Renowned investor Peter Lynch popularized the phrase "invest in what you know" to express that our everyday experiences as consumers can lead to valuable insights when it comes to picking the best companies. Amazon.com (AMZN +0.48%), Costco (COST +0.25%), Nordstrom (JWN +0.00%), Chipotle (CMG 0.48%), and Starbucks (SBUX +0.02%) know how to make their customers happy, and that generally means they can make their shareholders wealthy, too.
The value of customer loyalty
Amazon consistently ranks on top of its competitors in the online retail industry according to the American Customer Satisfaction Index. The company is notoriously committed to providing competitively low prices for its products and remarkably efficient customer service, even if that means operating with razor-thin profit margins.
Founder and CEO Jeff Bezos is well-known for his relentless customer focus; he even has a public email address -- [email protected] -- where he receives and reads customer complaints. Not only that, Bezos usually forwards those emails to the Amazon employee in charge of the relevant area, expecting an explanation and a solution to the problem.
Bezos is obviously a very busy man, but he still makes time to ensure that Amazon listens to its customers and keeps them satisfied. It's no wonder the company has been growing at an amazing speed.
Costco has a remarkably loyal customer base -- retention rates are usually above 85% -- and the company continues performing outstandingly well in that area, with a global retention rate near 87% in the last quarter. Major markets like the U.S. and Canada performed even better, with retention rates above 90% for the quarter ended on Nov. 24.
As the company continues growing and expanding on a global base, it tends to retain a high proportion of the customers it gains. This represents an enormously valuable competitive advantage in a very challenging industry like discount retail, and it makes Costco a unique name in the industry.
Nordstrom leaves its competitors in the dust when it comes to the American Customer Satisfaction Index; it has a score of 84 versus an average industry ranking of 74. Nordstrom has consistently been on top of the ranking over the years thanks to its culture of excellence in areas like service and overall customer experience.
Superior customer service has traditionally been a differentiating factor for Nordstrom; the company prides itself on its liberal return policy and attentive employees doing their best to connect with clients. Thank-you cards, home deliveries, and personal appointments have always been part of the company's competitive differentiation, and Nordstrom has successfully incorporated new technologies lately to improve the shopping experience and consolidate customer loyalty.
When investment ideas taste good
You don't need a doctorate in rocket science to tell that Chipotle Mexican Grill has been growing at full speed over the last several years. The company has expanded from a single store in 1993 to more than 1,500 restaurants, and counting.
Chipotle's "food with integrity" approach to Mexican food continues to resonate outstandingly well among customers. Sales jumped by 18% in the third quarter of 2013 on the back of a 6.2% increase in comparable-restaurant sales, so demand is still firing on all cylinders and Chipotle has a lot of room for growth before reaching a market saturation point.
Anyone who regularly drinks coffee can tell that Starbucks is a differentiated player in the business. Product quality, a culture of permanent innovation, and a unique customer experience mean exceptional competitive strengths for the company and superior pricing power for its products. In addition, this generates sky-high profitability for Starbucks as the company reported a record operating margin of 19.2% of sales during the last quarter.
The stock has returned more than 750% over the last five years, and all that time it has been one of the most popular names among consumers, building stores at an amazing speed all over the world and incorporating new products into its menu in order to continue attracting new customers to those stores.
Bottom line
There are many things to consider when making investment decisions; however, finding high-quality investment opportunities doesn't need to be a complex and sophisticated task: Companies that make their customers happy tend to deliver superior returns for investors. Amazon, Costco, Nordstrom, Chipotle, and Starbucks know how to provide what their customers want, so they are in a position of strength to reward their shareholders with growing profits over time.
