DO YOU HAVE A CONSUMER STAPLE OR CONSUMER DISCRETIONARY BUSINESS?

January 13, 2016

 

How were some businesses able to make it out of the recession of 2008 while others were not so lucky? The answer is not as hard as you think. Far too often when people start on the path to entrepreneurship they don’t ask themselves enough questions. One of those questions should be is my business a consumer staple or a consumer discretionary business? Which one is better? Which one is the least volatile? Many times when I go on a initial consultation I asked these questions and people don’t have a clue what I am talking about. Now my readers who are investors know exactly what I'm talking about and they may get a bit confused by this piece. However you should know that I am going to blur the lines a bit to explain the overall idea. I guess before we move forward we must define the two terms. A consumer staple style business is on centered around a product that most consumers feel that they must have in order to meet the requirements of basic life functions. It relates to something people will almost always need. For example, healthcare, food products, toiletries, and bargain retail items would fall under this cluster. Alternatively, a discretionary business is one in which, just as the name implies, the consumer can typically live without and still have a quality of life that meets their basic requirements. This would be things like jewelry, consumer electronics, and high end retail items. Knowing the difference between the two will make you more knowledgeable about your industry and lower the risk of another business closure.

 

Consumer Staple

 

If you decided to open a grocery store or a gas station then your business is a staple. In a staple business, the likelihood of you having a steady stream of customers is very high. You provide products or services that people need in order to keep life functioning properly. Women will need feminine hygiene products, men will need underwear, and kids will need toothpaste to keep their smiles bright for those school pictures. A staple business is not very risky and can provide sustainable gradual growth for any business. However just like any other business it can be susceptible to volatility as well. During a recession these companies did okay but the ones that were able to bundle, provide discounts, or general good value for the consumer’s dollar were the ones who did better than most. Even now the oil business is suffering because of cheap gas prices. It’s even crippling the economies of some countries. Once again there are never any guarantees in business but with a staple styled business its closest thing you will find to one.

 

Consumer Discretionary

 

Remember that example I gave earlier with the kids having bright smiles for picture day? The photography studio that would take those school pictures is the prime example of a discretionary business. These businesses provide goods and services that we can live without and life would go on just fine. This can be confusing because you could make the argument that if you buy a pair of Jimmy Choo’s that this would be a staple because you need shoes to meet a basic need requirement. This is true however it does not have to be designer shoes which makes it discretionary. These types of business are usually more volatile than most and they first ones to suffer when a recession happens. People tend to tighten up their budgets, look for deals, and more importantly only buy what they need. Some of those businesses are just now starting to recover. One great thing about discretionary businesses is that when they hit, they hit big. Case and point. In 2007, Blackberry dominated the smartphone market but thats the same year the iPhone was announced. The rest is what they say is history. Discretionary businesses can be boom or bust. When it’s good it’s really good. However when it’s bad it can be unfathomably bad.

 

WHATS THE BOTTOM LINE?
 
No matter which type of business you decide to engage in there are risks and rewards to both. Staples are great for gradual growth and the potential for a revolving door of clients. However, you can not rest on your laurels and just expect the revenue to always roll in. There is always a lot of competition in this space and they may not beat you on exclusivity but they just might on value pricing and special deals. The discretionary business may be your choice and with proper market research you can win. However, without it and the rejection of your product by the market you could find yourself with a lot of product and no one to sell it to. One type of business is not better than the other but a proper cost benefit analysis can help you find the one thats right for you which can lead you to success in your business. #AnOwlInYourCorner

 

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