Terry Smith

Terry Smith runs a few funds. Two of these are Smithson and Fundsmith.

I came across this clip of him talking about some companies he likes.

He mentions Brown-Forman, wich I’d never heard of but who own Jack Daniel’s. They are real corporate survivors! Not only did they get through two world wars and the great depression but they managed to somehow survive prohibition, despite the US government making their product illegal! Some savvy marketing saved them, see here,

All the company’s advertising concentrated on marketing Old Forester, which it promoted as a product that would restore health: “Many, many times a day, eminent physicians say, Old Forester will life prolong and make old age hale and strong.” Although this advertising was effective, Prohibition threatened to close Brown-Forman Distillers. To prevent this from happening, Brown-Forman went public just prior to Prohibition, but the Browns maintained control of the company.

The pre-Prohibition advertising had been valuable: the Brown-Forman company was one of four distillers permitted by the government to sell alcohol for medicinal purposes during Prohibition. The marketing of Old Forester had saved the company from the kind of downfall that other distillers suffered.

Most of the companies he talks about have this longevity factor and share a common theme of steadily increasing dividend payments over decades. One area in which I’m less in agreement is his outlook on the franchise restaurant business model.

At about the five minute mark he says (paraphrasing slightly)

The franchisors (McDonald’s, Yum! Brands’, Restaurant Brands International, Domino’s etc) don’t put up any capital [to run the physical restaurants] the franchisees put up the capital. The franchisors just get a royalty.

That model is appealing in that the franchisor doesn’t have any risk related to running physical restaurants. The franchisees bare this risk. Essentially the franchisor runs a kind of subscription model where they are selling their intellectual property (restaurant branding/design, recipes etc) to the franchisee. This works well when the franchisees are making money. However, that may not always be the case, especially now when many have been forced to close. Also many of these franchised restaurants may well be coming close to saturation and may struggle to differentiate themselves (Tim Horton’s comes to mind).

These aren’t original thoughts, Jim Chanos (famed short seller who bet against Enron) talked about the conflict between franchisors and franchisees a while ago here.

There is a longer video here of one of the Fundsmith annual meetings that I haven’t got around to watching yet.

Written on April 8, 2020