significant liquidity 15%

10%
 Low turnover, minimising frictional costs 5%

 Removes reinvestment risk and the need to find the ‘hot 0%

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new’ investment theme

 Managed by experts in the Consumer Staples industry and 5yr Annualised Total Returns Average

backed by a global network of contacts

Returns in US$ for Ash Park Global Consumer Staples index
 Principals have at least 75% of their investible assets in the Source: Ash Park, Refinitiv Datastream
Strategy

Ash Park Global Consumer Franchise Strategy Returns (US$, net of all fees and expenses)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

2019 4.1% 4.2% 6.6% 15.7%

2018 1.8% -9.3% 1.9% -2.5% -2.9% 2.7% 4.0% -2.5% -0.3% -5.0% -2.3% -6.8% -19.9%
2017 2.1% 6.6% 2.7% 1.9% 8.0% -2.3% -0.4% -0.3% -0.8% 0.3% 2.1% 3.7% 25.7%
2016 -1.9% -0.1% 6.5% 0.8% -0.5% 2.7% -0.3% -1.3% -0.3% -5.1% -6.3% 1.5% -4.6%
2015 2.3% 4.7% -4.3% 2.4% 0.8% -2.7% 5.1% -6.5% 1.5% 7.6% -1.5% -0.5% 8.2%
2014 3.3% 3.4% -4.1% 2.4%

Cumulative Annualised
2018 to Year to 3 yrs to Since Year to 3 yrs to Since
29th Mar 2018 2017 2016 29th Mar 29th Mar Inception 29th Mar 29th Mar Inception

15.7% -19.9% 25.7% -4.6% -1.6% 6.3% 23.0% -1.6% 2.1% 4.8%

The value of all investments and the income from them can go down as well as up; this may be due, in part, to exchange
rate fluctuations. Past performance is not a guide to future performance.
Source: Ash Park. This table illustrates the returns of the Ash Park Strategy. The Ash Park Strategy returns from October 14, 2014 to January 11,
2016 are the net asset value per share of Class A GBP shares of the Ash Park Global Consumer Franchise UCITS Fund translated into USD at the
relevant daily exchange rate; and from January 11, 2016 to date the returns are the net asset value per share of the Ash Park Global Consumer
Franchise Fund’s Class A1 USD shares (net of all fees and expenses, all dividends reinvested). Past performance is not an indicator or guarantee
of future results. Returns experienced by individual investors in different share classes of the Fund may vary from the performance shown,
depending upon factors including date of investment and fees. The performance and NAV per share of each share class is available upon request.

1
 Ash Park
Ash Ash
ParkPark
Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Dealing with disruption, killing zombies and why Consumer Staples remains a great hunting ground for
high-quality compounders
Disruption . . . again has created much more volatility in the companies who are winners
“My dear sir!' cried Mr Wonka, 'when I start selling this gum in the and losers. . . This logic does not apply just to things that consumers
shops it will change everything! It will be the end of all kitchens and buy, but also to the retail channels in which people buy their goods,
all cooking! There will be no more shopping to do! No more buying which have changed dramatically in the last few decades.”
of meat and groceries! There'll be no knives and forks at mealtimes!
No plates! No washing up! No rubbish! No mess! Just a little strip of We are interested observers, rather than expert followers, of other
Wonka's magic chewing-gum — and that's all you'll ever need at industries, but beyond other consumer examples this still seems to
breakfast, lunch, and supper! This piece of gum I've just made apply: if we look at sectors such as Energy, Media, Financial Services,
happens to be tomato soup, roast beef, and blueberry pie, but you Communications or (obviously) Technology itself, the potential for
can have almost anything you want!” disruption looks enormous – and on a completely different scale to
somebody choosing a different kind of razor blade.
Figure 1: Roald Dahl’s Charlie and the Chocolate Factory
This is also borne out in the composition of stock market sectors
over time. Going back fifteen years, the three largest companies by
market capitalisation across Consumer Staples subsectors have
remained largely unchanged, with Chinese baiju maker Kweichow
Moutai the only new entrant into the top 12 (at the expense of
Diageo, Figure 2).

Figure 2: Top 3 companies by market cap across Consumer

Staples subsectors vs 15yrs ago
No.1 No.2 No.3
HPC - 2004 P&G Unilever L’Oréal
Food - 2004 Nestle Mondelez Danone
Beverages - 2004 Coca-Cola PepsiCo Diageo
Tobacco - 2004 PMI* Altria* BAT
Source: Penguin Random House

HPC - 2019 P&G Unilever L’Oréal

It’s two and a half years since our first letter on disruption1, but the Food - 2019 Nestle Mondelez Danone
frequency of questions we receive and the volume of press articles
we are sent attest that this topic is still front-of mind when it comes Beverages - 2019 Coca-Cola PepsiCo Moutai
to Consumer Staples, and big brands more generally. Have we Tobacco - 2019 PMI Altria BAT
missed a Willy Wonka-esque innovation that could make an entire
*PMI didn’t actually spin-off from Altria until 2008, but the implied value
industry redundant? of both businesses in 2004 still leaves them comfortably in the top two
spots.
When we wrote the first of the Many Happy Returns2 reports which Source: Ash Park and Refinitiv Datastream.
inspired the launch of our Strategy, the resilience of the Consumer
Staples industry was one of the attractions that leapt out at us. We In contrast, looking across all the other stock market sectors over
came to realise that the very consistent long-term earnings growth the same period, only 18 of 48 companies have retained their
of these companies was heavily underpinned by the fact that they positions as top-three companies by market cap (two of which are
were so hard to disrupt. That’s not to say that the industry is the Staples-like Starbucks and McDonalds). Please let us know if
invulnerable to change but that, compared to other industries, the you’d like to see the full data set.
change seems to be more manageable and less damaging. We
wrote: Others agree with our view of disruption: according to a useful
‘Disruptability Index’ produced by Accenture 4 (Figure 3), the
“Technology does not tend to render whole Staples categories consumer goods industry looks to be just about the most durable
irrelevant via the invention of a proven new and better product. . . and least volatile of any industry in the face of future disruption.
In contrast cars3, household appliances, televisions etc are all items
in which technology is a vital part of the consumer offering, and in
which the technology itself has tended to evolve very rapidly. That

