Partner Content by Franklin Templeton

UK Smaller Companies: Transformative Trends

In this article, Dan Green, lead portfolio manager of UK Smaller Companies, discusses how resilient Consumer Brands offer a competitive edge for investors in UK smaller companies.

The UK Consumer

Since late 2021, the UK has been forced to navigate one of the most crippling cost of living crises experienced in recent years. With high inflation outstripping wage and benefit increases, real disposable incomes are compressing, further exacerbated by domestic tax hikes. Certain consumer companies have felt the brunt of this; these are cyclical in nature and usually hard hit during an economic downturn as investors flock to safe-haven staple goods at the expense of non-essential consumer products and services.

While many consumers will be seeing their spending power eroded by inflation and higher utility costs, it is worth remembering that in the UK excess saving, the amount deposited over and above levels seen in the equivalent period before the pandemic, totalled over £190bn as of March this year. This may provide a cushion to the reduction in spending available to households as will the proportion of fixed rate mortgages also shielding mortgage holders from increased interest rates. Despite the mixed picture and near-term challenges to the UK consumer we continue to believe in the long term value creation of investing in respected consumer brands, and believe they will demonstrate their resilience through any short term downturn.

Consumer Brands

To best leverage any rebound in consumer spending habits, the power of a strong brand should not be underestimated. Carving the personality of a company, a brand is the core identity of a business and much more than ‘just’ a logo. A carefully considered brand controls the way consumers perceive products or services; it is a powerful tool to preserve future earnings prospects. With the upsurge of the UK digital economy, a strong brand is arguably more valuable today than it ever has been. Consumer exposure is at its highest and businesses are grasping the opportunity to showcase their enterprise in innovative ways, considering that 77% of consumers are likely to buy from a brand that they follow on social media1.

1Source: Renderforest Branding Survey, December 2020

UK Smaller Companies Offer a Competitive Edge

Brand strength provides much more than just a marketing edge, however. The economic moat created from ‘consumer brand’ intellectual property cannot be understated. Consumers are often willing to ‘pay up’ for superior brands, offering a degree of pricing power as well as resilience during market-wide downturns. In fact, over 65% of people have formed an emotional connection to a brand*, a connection that is difficult to replicate once established and reinforces competitive advantage. 

However, in order to benefit from the competitive edge inherent in a strong consumer brand, investors do not necessarily need to limit their search to established FTSE 100 companies. Iconic brands develop over time. By partnering with management teams during earlier-stage evolution, investors benefit from compound growth as companies that are protected by expanding brand power disrupt their paths to industry-leading positions. Through rigorous company analysis we have identified several UK Smaller Companies that align to our consumer brands investment theme.