Oliver Phillips: Well managed companies can thrive in a declining sector
- Credit: Archant
When investing in a business, one of the key drivers of the company's performance can be the market in which it operates.
However, good companies should be able to navigate through changing landscapes and many are able to operate successfully in declining markets.
An interesting example of this is the tobacco sector. Global cigarette volumes are in decline and the industry remains under pressure from increasingly stringent regulations.
Canada, New Zealand and Norway are following the lead of the UK, Ireland and Australia in progressing towards the introduction of plain packaging. To date, there has been no visible effect on smoking patterns in Australia, however, the long-term consequences of such a level of brand commoditisation are unknown.
Despite this, and declining volumes, tobacco companies have continued to perform well, with share prices outperforming the wider market over the long term.
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There are also interesting opportunities within the sector; first, emerging markets are bucking the trend of declining sales in developed markets, and second, new products such as vapour (e-cigarettes) offer potential new sources of long term growth.
Good management should be able to recognise changes in markets early and respond accordingly. If successful, companies can manage to grow profits in declining markets by managing costs, squeezing margins and finding areas of future growth.
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