1 3
Ash Park on Disruption – Q3 2016. Let us know if you’d like a copy. Jamie occasionally mentions that he doesn’t think his boys (aged 4 and 6
2 and big Roald Dahl fans) will ever need to learn to drive, given the growth
Many Happy Returns – Deutsche Bank, January 2011
of ride-sharing, and likely advances in driverless cars.
4
Disruption Need Not Be An Enigma – Accenture, February 2018

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 Ash Park
Ash Ash
ParkPark
Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Figure 3: Accenture’s ‘’Disruptability Index’ “Many large corporations selling consumer-focused products add
extra costs to the price of items, making them more expensive than
they need to be, according to critics. Sharkey and Leffler [the
founders] refer to this as the ‘brand tax’, which they say isn’t added
to the items they are selling. . . Although Brandless is not marking
up items with this ‘brand tax’, the company claims that it will still
be able to make money from each product sold. But these margins
will be taken at a much ‘fairer price’, says Leffler, than other outlets.”

We were somewhat amazed to read that Softbank’s Vision Fund

had invested $240m in this business last July, valuing Brandless at
over $500m. Reports later in 2018 suggested that the business was
struggling with relatively low customer retention and order size,
and in the middle of March this year Tina Sharkey announced that
she was stepping down as CEO to become co-Chair with Ido Leffler
Source: Accenture
while the company launched a search for a ‘seasoned retail
operator’. We wish them well, but that seems like a high valuation
for something which, with its broad range of products, could be
The venture capital wall of money described as a cross between Costco’s Kirkland private label brand
(without the massive retail scale) and Goop (without the Gwyneth
If management consultants have played a part in promoting the
Paltrow). Will the novelty pall?8
disruption debate, venture capitalists seemed to have jumped
aboard with gusto. To some extent that’s understandable when a
Even if we question the impact of disruption on Consumer Staples
business like Dollar Shave Club (‘Our blades are f**king great’) sold
compared to the change happening in other industries, we are
to Unilever for around $1bn, just five years after its launch.
always on the look-out for any threats that we feel could have a
major impact on the earnings power of our portfolio companies.
But it sometimes seems to us that the cart is being put before the
We have yet to come across anything that we fear could have a very
horse: instead of capital finding its way to ventures which have
significant impact across the broad spectrum of Consumer Staples,
been tested against the disciplines of the market and struggled
but we watch potential existential threats to specific product
through the usual agonies of start-ups to an attractive and
categories. In the appendix to this letter we review three of the
scaleable niche with consumers, bold but unproven concepts are
most interesting – meatless meat, artificially-aged spirits and the
raising large sums of money up-front to try to guarantee – or spend
laser razor.
their way to – success.5

Ryan Caldbeck, founder and CEO of CircleUp, an early-stage Figure 4: Harold’s selfie with Dollar Shave Club founder Michael
consumer brands investor amused us with this tweetstorm Dubin
lamenting the proliferation of lavishly-funded direct-to-consumer
(‘d2c) start-ups:

“d2c is a horrible channel for scaling a business but it is a wonderful

channel for testing new products and iterating. For scaling there
aren’t many companies in history that have scaled w/o raising
$X00m and without expanding into offline eventually. . . Everyone
gets excited because the d2c juice company raised $150m. Wait-
what?? Why are you excited it is capital inefficient? Why is that a
good thing? Is anyone listening to this? I feel so alone!”6

A couple of years ago we read about a new company that seemed

to be trying to do a Willy Wonka on the Consumer Staples sector.
Brandless (‘Better Everything. For Everyone’) launched in July 2017
with around $50m of high-profile celebrity and VC funding to sell
‘brandless’ food, household and personal care products direct to
Source: Ash Park (‘Our funds are f**king great’)
millennial consumers. An early news report explained:7

5 8
$100 Million Was Once Big Money for a Start-Up. Now, It’s Common. – This No-Brand Startup Won $240 Million to Fight Amazon on Price and
New York Times, 14th August 2018 Quality – Bloomberg 31st July 2018; Brandless wants to create the next
6 great consumer packaged goods brand — but it hasn’t built customer
Tweets from Ryan Caldbeck – 27th October 2018
7 loyalty yet – Recode, 18th October 2018; More Goodness – Tina Sharkey
Exclusive: Investors Bet on Brandless as the Next Procter and Gamble for
Medium post, 14th March 2018
Millennials – Fortune, 7th December 2016.

