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Many kinds of consumer service:
[edit] Retail
This grouping consists of the Clothing Stores, Electronics Stores, Specialty Retail, Groceries, Online Retail, and Furniture Retail industries. Examples of stocks in this industry include Bed Bath & Beyond (BBBY), Best Buy (BBY), American Eagle (AEO), and FTD Group (FTD). For many investors, these stocks are attractive as they fall into the "buy what you know" advice so often tossed about. But it is important to realize that retail firms have very few built-in competitive moats.Anyone can just as easily cross the street to Wal-Mart Stores (WMT) to buy that new video game instead of buying it at Best Buy, for example. Think of all the once mighty retailers that have declined or are a shell of their former selves, such as Montgomery Ward, Woolworth's, and K-Mart . Clearly we must tread carefully when investing in a retail firm.
The one method of building a narrow competitive moat in this business is through execution or being a low cost provider. Only a well run retailer can earn high return on capital due to the high expenditures necessary to build and maintain stores, and these companies only sell cheap during a downturn in consumer confidence.
[edit] Restaurants
The restaurant business is probably one of the least attractive industries for investment. As with retailers, customers can easily choose a different restaurant to patronize, or just not eat out if times are tight. The business requires a lot of capital investment to build new locations, and once a new location is established it is very difficult to increase sales at that location for any period of time. Like retail, the ultra-competitive restaurant business has consumed once well known chains such as Bob's Big Boy and Sizzler.
Thestocks from this group include Popeye's parent AFC Enterprises (AFCE) and tiny Nathan's Famous (NATH). AFC Enterprises is an unattractive company due to a heavy debt burden, while Nathan's Famous is a micro-cap stock that runs a few local chains in the northeast such as Kenny Rogers Roasters and Miami Subs, as well as the namesake hot dog shop. In general, IGenerally, the restaurant segment is not viewed as a great business and sustainable returns on capital are quite elusive.
[edit] Personal Services
Personal services consists of companies that offer service based products to consumers. The 2 Personal Services stocks include are Jackson Hewitt Tax Services (JTX), and Ambassadors Group (EPAX), a provider of educational travel services.
Most service based companies do not require a lot of capital investment to grow or maintain earnings. For example, Jackson-Hewitt is a franchise based business. It spends none of it's own capital to open new locations, it simply sells franchise rights to franchisees who then bear the burden of acquiring a lease and opening a new location, while the parent company collects royalties and marketing fees. Ambassador's Group simply organizes and plans travel - it requires only small offices and some computer equipment to run it's business. This minimal capital can then be leveraged to handle increasingly larger business brought in by advertising, growing revenues and profits with minimal costs for new assets. Both companies have very profitable and scalable business models.
However, Personal Services is less attractive than Business Services. Few personal service business have truly high switching costs, while companies are more reluctant to switch service providers, lest business be interrupted. Like most consumer oriented stocks, look for strong brands and unique services in this segment.
