January 13

Unlikely Winners

When the recession began in 2007, there were always going to be casualties. The severity of the downturn meant that a long list of well-known names foundered – Blockbuster, HMV, Jessops, Comet and La Senza are just a few examples. Unsurprisingly, there were also some winners: established counter-cyclical businesses such as the discount retailer Poundland, for example. Meanwhile, the British high street now has 30% more charity shops than it did five years ago. But if we look more closely at some of the big winners, we uncover some surprises.

Do a UK luxury car manufacturer, a high-end supermarket chain and a coffee retailer sound like the sort of businesses which would flourish in a struggling economy? Probably not; but in the case of Jaguar Land Rover, Waitrose and Costa Coffee, this is exactly what happened.

Before Jaguar Land Rover was purchased by Tata Motors in 2008, the business was struggling. However, continued growth during the recession means that the UK’s largest luxury car manufacturer is now generating annual profits-before-tax of £1.68 billion, which is more than Tata paid for the company. One of the reasons for this success is increased demand in the luxury car market, particularly from China, where demand has risen by 56%.

In order to meet the demands of its Chinese customers, the company is building a manufacturing plant in Shanghai. The purpose of having this presence in China is to allow the company to better adapt its products to meet the specific needs of Chinese customers – it may also help establish a wider dealer network across China. Our lesson: it’s a big world out there, so if there is no growth at home then look elsewhere.

Waitrose, the high-end food retailer, is one of the fastest-growing supermarkets in the UK. Customers who search for quality turn to Waitrose, but Waitrose has also met demand for value. The launch of its highly successful ‘Essential Value’ range in 2009 helped stem the flow of consumers who were moving away from Waitrose towards lower-end supermarkets like Aldi. The differentiating factor between this and other ‘value’ ranges is that the products are still of a higher quality. Our lesson: anticipate what your customers will want and adapt accordingly – no one is too proud to take a deal!

Meanwhile, leading British coffee chain Costa Coffee continues to go from strength to strength. In April 2013, the firm reported annual profit growth of 29% over the previous year. An amazing feat when you consider the market environment. While cash-strapped Britons were willing to give up various luxuries during the downturn, it seems that their daily caffeine fix was not one of them.

Costa Coffee’s growth has also been boosted by a number of other factors. For example, it has grown strongly throughout the recession by pressing ahead with plans to open new shops, despite the difficult economic environment. Our lesson: maybe Warren Buffett summed it up best with his famous advice to “’be fearful when others are greedy and greedy when others are fearful”.

So should we really be surprised by these unlikely winners? The fundamental investors out there would argue that we shouldn’t be shocked. Macro investors may shrug this off, claiming hindsight is a wonderful thing. But while market conditions can sometimes defeat even the most talented management teams, some have shown the ability to beat the cycle against the odds. Which is no doubt a delight to the ears of all the stockpickers out there.

Katy Fillingham , 13 January 2014