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 Ash Park
Ash Ash
ParkPark
Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Barriers to Entry v Barriers to Scale Even the well-known success stories are not particularly large in the
There is no doubt that today it’s easier to launch a new brand than context of the overall industry. Figure 6 shows that the cumulative
it was 10-20 years ago. Unilever estimates that the top six Beauty turnover of ten of the most high profile Consumer Staples
and Personal Care markets have seen 6,000 new brand launches in ‘disruptors’ only equal to Beiersdorf’s Nivea brand. Incidentally, the
the last two years: many from small/start-up businesses, but also average age of those brands is an older-than-expected 11 years.13
some from the larger companies. Barriers to entry might have
crumbled, but barriers to scale are much tougher to crack; Figure 6: Current / at-acquisition US$ sales of ‘disruptors’
moreover, Staples is rarely (if ever) a ‘winner takes all’ category.
5,000 RX Bar
Launch, and even initial success, does not imply sustainability nor Dollar Shave
4,500 Lagunitas
necessarily a long-term threat to larger brands. Fevertree
4,000 Halo Top
Kylie Cosmetics
As Jean-Paul Agon, the CEO of L’Oréal – where the eight largest 3,500
Bai
brands grew 8.4% in aggregate last year – said at the February 3,000
CAGNY conference:9 2,500 KIND

2,000
JUUL
“. . . definitely it is easier for someone to start a little beauty brand, 1,500
and we see that mushrooming everywhere in the world. But it is still 1,000
difficult for all these small beauty brands to grow and scale up their 500 Blue Buffalo
business. . . You see many brands arriving in the market, but you
0
also see many brands disappearing. . . this new digital world makes 'Disruptors' Nivea IQOS
it clear that there will be much more small brands in the market, so
there are. But at the same time it’s also powering the big ones. Why? Source: Ash Park, company reports and various press articles
For very simple reasons: number one, because in a world of hyper
choice, consumers at the end. . . want to get back to the brands they
know . . . number two, algorithms push the brands that are the most Juul, which seemed the most talked-about disruptor of 2018, hit
famous, the most asked for, the most top-of-mind . . . ” $1.3bn in sales last year, having launched its product in 2015. Philip
Morris International’s IQOS tobacco heating product, launched in
Although Consumer sectors as a whole represents around 14% of 2014, last year generated $4.1bn in sales14, and ought to hit around
global stock market capitalisation 10 , a recent report by KPMG 11 $5bn this year. Another critical point to note with Juul is that its
showed that, for all the hype, Consumer Goods & Recreation revenues seem to have been almost entirely accretive to the US
received less than 5% of all venture capital funding last year, down tobacco industry sales pool. The large majority of start-up brands
from close to 10% three years ago. The Consumer Staples sector sell at a premium price to incumbents, which is good for overall
has produced only 1% of all the current ‘unicorns’ (Juul Labs being category growth.
by far the largest).12
There are advantages to being small and new, but the disruption
Figure 5: 2019 Unicorns by industry debate often seems to overlook the very significant benefits that
scale can bring. A recent article by digital consultants Gartner L2,
looking at the growing importance of advertising to Amazon (which
Consumer Staples,
1% they claim is expected to bring in $18bn of ad business this year)
highlights the ‘wall of Finish’ that greets UK consumers searching
Data Analytics Internet for ‘dishwash’ (Figure 7).15
Social software

Hardware

On-demand

E-commerce

Healthcare

Other
Fintech

Source: CB Insights and Ash Park

9 14
L’Oréal CAGNY presentation, 22nd February 2019 61% of these sales came from the markets where IQOS has so far
10 enjoyed its greatest success, Japan and Korea, but as of early February this
Our definition of Consumer Staples represents about 8%
11 year the product was available in 44 markets. Europe produced 29% of
Venture Pulse, Q4 2018 – KPMG, 19th January 2019
12
IQOS’ revenues in 2018, with Middle East & Africa adding the remaining
Recently-created $1bn+ valued private companies 9%.
13
The oldest of them, Lagunitas, was started in 1993, the youngest (Kylie 15
Nice Products Finish Last – Gartner L2 Daily Insights, 25th February 2019
Cosmetics) in 2015. The Nivea brand will be 108 years old this year.

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 Ash Park
Ash Ash
ParkPark
Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Figure 7: Reckitt Benckiser’s Finish on Amazon making responsibility as close as possible to the consumer. By way
of a few examples:

 L’Oréal has hired around 2,000 digital experts since 2010, and
all new marketing recruits to the company are required to pass
a digital test.

 Unilever is running a programme called ‘Connected4Growth’,

which it describes as its biggest organisational change
programme in more than a decade, to increase the decision-
making speed. It’s creating digital marketing hubs, moving away
from the old brand manager / outside agency model (its biggest
agency is now its own internal digital agency, Unilever Studio).
And it’s ploughing a lot of resource into a massive cloud-based
data management programme which will link over 150 data
sources ranging from consumer and customers to
macroeconomic inputs and its supply chain (even in its ice-
cream cabinets).
Source: L2

 Beiersdorf – a business which has consistently been growing its

sales rates above the Staples average – announced with its full-
year figures in February that it would be increasing its annual
Re-engineering for the new world
marketing spend by €70-80m “to boost the opening of new
In Many Happy Returns we recognised that the success of the
markets, innovations, digitalization and up-skilling of
Consumer Staples sector was down to brands and franchises
workforce”.
allowing the best companies to generate returns consistently well
in excess of their cost of capital. But we also highlighted the
problems of businesses which failed to adapt to challenges, Figure 8: Unilever is creating digital marketing hubs
perhaps most evident at the time in mid-cap Food stocks – what
one of our former clients once unkindly called the ‘valley of death’.
If you fail to grow your brands through investment in advertising,
promotion and innovation, and fail to protect your franchise by
adapting your strategy and organisation to external challenges
you’re always likely to be in trouble.

The challenges we talked about then – particularly globalisation,

and the rise of dominant multiple-grocer chains – are still relevant,
but now there are new ones, largely linked to the digital world and
the accelerating pace of technological change. We have heard the
well-worn line that ‘change has never been this fast, and will never
be this slow again’, and the argument that FMCG businesses have
Source: Unilever
never faced bigger challenges. 16 But we have always liked the
concept of owning companies with the ‘capacity to suffer’: to
reinvest in their businesses and build the foundations for future The flip-side of being forced to adapt is that the best-performing
growth, even at the cost of a slowdown in near-term earnings. companies have the chance to create even more attractive business
models. Our goal is to invest in the companies for whom disruption
In order to protect their franchises, Consumer Staples companies presents an opportunity rather than a threat: for instance, the
are having to redesign their organisations and build new beauty businesses for whom technology presents new and exciting
capabilities to ensure that they have the agility to deal with the new ways to connect with consumers and personalise products, the
consumer environment. At some point in the last decade or so, spirits companies capitalising on consumer demand for premium
most large Consumer businesses have put significant effort into and personalised experiences, or the tobacco companies shifting
investing in enterprise software which, at the time, gave them their revenue into next-generation nicotine products.
previously unheard-of visibility into the financial metrics of their
business.

