Hugh Yarrow: What investors can learn from the Victorians?

Almost a decade on from the global financial crisis and the signature motifs of the post-crisis world – low growth and low inflation – continue to cast shadows on the corporate world. Meanwhile, innovation continues to shape industry, driving disruption and disintermediation.

The implications of this set of phenomena extend to all facets of the economy. New businesses with new ways of operating are challenging industry incumbents and adding to deflationary trends. Look no further than Amazon’s purchase of Whole Foods for a symbolic totem of these trends.

With a backcloth of disinflation and disruption, companies need to be self-sufficient; they cannot rely on a ‘rising tide that lifts all boats’. Equally, even companies operating within the most stable, rational industries need to move with the times. This means evolving business models and adapting to changing technology and new entrants.

Just another case of history repeating?

But is this something new? The history of the chocolate industry gives us a taste of the past. Chocolate Wars by Deborah Cadbury, which traces the chocolate industry (Cadbury, Rowntrees, Hershey, Lindt, Nestle et al.) is a reminder that even for an industry as slow-moving as chocolate, there has been plenty to cope with, and adapt to, along the way.

The necessity for innovation for chocolatiers came with the advent of mass advertising, the invention of highly refined chocolate powders, and the onset of new entrants. Meanwhile, consolidation grew as the sector became increasingly global in nature. This step back in history tells us that 19th century capitalism was just as cut-throat and unpredictable as 21st century capitalism. Moreover, the temptations of short-termism were just as human then, as they are now.

Lessons from 19th century pioneers

While today’s managers of publicly listed corporations confront a different flavour of challenges to those faced by business leaders, such as Quaker capitalists George and Richard Cadbury, there’s still a lot to be learnt from these Victorian pioneers. Not least their holistic attitude toward business development; obsession with product quality;  relentless focus customer satisfaction; consistent approach to investment in R & D, staff and facilities – symbolized by projects such as Cadbury’s Bournville; and open eye to expansion into adjacent markets and new innovations.

Cadbury, for example, expanded into Africa, with a single ‘traveller’ (the company’s name for salespeople at the time) in 1886 when Harry Gear set sail for Capetown, and was joined shortly after by E.B. Brown, who requested the whole of southern Africa as his ‘patch’. As Deborah Cadbury puts it, “traversing wide tracts of land on horseback under a meltingly hot sun, he went where no confectionary salesman had ever been, carrying a stock of cocoa and chocolate wares that had never been seen before in Africa and blazing a trail from the Cape to Northern Rhodesia”.

While emerging market distribution networks have moved on from 1886, we continue to appreciate the investments many Evenlode companies continue to make in building their presence in high-growth markets around the world.

Prudent approach to financial management

Above all, these factors exemplify a mindset that consistently puts the horse of long-term investment ahead today’s profit stream cart.

Returning to 2017, the current macro-economic environment does not change the fact that steady investments to improve product quality, innovate, adapt, keep customers happy and expand addressable markets remain vitally important for business success.

These developments, often incremental, won’t dictate the news headlines in the way that political shenanigans, central bank decisions, or the latest economic data points invariable do. But they mean a lot more for cash flow and dividend growth over the long term.

We remain encouraged by the number of market-leading British businesses that continue to invest in this way, and have had several conversations with management teams over recent weeks in which we have stressed our wholehearted support for this approach. The Victorian pioneering spirit lives on.

Hugh Yarrow is fund manager on Evenlode Income