Contrarian Investing in Rural America

By making court appearances on behalf of clients in small towns across Missouri, I have observed that certain businesses have extremely strong footing in each and every small town. People get gas at the Casey’s General Store or the Exxon franchisee station, go to McDonald’s or Dairy Queen to eat, and grocery shop at Wal-Mart or Kroger.

People rarely think in these terms, but of McDonald’s 34,000 locations, almost 22,000 of them are in areas with populations less than 15,000.

I contend that these businesses, when bought at the right initial price of 15x earnings or cheaper, will lead to 10-12% annual returns over the long haul. I also contend that these investor returns will be well-earned, in that one will encounter many doom-and-gloom newspaper headlines as they go through the process of earning these superior returns.

There are two main grounds for why these rural staples of American capitalism have a multi-decade run ahead of them.

First, they excel at treating America’s “last mile” logistics dilemma. It will cost more to ship a consumer good from St. Louis to a surrounding rural county than from China to New York to St. Louis combined. Mass economies of scale, coupled with the sale of product that nearly everyone in the small town will consume, are necessary preconditions for sustainable prosperity for businesses that intend to sell products in towns with a population less than 2,000.

Second, they excel at maintaining relations that build trust. In urban settings, it is more likely to type in a google search for the cheapest product or service and proceed accordingly. The brand equity of these staples is more enduring. In rural America, “Joe” is the guy at Casey’s you buy gas from. “Jenny” is who you check out with at Kroger. The old timers at McDonald’s knows to get you your cup of senior discount coffee at 7:30 a.m. The initial limitation of choice forms habits, and those habits are forged to the point where a new competitor would find great difficulty in dislodging them.

When I first paid attention to these same dozen or so businesses that dominate in small American towns, I was initially saddened to see how “Big Box Capitalism” had seemingly displaced local businesses. Then I realized that the economies of scale that these businesses bring are necessary to sustain a profit in an areas where the consumer base is low and the transportation costs of delivering goods to them is high.

My guess is that, in 2030, you will see McDonald’s, Dairy Queen, Casey’s, Wal-Mart, and Kroger continuing to dominate the rural American landscape. Investors will be rewarded commensurately.

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