Something similar – though on a larger scale – is happening now, as

companies build digital capabilities and also re-work their
organisations: the trend now is to decentralise, and move decision-

16
If that’s true for the Staples sector we wonder, once again, which industry
wouldn’t that be the case for?

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 Ash Park
Ash Ash
ParkPark
Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Creating new brand challengers and killing zombies especially in the Explorer phase: ie patient and consistent
The Coca-Cola Company has been going through its own large-scale marketing execution. Coca-Cola is in a hugely advantaged position
internal reorganisation, including the re-franchising of its US and as it tries to scale initial Explorer successes, with access to
part of its Asian bottling units, but also provides useful insights into significant resources in terms of management, capital and
how large FMCG businesses are now managing their brand distribution.
portfolios.
When Coke acquired Innocent in 2009, sales of the smoothie brand
The company clearly has outstanding geographic breadth and scale were £113m; today revenue is approximately £400m and this is
(is there a more powerful distribution platform in the world? 17), now the number one chilled juice brand in Europe. Compare that
built over decades and now with 21 brands achieving sales of over to one of the big independent success stories over the last decade,
$1bn each, double the number from 2007. However, despite the and another poster-child for disruption, Fever-Tree mixers. Last
continued growth of these core brands (Coca Cola and Sprite both year the brand recorded sales of ‘only’ £237m. Fever-Tree has done
grew volumes by 2% last year, for example), the company is actively an excellent job and may well deserve its P/E multiple of around
trying to disrupt itself through innovation around new brands, new 45x, but Innocent is both bigger and has added more absolute sales
categories and new formats18. in the last 10 years: that’s the benefit of having such a powerful
parent.
Figure 9: Coca-Cola Company portfolio management
Acquiring innovation is an important skillset
Should we expect Coca-Cola to create more brands from scratch
rather than buy-in proven innovations? In our first Disruption piece
we wrote that the “the phenomenon of large businesses buying
smaller, faster-growth upstarts has been part of the Consumer
Staples – and also broader business world – for a very long time.”

To use the fashionable terminology, the best Staples companies act

as growth platforms: providing the supply chain, IT, marketing and
sales infrastructure for brands to flourish. Running an effective,
agile growth platform is quite a different skill to creating a new
brand from scratch.
Source: The Coca-Cola Company
As Unilever’s departing CEO Paul Polman told us in a meeting last
summer: “We are not the best creators of brands, and we’re not
Coke describes its core, established brands as Leaders, which even ashamed of that. Most new brands fail; we want to be the
obviously dominate the global profit pool for soft drinks; at the best optimiser of brands. Launching new brands requires a different
opposite end of the scale are start-up Explorer brands, many of mindset: an ability to suffer, mortgage the house and ‘kill your
which are created internally but some of which may also be wife’20.”
acquired at an early stage (eg fairlife, Honest Tea, Innocent). In
between are what Coke calls Challenger brands, which have Acquiring successful start-ups might be optically expensive, but if
established themselves but over 5-10 years have the potential to large Staples companies tried to start everything from scratch
become Leaders (in the way Powerade has in Mexico, for example). themselves they would undoubtedly pour a lot of money down the
drain on ventures which – however hard they tried – failed.
Inevitably, not all of the experiments will work, so you also need
the discipline to quickly discontinue them; ‘failing fast’, innovating And start-up M&A can look very attractive if done well. We have
on a small scale, learning from consumers, building on what works already highlighted Innocent’s strong continued growth since its
and shutting down what doesn’t is an increasingly common purchase by Coca-Cola. Another good example is Estée Lauder’s
message in our universe. In the last five years, Coca-Cola launched purchase of Jo Malone in 1999 for under $30m, when that business
approximately 2,000 new products; of these, 20% drove 80% of the had sales of around $5m. Twenty years on, Estée Lauder
volume growth from launches – and 30% of the launches commented that sales of the Jo Malone brand are now
contributed less than 1% of divisional volumes. The company killed approximately $700m, representing a more than hundred-fold
700 ‘Zombies’ in 2018 to create room for the next round of increase, or 30% CAGR. Despite this, in its home market of the UK
innovations19. the brand is available at less than 20% of the points of sale of the
leading competitor, indicating plenty of room for further growth.
Going from Explorer to Leader requires brands that have an edge
and also takes what the company’s marketing director calls stamina,

17 19
Coca-Cola and its bottlers have more trucks on the road than UPS and New products launched in the past three years contributed 17% to unit
FedEx combined and is even relied upon for things like delivering case volumes in 2018.
refrigerated vaccines in rural Tanzania. 20
Not literally. But having ourselves started a business, we have some
18
The company even raised $10,000 recently on Indiegogo to help small insight into the privations start-ups can force upon very supportive
determine if US consumers have an appetite for Valser, a Swiss water brand spouses. Notwithstanding the challenges Unilever does in fact still try to
it has owned for nearly 20 years. invent its own brands, and has created 28 from scratch since 2017.

