These firms will tell you why you should invest in what people want, not just what they need.
about investing because we believe diving into the world of investments can help you attain wealth creation and achieve true financial freedom. Today, we’re thrilled to share with you another investing insight that will help you make better financial decisions. Continue reading to know why it’s crucial to understand what people want when picking companies to invest in.
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These firms will tell you why you should invest in what people want, not just what they need. Discouraged by so many fad diets and false promises, Jean Nidetch, an American entrepreneur, founded Weight Watchers (now known as WW International) in 1963 to offer a scientifically-backed support system for those who wanted to lose weight. Since the firm’s founding, it has become one of the most popular companies in its space. WW International also boasts one of the highest Uniform return on assets (ROA) on Altimetry’s database, making it one of the most profitable companies. In fact, the firm’s Uniform ROA has stayed at high levels for several years.
WW International seems like a great investment, since it’s selling a service that people actually need. Yet, as we will discuss today, just because a firm targets what customers need, that doesn’t mean it has lots of upside. Providing What Consumers Want When investing long term, you want to invest in companies that cater to what a consumer wants, as they tend to outperform those who focus on needs. To better understand what this means, let’s take a look at Starbucks Corporation.
Starbucks isn’t just a company that sells everyone a cup of caffeine goodness each day. It’s practically a candy store because of the sheer amount of the sugary products it serves. A venti Iced Chai Tea Latte can have as much as 62 grams of sugar, nearly the same as a 20 oz bottle of Coca-Cola, which has 65 grams. If that wasn’t bad enough, a venti white chocolate mocha can contain up to 76 grams of sugar. Starbucks also sells dessert items since it offers everything from a berry trio parfait (25 grams of sugar) to an iced lemon pound cake (39 grams of sugar per slice). While there’s no doubt that the coffee giant’s sugary offerings have contributed to unhealthy eating habits, it cannot be denied that it’s a solid performer. Starbucks’ Uniform ROA has risen from 14% in 2013 to 23% in 2023. Both Starbucks and WW International look like strong businesses based on Uniform ROA. However, when those two are compared to each other, Weight Watchers looks like a much better firm.
Before you sell your shares in Starbucks and invest them into WW International, you have to understand this: Weight Watchers will always be a niche business as it only targets people who want to lose weight. On the other hand, Starbucks will keep finding ways to sell offerings that people want. The firm has expanded its menu to include non-coffee drinks and other types of pastries. Simply said, almost everyone can find something they like whenever they go to a Starbucks store. If you aren’t convinced yet, let’s compare the Uniform Earnings of Starbucks and WW International.
While WW International is profitable, its earnings aren’t on an upward trend. On the other hand, Starbucks went from USD 1 billion in 2013 to over USD 3 billion in 2022. The reason for this difference is simple: WW International’s addressable market just doesn’t have the same growth potential as Starbucks. Think about it: Consumers are much more likely to spend on what they want, instead of what they need. This explains why even though WW International has been around for far longer, its market cap is well below USD 1 billion. Meanwhile, Starbucks’ value sits at over USD 100 billion. Upside Potential Matters Too It’s not always enough to see how good a business is. You need to see how big it can become as well. Consumers will spend more on treats and luxuries, especially when times are good. Over time, companies that constantly cater to what people want will have a chance to grow their market size. WW International is a fantastic company on the surface. However, the caveat with it is that its addressable market hasn’t grown its earnings. On the flip side, Starbucks keeps finding ways to bring more customers in. What does this mean for investors like you? When considering a new investment, take customer wants and needs into account. If a firm is offering products that customers need, it’s a good start. However, if those offerings are something people don’t want, that company will be hard-pressed to grow. So, the next time you scout the market for new opportunities, make sure to keep today’s investing insight in mind. Hope you’ve found this week’s insights interesting and helpful. In August 2023, Valens Research’s Director of Research Robert Spivey delivered a coaching comment to the workforce at Valens Research. He said investors are quick to cast aside their fears. Learn more about why you shouldn’t get too comfortable as an investor in next week’s article! |
