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Rising inflation and fears of a recession are driving consumers to trade down from their favorite brands to private or off-price brands as a way to stretch their spending dollars. We could see spending dollars rerouted from on-brand items to private label brands, which could lead to a dichotomy in operating performance between on-brand and off-brand retailers/brands in the short-term. Companies such as Aldi, Dollar General, TJMaxx, and Walmart are expected to benefit from rising inflation and recession fears. It will be interesting to see how on-price brands/retailers react to this trend and how this trend impacts inventory levels over time especially with COVID disrupting supply chains and inventory management.

A business model historically considered to be recurring in nature might be starting to feel pressure from consumers who cannot afford to pay monthly for music streaming as more essential items like gas and food rise in cost. While music streaming subscription trends remain stable/positive outside of the U.K we might be seeing the onset of mass cancellation of discretionary entertainment as consumers are forced to pick and choose which of these services are essential to them and which ones are not. It is unlikely that consumers ditch all these subscription services at once, but likely consumers will decide to limit their subscriptions to one or two services versus the three to four they had pre-inflationary times. We believe that over the next year we are going to see which of these subscription services are truly essential/sticky and which ones fall easily to churn.

The slow death of U.S conglomerates continue as investors push for more simplified, focused, and higher growth companies versus complex and slow-moving conglomerates. Kellogg is the most recent example of conglomerate busting in the U.S with their recent announcement of separating their business into three different companies: snacks, cereal, and plant-based. With snacks being the crown jewel of the company, Kellogg is trying to offload the lower margin and more competitive cereal and plant-based businesses so the market can ascribe a higher multiple to the standalone snacks business. All three businesses should benefit from this breakup as each of these businesses are in different stages of maturity and face different challenges each requiring a specialized management team in order to extract the most value possible.