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 Ash Park
Ash Ash
ParkPark
Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Navigating distribution changes consumer recognition, but it completely missed the channel shift
Estée Lauder is a good example of a ‘big’ company which has dealt taking place in the beauty industry.
very successfully with the threat from new independent brands. As
its CEO Fabrizio Freda noted last month, the company’s largest and We wrote about this in Q4 2017, in particular on the then perceived
oldest brand, Estée Lauder (over $2bn in sales) grew by over 20% in very heavy threat from Amazon,22 so won’t go into further detail on
2018: “the growth of Lauder alone in our portfolio is bigger than the this occasion. But it’s worth remembering that changes in the retail
growth of the total indie brands combined. So, the facts are not that / distribution landscape – whether that’s the rise of Wal-Mart and
the small brands are winning and the big brands are losing . . .”21 subsequently Amazon in the US, or the rapid recent success of T-
Mall in China – have always been a challenge for some consumer
What we also find interesting is that Estée has been able to manage companies, but also an opportunity for those companies on the
a rapidly-changing distribution landscape, another of the disruptive front foot.
challenges we are often questioned about with regards to Figure 11: Estee Lauder sales by channel – 2018 vs 2009
Consumer Staples. To our mind, dealing with channel shifts requires
similar agility and foresight to those needed to deal with the risk
posed by upstart brands.
FY09 26% 30% 7% 9% 5% 22%

Figure 10: Estee Lauder vs Avon – annual turnover, $bn

16
FY18 24% 15% 18% 10% 12% 5% 16%
14

12

10 0% 20% 40% 60% 80% 100%

8 Intern'l Dept Stores US Dept Stores Travel Retail Retail Stores

6 Speciality-Multi Brand.com Other

4
Source: Company reports
2

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E
Plus ça change, plus c'est la même chose
Estee Lauder Avon We often explain to people that we are obsessed with thinking
about the things that could go wrong for the companies that we
Source: Company reports own, and that means we spend a lot of time thinking about the
threats posed by upstart competitor brands, the digital world, and
further evolution of retail channels.
Back in 2012, Avon Products and Estée Lauder each had portfolios
of beauty brands with around $10bn of annual sales. Forecasts for But we wonder if sometimes this focus on stuff that could go wrong
the current calendar year estimate that Estée Lauder’s sales are set makes us sound more miserable than is warranted: in fact we own
to reach $15bn, or three times those of Avon. a collection of exceptional businesses. At root we run a ‘Quality’
Strategy: we own companies which we believe can reliably
That’s a fascinating outcome since Avon, founded in 1886, compound, that make sustainably-high returns on capital, produce
pioneered the DTC model that everyone is today so excited about. lots of cash flow, and that can grow consistently without requiring
Estée Lauder, on the other hand, faced a significant challenge in its the large-scale deployment of additional capital.
exposure to the US Department Store channel, which has declined
at the hands of speciality stores and online portals. Avon did not A further important aspect of our Strategy is gaining exposure to
adapt its DTC platform to the digital and online worlds, whereas emerging markets and the tremendous long-term per-capita
Estée Lauder proactively invested and acquired capabilities and growth opportunities available for many consumer categories. We
new brands that would flourish in the new more fragmented effectively outsource this to experts: via developed market
distribution landscape. companies that have a long history of operating in such regions, and
with the governance standards typical of developed market
As Figure 11 shows, Estée’s dependence on North American investments. We estimate that emerging markets account for
Department stores has halved over the last decade, as its portfolio around 40% of the look-through revenues of our portfolio.
of brands shifted towards the channels of today. There is little
intrinsically wrong with the Avon brand, which enjoys 98%

21 Information, that only about 2% of the people with an Amazon Echo device
Estée Lauder investor day, 6th March 2019
22 used Alexa to make a purchase with their voices in 2018 and that, of the
Ash Park on Amazon – Q4 2017. Again, please let us know if you’d like a
people who did buy something, about 90% didn’t try it again (The Reality
copy. At the time some commentators appeared obsessed with that idea
Behind Voice Shopping Hype, 6th August 2018)
that voice search – specifically via Amazon’s Alexa product – was the next
big looming threat for CPG companies. We were interested to read, via The

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Ash Ash
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Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Figure 12: Underlying returns for global sectors, 1995-2019 Figure 14: Estimated look-through revenue exposure to the US
14%
50%
Annualised Earnings + Dividend Effect

13% Autos
45%
Tobacco
12% 40%
11% 35%
Healthcare
10% HPC 30%
9% STAPLES Beverages 25%
8% Food 20%
7% Market 15%
6% 10%
5% 5%
4% 0%
0% 5% 10% 15% 20% MSCI World iShares Edge MSCI World Ash Park Strategy
Quality Factor ETF
Standard Deviation of Returns

Shows US$ 5yr annualized earnings growth + dividend yield, monthly Source: Ash Park
periods, January 1995 to March 2019
Source: Refinitiv Datastream
Dollar strength has hit the international and EM earnings of the
Some Quality strategies pick companies from a range of sectors (IT, companies in our portfolio. We know currency volatility is a fact of
Healthcare, Media and Financial data providers providing the bulk life for our Strategy, but the last five years look atypical: the US
of stocks outside of Consumer Staples), but our long-term work nominal dollar broad index, measuring the weighted average of the
convinced us that we could create an attractive investment product US$ against a basket of major trading partners, has risen over 20%
without straying out of our area of core expertise. We don’t regard and is now very near 25-year highs; the average annual dollar
ourselves as a sector fund, but as a Strategy focused on some of the strengthening over the whole period was just 1.2% a year. Last
most reliable compounders in the Quality bracket. year’s large US tax cut, which provided a big earnings boost to many
companies, was also something to which our Strategy was under-
For the last 25 years each of the four Consumer Staples subsectors exposed.
has produced earnings growth plus a dividend yield – what we
regard as the real sustainable driver of long-term returns, ie Figure 15: US nominal dollar broad index
stripping out the valuation movement – in excess of the market,
and with lower volatility. The only sector to come near Staples in 140

terms of producing high underlying returns with low volatility is 135

Healthcare (Figure 12). 130

125
1.2% pa
120
Figure 13: Earnings & dividend index over last decade, US$
115

220 110

200 105

180 100

160 95

140 90
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
120
100
80 Source: Refinitiv Datastream
60
Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18
Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

