Long-standing moats seem to be most vulnerable to fundamental changes that initially are not
apparent, direct threats. There is not the direct response to protect a moat (if that's what it is) than if confronted with direct competition. We can just look through the 30 DJIA index members from our childhoods for examples. Some Berkshire-owned and defined moats have turned out to be transient, of course. We’ll remember that ABC of CapCities/ABC was considered to have particularly moat-like impregnability. Same with the newspapers. Similarly (going back a ways) with Pinkerton, and a number of other examples.
For at least half a century, railroads were considered to have some level of moat. Then they didn’t -- for decades. Now they do again. The assumption is that this time the swing back to their having a moat is permanent – energy costs will henceforth be the pivotal factor in the transport equation, and truck propulsion technologies will always be less efficient than, for example, that of train locomotives. (And tracks are going where they will be needed.) Sounds plausible – so now we’ve discovered, or rediscovered, a presumably enduring moat. Congress, technology and locations willing. For the foreseeable future, though, we should be good.
For a number of decades, bigger has been better for consumer goods. Distribution scale has in itself become a moat. Going forward, is that moat widening or narrowing? Increasingly in recent years, selling a consumer product to just a few customers gives a consumer goods company a shot at capturing a 50%-plus US market share. Increasingly, getting into Walmart, Tesco, and a few others (or for some specialized products, a handful of companies like CVS and Walgreens) means you don’t need the traditional, extensive distribution networks that were necessary just a few decades ago to get nationwide consumer access, at least in developed countries. Distribution capabilities are still critical for wide-spread global access, but the overall dynamics are changing, albeit gradually, sector by sector.
Smucker, Nu Skin, Tupperware, Reckitt Benckiser, Church & Dwight, Beiersdorf, Elizabeth Arden, Hormel, Clorox and numerous other consumer goods companies thrive without the infrastructure and reach of a Proctor & Gamble or Unilever. They are all increasingly selling to a steadily declining customer base, but those fewer, larger, and increasingly global customers have ever-expanding reach.
Do strong brands translate to moats? Is that brand-moat dynamic evolving? Depending on the category of product, ‘yes’ and ‘yes.’ Already we’ve seen the near-collapse of apparel brands. A generation ago, brands mattered – their owners could reach out directly to consumers and the public would respond.
Companies like VF still take advantage of that fading perception of brand differentiation, owning a multitude of brands but with production predominantly outsourced to factories that produce their products side-by-side with competing ‘private labels’. Costco customers, in particular, realize and benefit from this development.
Now, even many prestigious Swiss watch brands source their mechanical movements from (admittedly high quality) common generic sources. There’s not even a minimal ‘moat’ to manufacture a watch with hand-assembled Swiss movement; you just need to acquire or fabricate some brand name. That’s just a minor example, but it’s a continuing and pervasive trend among consumer products.
A few years ago I would have predicted that ‘brands are dead’. Now we see that brands can survive, though at the pleasure of their few major customers. They provide a pricing reference point for consumers (Oreo’s are Oreo’s, and consumers can compare value propositions). As Walmart has demonstrated, branded suppliers can also provide reliable sources of cheap inventory financing that can’t be obtained from private label sources. Brand owners can also be compelled to absorb inventory risk. Increasingly, these owners can be allowed to survive, but are increasingly manipulated and perhaps abused by their handful of life-blood customers.
Jumping to Coke - part of the long-running appeal of Coke is that, unlike most other beverages – premium whiskeys, wine, beer, even bottled water - there so far has been no higher-level aspirational brand of cola. Virtually anyone can purchase and enjoy it, but even a billionaire doesn’t have access to a more premium brand. And an appeal of colas among soft drinks is the rather unique complexities of the flavor – which also helps it cross into adult consumption – unlike, say, a premium root beer, where one serving might be ok but many adults’ taste buds couldn’t handle a six-pack or more of that alternative soda's less-complex flavor. (Plus we’re probably pretty sure any Coke is safe to drink, regardless of country of origin.)
As long as longer-range trends don’t eventually bring people to universally question the health or other aspects of drinking sugared water – never will happen, right? – Coke should be ok. Even if the unthinkable eventually does happen, we should get a long, long (even tobacco-like-time-frame) warning.
