Economic slowdown is helping discounters of all types
Investment money typically pours into defensive names at the first sign of an economic slowdown. Much of the larger returns from defensive names is from a change in investor sentiment, where investors pump up the valuations of defensive names to level that are above normal. We are finally getting some kind of proof that a shrinking economy really does help the discounters, and its coming from a fast food chain.
McDonalds has weathered virtually every economic downturn since its IPO but the company posted spectacular sales growth in October, 8.2% year over year. This sales growth is even more important because it is same-store growth, meaning that the growth came from its already existing locations rather than new locations around the world. An 8.2% change in sales represents what was already perceived to be true, a slowing economy pushes people to cut corners and their budgets. Discounters across the board are thriving.
It is normally the case that in an economic slowdown consumers look to replace rather than eliminate their expenses. A meal at McDonalds can be had for less than $5 through their budget menu, while a meal at a sit down restaurant can be as high as $20 per person. The difference is that today’s consumers are feeling the pinch and moving towards a utilitarian ideology rather than the “real estate luxury” that was afforded in the past decade.
Discounters are the best place to park your money right now. It is certain that the turnaround in the economy is at least a year off spare any future movements from the federal government. Discounters serve a purpose in every market climate however a slowdown increases its customer base rather than shrinks it. Consumers as a whole are demanding 8.2% more McDonalds than they were a year ago, and that’s proof enough for me that defensive names are the place to be.