The portion of our portfolio’s look-through revenues which comes

Market Consumer Staples Food from EMs tends to be much less threatened by disruption. A lot of
the rest of our Strategy’s exposure either comes from minimally-
Source: Ash Park, Refinitiv Datastream exposed segments such as the on-trade in Spirits and Beer, or
categories where disruption, premiumisation and personalisation
trends are arguably more of an opportunity than a threat (Beauty
For all the market’s concern over disruption, Amazon and the and Personal Care, Tobacco).
‘death of brands’, that record has continued in more recent times,
albeit the gap compared to the overall market is not as wide as it However, we remain vigilant in looking for signs that companies are
has been over the long-term (Figure 13). We think a lot of that is not adapting quickly enough to the changes that are happening. We
explained by US exposure: by our reckoning around 27% of the spend a significant amount of time talking to management, retailers,
look-through revenues of our portfolio are generated in the US, competitors, suppliers, entrepreneurs and a whole host of other
compared to around 40% for the MSCI World index and nearly 45% industry contacts to sense-check our research. We have no doubt
for the iShares MSCI Quality Factor ETF (Figure 14). that a basket of high-quality Consumer Staples companies will

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Ash Ash
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Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

continue to produce excellent long-term returns, and the compared to other industries. Ash Park does not own any US Food
opportunity set that we saw when we launched the Strategy is still stocks.
very much intact.
After a torrid end to 2018, we have been pleased to see that a
What we have found is that market volatility, and the large number of our stocks which were worst-hit in Q4 last year have
disparities in valuation that wild swings in sentiment have bounced back quite nicely at the beginning of 2019. We have made
sometimes created, has provided us with more occasion to alter no major changes to the portfolio so far this year but are watching
weightings and positions. Underlying portfolio turnover is running a couple of stocks very closely with an eye to starting to build a
at 10-15%, compared to the 5-10% we expected at the outset. As position.
we wrote at our three year anniversary, more of our recent
research efforts have been going into the (relatively) smaller stocks Thank you for your interest and support.
($2.5-10bn) in our universe. Indeed, the newest addition to our
portfolio is now the smallest company we own; it was also one of
the top contributors to performance in 2018. That research focus is The Ash Park team
likely to continue, though we would also expect larger businesses 2nd April 2019
which are diversified across both regions and product categories to
remain a significant portion of our portfolio exposure. Jamie Isenwater Jonathan Fell
[email protected] [email protected]
Q1 developments +44 (0)20 3411 6433 +44 (0)20 3411 6434
The highest-profile event of the quarter in our universe was the
disaster that befell Kraft Heinz with its Q4 figures – a major earnings Harold Thompson Mark Purdy
miss, a $15bn goodwill write-off, and an accounting investigation [email protected] [email protected]
which has contributed to the company still not being able to file its +44 (0)20 3411 6435 +44 (0)20 3411 6432
10-K.
All data sourced from Ash Park unless otherwise stated.
We try to own companies which drive margin expansion in a slow
and sustainable manner, reinvesting heavily on a consistent basis Performance for other share classes of the Fund may differ. Please
to drive superior top-line growth. Kraft Heinz’s troubles therefore refer to your individual statements or contact Ash Park for further
came as little surprise to us (please let us know if you‘d like a copy information.
of our letter on the 3G approach).

Figure 16: 2018 organic growth of Bellwethers vs 10yr averages Note: Throughout this newsletter ‘Consumer Staples’ or ‘Staples’,
where the term is capitalised, refers to the Ash Park definition or
8% proprietary indices of the consumer staples sector, which include
7% Food, Beverage, Tobacco and Household & Personal Care
6%
companies; the S&P Global Consumer Staples index also includes
the Food Retail sector.
5%

4%

3%

2%

1%

0%
Coca-Cola Heineken BAT Diageo P&G L'Oreal US Big Food

10yr Ave 2018

US Big Food = Campbell Soup, General Mills, Hershey, Kellogg, Kraft

Heinz, McCormick, Mondelez
Source: Ash Park

Although our portfolio construction is based solely on bottom-up

stock-picking we do think there is one Staples sub-sector that is
more challenged than others (albeit compounded by self-inflicted
mistakes). When commentators or consultants talk of the woes of
CPG / FMCG companies, very often they really mean US packaged
Food companies. A combination of the growth in eating away from
home and restaurant delivery (and to a lesser extent DTC meal kits)
alongside the competition from home-cooked meals means that
growth is more challenged (Figure 16) and gross margins are low

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Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Appendix: A few of the most interesting potentially disruptive products

