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Forward Thinking Magazine : August 2010
37 stock story When considering a company for the IFP Global Franchise Fund, IFP seeks those that have dominant intangible assets, high return on capital employed and attractive valuations. IFP believes that these companies are likely to sustain high returns on capital and generate above average investment returns with less than average absolute volatility. Intangible assets such as brands, patents, licences, copyrights and distribution networks can create barriers to entry for new competitors which are difficult to replicate. Since they are intangible, these can be less capital intensive than physical assets, and can generate relatively high returns on capital. In the same way that IFP seeks companies with intangible assets that are hard to replicate, it avoids companies that are highly capital intensive and depend on large physical assets like real estate, factories, and machinery. Physical assets invite replication by competitors which often leads to excess capacity, price competition and erosion of returns on capital. Source: Independent Franchise Partners Written by Luke Crozier, Macquarie Global Investments Foundation of a franchise - Estee Lauder Founded in New York in 1946, Estee Lauder is a leading player in the global cosmetics industry, and a classic example of a franchise. The company enjoys significant competitive advantage over many of its competitors, leveraging a formidable portfolio of globally recognised flagship brands with a hard to replicate global distribution network. Since its early days, Estee Lauder has grown both organically and through acquisition. The line-up of brands includes the eponymous Estee Lauder, Clinique, Aramis, Prescriptives, Origins and M-A-C, to name a few. Establishing an international presence in 1960 with offices in London, and Hong Kong a year later, Estee Lauder holds strong and significant market positions throughout developed and developing markets. Operating in more than 140 countries under a plethora of different brands, over half of sales and close to 80 per cent of operating income now come from outside the US Operations in the Asia/ Pacific region alone contributed close to 20 per cent of net sales and a third of operating income in 2009. Under its new CEO, Estee Lauder announced a corporate restructure in early 2009, aiming to significantly reduce its cost base by rationalising staff numbers, exiting underperforming operations and outsourcing costly IT processes. The company expects to save around $ 500 million by 2013, reducing the margin differential with competitors, an opportunity long identified by the IFP investment team. As part of the restructure, Estee Lauder has begun optimising its merchandising in line with sales trends, reducing inventory by almost 15 per cent at the end of March 2010 (compared to the same period in 2009). Operational performance is also expected to benefit from the implementation of an SAP-based enterprise resource planning platform designed to further enhance inventory management and sales productivity. Estee Lauder offers investors a consistent track record of regular dividend payments, a strong balance sheet and a competitive advantage that is hard for competitors to replicate. Enjoying a distinct franchise position in the high margin global cosmetics industry, IFP has enjoyed strong stock performance since making its first investment in March 2008.