Starbucks is not just a coffee shop, and McDonald’s isn’t solely a burger-selling chain
When we think of Starbucks and McDonald’s, our minds typically conjure images of coffeehouses and fast-food chains. However, there’s more to these corporate giants than meets the eye. Their innovative business models redefine the traditional notions of their industries.
Starbucks:
As the foremost coffee purveyor globally, Starbucks commands unparalleled customer loyalty. This loyalty translates into a remarkable financial phenomenon: customers have effectively loaned the company a staggering $1.6 billion, interest-free. How is this possible?
The cornerstone of Starbucks’ success lies in its ingenious loyalty program, which contributes a substantial 44% to its revenue stream. Through this program, customers load funds onto their gift cards via the app, effectively providing Starbucks with capital for growth and development.
This achievement is particularly noteworthy when juxtaposed with the fact that over 3,900 banks in the U.S. hold less than $1 billion in total assets. With approximately 39,000 outlets worldwide and a continual expansion trajectory, Starbucks amasses increasing cash reserves over time.
McDonald’s:
While renowned for its hamburgers, McDonald’s is also adominant force in the real estate realm. Holding the title of ‘The World’s Largest Restaurant Company’, McDonald’s boasts a unique business model that emphasizes property ownership.
In its 2021 Financial Report, McDonald’s reported assets worth $41.9 billion in property and equipment, ranking it as the 6th largest public real estate company globally.
This strategy stems from a visionary concept introduced by Harry J. Sonneborn in 1956: McDonald’s would own the real estate upon which future franchises would be erected. Rather than solely profiting from supplies or royalties, McDonald’s Corporation became the landlord to its franchisees.
By acquiring properties and leasing them at considerable markups, supplemented by a percentage of each shop’s gross sales, McDonald’s transformed into a real estate powerhouse. Presently, McDonald’s generates revenue through strategic real estate maneuvers, with its subsidiary handling property transactions and collecting rents from over 40,000 locations across 100 countries.
Quote of the month
Don’t be afraid to take risks and embrace failure. That’s where the best opportunities often lie.
Luck plays a role in success but the harder you work and the more you prepare, the luckier you get.
-Jim Simons, Founder, Renaissance Technologies
Economic Indicators Overview:
Manufacturing PMI: India’s Manufacturing Purchasing Managers’ Index (PMI) remained robust at 58.8 in April 2024 (compared to 59.1 in March 2024), marking its 33rd consecutive month in the expansion zone. The acceleration in output and new orders underscores strong demand conditions.
Services PMI: India’s services sector displayed strong growth in April, registering a PMI reading of 60.8.
GST Collection: Gross GST collections reached INR 2.10 trillion in April 2024, marking a 12.4% year-on-year increase and the highest ever recorded. This concludes the twenty-sixth consecutive month of collections exceeding the INR 1.4 trillion mark, following the previous record of INR 1.87 trillion in April 2023. Rising compliance, increased formalization of the economy, uptick in domestic transaction volumes, and growth in imports have contributed to elevated tax collections.
Core Sector Production: The index of eight core sector industries decelerated year-on-year to -5.2% in March 2024, contrasting with a +7.2% jump in February 2024 (revised upwards from +6.7%). Six of the eight constituent sectors recorded positive year-on-year growth, with fertilizers and refinery outputs experiencing a decline.
Industrial Production: Factory output growth, as measured by the Index of Industrial Production (IIP), reached a four-month high in February 2024, with a rise of +5.7%, compared to a year-on-year growth of +3.8% in January 2024. This growth was driven by positive year-on-year growth in three major sectors: mining, manufacturing, and electricity.
Credit Growth: Scheduled Commercial Bank Credit growth stood at 19.01% year-on-year as of April 19, 2024, compared to a year-on-year growth of 15.92% observed on April 21, 2023.
Equity Market Overview:
The S&P BSE SENSEX saw a rise of 1.1% in April 2024, mirroring the trend of the NSE NIFTY index.
The BSE Mid-cap and Small-cap indices outperformed the S&P BSE SENSEX, boasting gains of 7.1% and 9.6%, respectively.