Meat-free meat to Danone). For a meat industry said to be worth $1.4trillion

According to a recent Gallup poll23,
3% of US consumers claim to be ($270bn in the US), the opportunity is vast.
vegan (5% consider themselves to be vegetarian), while one in eight
Britons are now vegetarian or vegan and a further 21% identify as Perhaps most interestingly, Impossible claims that only 3% of its
flexitarians – people who eat meat but want to reduce their consumers are vegan, while Beyond has said that across the Kroger
consumption – according to research by Waitrose.24 retail chain, 93% of consumers who bought the Beyond Burger also
put animal meat in their shopping cart.
With these trends as a background, a significant amount of
investment has gone into plant-based alternatives in recent years The biggest challenge for these companies in our view will be the
including from the likes of Bill Gates. Starts-ups such as Beyond interplay between what we see are the clear benefits – a much
Meat and Impossible Foods seem to be very well funded. Likewise, smaller environmental footprint – and the fact that most
a number of pioneers of the ‘lab-grown’ or ‘clean’ meat industry consumers wrongly believe they are healthier for them. According
such as Memphis Meats have been recipients of significant to a University of Michigan survey 27 the current Beyond Burger
investment. generates 90% fewer greenhouse gas emissions, requires 46% less
energy, has a greater than 99% lower impact on water scarcity and
We wonder about the initial consumer response to eating lab- a 93% lower impact on land use than an equivalent amount of US
grown meat (Frankenstein food?), which might find success first in beef.
the leather goods market. 25 But we think the progress that has
been made on the plant-based side is quite extraordinary. Both the However, in order to replicate the taste and texture of beef, the
Beyond and Impossible burgers are very impressive in our view current products contain quite a lot of fat and a significant amount
having been sampled numerous times by the team across various of salt in addition to the major protein sources (soy for Impossible,
outlets.26 pea for Beyond), resulting in products with similar or higher levels
of calories compared to a McDonalds equivalent (albeit without the
Figure 17: Beyond Meat – made to resemble a ‘real’ burger cholesterol) and with twice the salt content – Figure 18.

Figure 18: Nutritional comparison of burgers (1/4 lb patty)

Impossible Impossible Beyond McDonalds
v1 v2
Calories 290 240 270 240
Fat (g) 17 14 20 18
o/w saturated (g) 14 8 5 8
Cholesterol (mg) 0 0 0 75
Salt (mg) 580 370 380 190
Carbohydrate (g) 7 9 5 1
Protein (g) 27 19 20 20

Source: Company websites

Source: Beyond Meat

Although the recipes, and thus nutritional profiles, will probably
improve over time (Impossible’s second version is significantly
If we look to the plant-based milk category as a precedent, dairy healthier than its first), according to a recent Mattson survey US
alternatives now account for around 13% of total US ‘milk’ sales consumers’ top three reasons for choosing plant-based foods are:
according to Nielsen, similar to levels in most large European general health benefits (76%), lose weight (44%) and feel better
countries where household penetration can be over 30% (90% of when eating plant-based foods (44%), and only 31% of consumers
households that buy plant-based milk also buy dairy milk according cite ‘better for the environment’.28

23 27
Gallup Snapshot – 1st August 2018 Beyond Meat’s Beyond Burger Life Cycle Assessment: A detailed
24 comparison between a plantbased and an animal-based protein source –
Food & Drink Report 2018-19 - Waitrose
25 Martin C. Heller and Gregory A. Keoleian, 14th September 2018
The Future of Leather is Growing in a New Jersey Lab - No Animals
Needed – Inc Magazine, March / April 2018
28
26
Reviews that we have read generally cite the Impossible burger as being 'Plant-based' plays way better than 'vegan' with most consumers, says
slightly superior to Beyond’s burger, perhaps because it uses what the Mattson – Food Navigator, 19th April 2018
company claims to be a ‘magical’ ingredient called soy leghemoglobin that
releases a protein called heme – which is also found in ground beef.

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Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Artificially-aged spirits Figure 19: Left to right - Glyph ‘Spirit Whiskey’ by Endless West,
The ageing of brown spirits is what makes this segment of the Time & Oak element32 and Lost Spirits ‘Abomination’
beverages industry both highly attractive (building up inventory is
a massive barrier to entry) and distinctly unattractive (the working
capital requirements mean that cash flow conversion can be low).

So, for as long as we can remember, companies have been trying to

speed up the ageing process and/or reduce the loss of liquid from
evaporation (commonly referred to as the ‘Angel’s share’). In fact,
AJ Menzies, former MD at Fettercairn Distillery in Scotland, claimed
in a recently unearthed 1952 communiqué that he had discovered
a process capable of reducing ‘the maturing time from about five
to 10 years to a few hours’.29

Needless to say, this proved unsuccessful but we have frequently

come across mini experiments at major distilleries involving cling
film, aluminium foil, wood chips, wobbling barrels and more.
Source: Company websites
At a relatively basic level, if you can increase the surface area of the
barrel and the rate at which liquid moves into and out of the wood
(usually by temperature fluctuations), that should, to some degree, If consumers can taste artificially-created Pappy van Winkle, for
increase the rate of ‘ageing’. At Ala Wai Whiskey in Hawai’i for example, at a fraction of the price, these products may attract a
example, it goes through a very laborious process in which barrels certain amount of trial and interest. However, in the same way that
are kept in subfreezing temperatures (-10 F / -23 C) for one week consumers can always find a handbag cheaper than a version from
and then moved to a ‘hot-box’ the following week at 110 F / 43 C, Hermès, it doesn’t have to threaten the desirability and success of
alternating between them for a year. The problem with this, though, the incumbents. Nevertheless, we watch the progress of this
is that the Angel’s share is between 25% and 30% (vs approximately industry with interest.
8% in Jamaica, 2% in Scotland and 4-5% in Kentucky).
Laser razors
More recent attempts to disrupt the ageing process, and thus the
Despite the inroads that the likes of Harry’s and Dollar Shave Club
industry, have included those from Cleveland Whiskey, where
have made, Gillette still holds an enviable razor blade market
young whiskey and chopped-up barrels are agitated in a tank under
leadership globally. Indeed, it was so dominant at one point that
various pressures in order to squeeze liquid in and out of the wood
one of the urban myths about it was that the company had created
pores, and from Terresentia which uses ultrasonic energy to try to
and patented a ceramic razor blade (that would remain sharp
reduce harsh-tasting congeners (impurities). However, the most
indefinitely) in order that it would never see the light of day with
promising, in our view, are from Lost Spirits and Endless West.
consumers.
Lost Spirits shortcuts the ageing process by taking new distillate and
However as King of Shaves founder Will King said in an excellent
running it through a chemical reactor to drive esterification (when
Esquire magazine article, “we spent two years looking at ceramic,
alcohol and weak acids bond together, the results of which are
trying to perfect a ceramic blade that would be sharp enough to
responsible for the flavours and aromas of honey, floral elements,
slice a human hair. That was because I'd bought some ceramic
and nutty notes in aged spirits)30. The product is good but expensive
kitchen knives from Tokyo. They looked really cool: white ceramic
(over $45 per bottle), and the company currently appears more
knife, chop your orange carrots… But you can't get the edge thin
interested in its distillery tour as an attraction 31 , rather than in
enough, at the tip, to slice a human hair. The olycrystalline matrix
making liquor.
starts to break up…if we could have got a single blade, ceramic razor
in a cartridge with a Hyperglide surround that, for me, would be
Endless West, funded by Li Ka Shing’s Horizons Ventures, is
pretty nirvanic”. 33
attempting to make spirits (and wine) from the molecule up,
directly from plants and yeasts, in the same way as Beyond and
Not to be deterred by his nirvanic ceramic razor blade, King is
Impossible are doing in burgers. Glyph ‘whiskey’, in our view, is not
currently CMO and strategic adviser to Skarp Technologies, a
there yet in terms of the quality of the liquid but we expect the
company with a somewhat chequered short history that is trying to
product to improve as the R&D process continues.
disrupt the razor blade market by completely redesigning the

29 31
Method to age whisky in just hours was axed over Scotch industry fears Forbes reviewed the distillery in January 2018 with the headline: Forget
– The Scotsman, 28th December 2017. The papers were recently relased The Hollywood Studios: Lost Spirits Distillery Is The Best Tour In LA
from the National Archive having been previously hidden over fears that the 32
The Time & Oak element is an intricately carved piece of wood to leave
process could undermine the Scotch Whisky industry by encouraging in your whiskey which it is claims “accelerates the maturation process, and
overseas imitators. reduces impurities” in as little as 24 hours. We’ve tried it – it is not good.
30
As an example, butyric acid, a common acid found in white rum, has the 33
Inside The Very Weird World Of Disposable Razors – Esquire, 30th
characteristic aroma of vomit. However, when it is esterified with ethanol, January 2016
the resulting ester, ethyl butyrate, has the aroma of a pineapple.

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Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

shaving process. Having raised money on a prominent

crowdfunding site, the company is in the process of moving from a
proof-of-principle stage to a tangible beta product with a myriad of
tech issues making progress frustratingly slow.

According to the company, its laser razor cuts hair by a laser light
targeting a specific chromophore in the hair (chromophores are
particles that absorb certain wavelengths of light).

Figure 20: Skarp Technologies’ Laser Razor

Source: Mashable

Shaving without having to touch the skin brings a number of

benefits, not least the elimination of razor burn, irritation and any
accidental cuts. Beyond this, consumers wouldn’t need to use
water, shaving gels or contend with expensive cartridge
replacements. IF the technology works and can be scaled effectively,
it has the potential to be highly disruptive. We watch its progress
closely.

Whilst we have yet to come across disruption that threatens the

wider Consumer Staples industry to any meaningful extent, we
have always remained cognisant of risks to certain specific
categories in the way that Kodak was made redundant. Beyond
artificially-aged spirits, meatless meat and laser razors, we also
keep a close eye on waterless washing machines, automatic
toothbrushes and counter-top home-brewed beer amongst a
number of others. Please get in touch if you’d like to learn more
about any of them.

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Ash Ash
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Capital Compounding through Consumer Staples Ash Park

Ash Park Capital

Ash Park is a division of Kingsway Capital Partners Limited. This newsletter is issued by Kingsway Capital Partners Limited which is authorised and regulated
by the Financial Conduct Authority in the United Kingdom (the “FCA”).The investment products and services of Kingsway Capital Partners Limited are only
available to persons who are professional clients and eligible counterparties for the purposes of the FCA's rules. They are not available to retail clients. This
document is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary
to local law or regulation.

This newsletter refers to Ash Park Global Consumer Franchise Fund (the “Fund”) which launched on 11th January 2016. The Fund is a sub-fund of Kingsway
Capital ICAV, an umbrella type Irish collective asset management vehicle with variable capital and with segregated liability between sub-funds registered
and authorised by the Central Bank of Ireland with registration number C142851, pursuant to Part2 of the Irish Collective Asset-management Vehicle Act,
2015.

This presentation does not constitute an offer to buy or sell shares in the Fund. The offering materials of the Fund are the only authorized documents for
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purchasers”, as defined in the Investment Company Act 1940, as amended.

The Fund is only suitable for sophisticated investors who are aware of the risks of investing in alternative investment funds. Investors are also reminded that
past performance is not a guide to future performance and that their capital will be at risk and they may therefore lose some or all of the amount that they
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Nothing in these materials should be construed as a recommendation to invest in the Fund or as legal, regulatory, tax, accounting, investment or other
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The following is a brief summary of only some of the risk factors which may apply to the Fund: Political and Economic Risk Political unrest and other factors
may disrupt financial markets and economic conditions in certain markets in which the Fund may invest and result in a temporary suspension of the
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The foregoing summary list of risk factors does not purport to be a complete enumeration or explanation of the risks involved in an investment in the Fund.
Prospective investors must read the entire Prospectus of the Fund and consult with their own legal, tax and financial advisers before deciding to invest in the
Fund.

Kingsway Capital Partners Limited has taken all reasonable care to ensure that the information contained in this document is accurate at the time of
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13