In terms of sectors, Metals, PSU, and Power emerged as the top three performers for the month, recording gains of 10.8%, 10.0%, and 7.7%, respectively. Eleven out of BSE’s 13 sectoral indices closed the month in positive territory.
Foreign Institutional Investors (FII) flows into equities turned negative for April 2024, amounting to -$1.3 billion, following a positive flow of +$4 billion in March 2024.
On the other hand, Domestic Institutional Investors (DIIs) remained net buyers of Indian equities, with investments totaling +$5.3 billion, compared to +$6.78 billion last month.
In the year-to-date 2024, Net Foreign Institutional Investors (FII) Flows stood at +$0.04 billion, while net Domestic Institutional Investors (DII) investments in the cash markets amounted to +$18.36 billion, surpassing Foreign Institutional Investors (FII) investments.
Fixed Income:
In April 2024, while yields in the Indian fixed income market experienced an uptick mirroring global trends, the increase in Indian Government Securities (IGB) yields remained relatively subdued.
Since the end of March, the G-sec yield curve fluctuated within a range of 15-20 basis points (bps), with a relatively muted impact on corporate bonds ranging between 10-14 bps across the curve. This is in contrast to global trends, where yields saw a broader increase of 20-40 bps following a repricing of global asset prices during the month.
The 10-year G-sec yield in April 2024 fluctuated between 7.10% and 7.23% before closing the month at a slightly higher rate of 7.20%. This marks a slight increase compared to March 2024 (7.05%), February 2024 (7.08%), and January 2024 (7.14%). The average 10-year term premia improved to approximately 13 bps during the month, compared to the previous month where it remained relatively flat.
Monetary Policy: In its April 2024 policy review, the Reserve Bank of India (RBI) opted to maintain the status quo on both policy rate and stance. Despite anticipating robust economic growth and a potential decrease in inflation for FY25, the RBI underscored several factors posing upside risks to inflation. These include food inflation, potential climate-related shocks, escalating geopolitical tensions, and fluctuations in crude oil prices.
Liquidity: Core liquidity, which comprises system liquidity combined with Government balances, experienced a decline from Rs. 2.4 trillion at the end of March 2024 to approximately Rs. 1.5 trillion by the end of April 2024. This decrease was attributed to several factors, including cash leakage resulting from heightened seasonal cash demand, actions undertaken by the Reserve Bank of India (RBI) such as interventions and forex swap maturities, and an increased Cash Reserve Ratio (CRR) provisioning requirement.
Looking Ahead:
India’s growth trajectory is poised to remain positive, bolstered by a convergence of favorable factors. FY24 witnessed robust performance across all market segments, with mid and small caps particularly thriving.
Despite global challenges such as geopolitical tensions and commodity price fluctuations, the domestic economy has demonstrated resilience. Various indicators, including robust power demand, recovering rural consumption, vibrant capital markets, increasing corporate investment, and external demand growth, have fostered a conducive investment environment, potentially propelling economic expansion.
A noteworthy aspect of India’s growth narrative is the uptick in capacity utilization, primarily driven by cyclical and capital-intensive sectors. This trend suggests that businesses are investing to meet the escalating demand within the economy.
While the overall outlook for India appears positive, valuations persist at elevated levels across the board, albeit with exceptions like Large Banks and select utilities and commodities. Elevated valuations, coupled with rising bond yields, contribute to a reduction in equity risk premium.
The ongoing election cycles in various countries may trigger policy shifts, potentially heightening volatility and uncertainty in the latter half of the year. Consequently, adopting asset allocation strategies becomes crucial for effective risk management.
Aligning asset allocation with investment objectives and risk tolerance is essential for optimizing risk-return dynamics. Asset allocation funds, which invest across multiple asset classes, can mitigate volatility and offer a more balanced portfolio mix.
From an equity standpoint, Large Cap-oriented strategies such as Large/Flexi/Multi Cap strategies seem well-positioned in the current scenario. Additionally, within thematic investments, the Banking & Financial services sector appears compelling based on relative valuations.