Unlike Pepsico’s products, Coke has a more developed and stand-alone distribution network to reach its global customers (while Pepsico enjoys clear market dominance in its primary product line, snack foods, it has a high concentration of its sales to a just handful of unaffiliated customers). That is worth something in assessing its moat, for sure.
So far, we have just covered consumer products. But does this translate to say, services, including financial services? As someone noted, cost (or difficulty) of transfer may constitute a moat. There’s no reason that someone couldn’t try to crack ADP’s or Iron Mountain’s dominance, but it would be a monumental undertaking. Maybe we can call that a moat. If these companies are eventually supplanted, it won’t likely be from a head-on assault, but rather some unanticipated or under-appreciated technological shift.
Similarly with Amex. They probably won’t be damaged by a head-on assault by some premium card upstart. It's conceivable that they could possibly misfire somewhere along the way in the post-plastic world in some simple way that will look obvious in retrospect. Until some inventive kid or someone at Google opens our eyes to alternatives, Amex looks good for now, though.
Looking at financial services companies in terms of moats, we might ask ourselves, how much of their advantage is a product of a their leadership – the strength of current management – versus some inherent advantage in their business model? Who didn’t think at one point that AIG, Salomon, or Lehman had something approaching an area of competitive strength that we'd refer to as a moat?
Might it be that if we swapped the top half-dozen executives between some even large Wells-size institutions, we’d see some reversal of performance? Maybe Wells has Goldman-like depth of talent and strength of culture. More frequently these days, though, we’re referring to relative competitive strength, or even solid strategic-thinking management, as a kind of moat. Of course that's often transient.
My favorite moat-in-the-making company in recent years? A prime contender would have to be privately owned Alvarez & Marsal. They have emerged as premier providers of financial services, carving out a solid niche. They are head and shoulders above anyone else, with impressive depth of talent. Too bad there was no way to get a piece of that.
apparent, direct threats. There is not the direct response to protect a moat (if that's what it is) than if confronted with direct competition. We can just look through the 30 DJIA index members from our childhoods for examples. Some Berkshire-owned and defined moats have turned out to be transient, of course. We’ll remember that ABC of CapCities/ABC was considered to have particularly moat-like impregnability. Same with the newspapers. Similarly (going back a ways) with Pinkerton, and a number of other examples.
For at least half a century, railroads were considered to have some level of moat. Then they didn’t -- for decades. Now they do again. The assumption is that this time the swing back to their having a moat is permanent – energy costs will henceforth be the pivotal factor in the transport equation, and truck propulsion technologies will always be less efficient than, for example, that of train locomotives. (And tracks are going where they will be needed.) Sounds plausible – so now we’ve discovered, or rediscovered, a presumably enduring moat. Congress, technology and locations willing. For the foreseeable future, though, we should be good.
For a number of decades, bigger has been better for consumer goods. Distribution scale has in itself become a moat. Going forward, is that moat widening or narrowing? Increasingly in recent years, selling a consumer product to just a few customers gives a consumer goods company a shot at capturing a 50%-plus US market share. Increasingly, getting into Walmart, Tesco, and a few others (or for some specialized products, a handful of companies like CVS and Walgreens) means you don’t need the traditional, extensive distribution networks that were necessary just a few decades ago to get nationwide consumer access, at least in developed countries. Distribution capabilities are still critical for wide-spread global access, but the overall dynamics are changing, albeit gradually, sector by sector.
Smucker, Nu Skin, Tupperware, Reckitt Benckiser, Church & Dwight, Beiersdorf, Elizabeth Arden, Hormel, Clorox and numerous other consumer goods companies thrive without the infrastructure and reach of a Proctor & Gamble or Unilever. They are all increasingly selling to a steadily declining customer base, but those fewer, larger, and increasingly global customers have ever-expanding reach.
Do strong brands translate to moats? Is that brand-moat dynamic evolving? Depending on the category of product, ‘yes’ and ‘yes.’ Already we’ve seen the near-collapse of apparel brands. A generation ago, brands mattered – their owners could reach out directly to consumers and the public would respond.
Companies like VF still take advantage of that fading perception of brand differentiation, owning a multitude of brands but with production predominantly outsourced to factories that produce their products side-by-side with competing ‘private labels’. Costco customers, in particular, realize and benefit from this development.
Now, even many prestigious Swiss watch brands source their mechanical movements from (admittedly high quality) common generic sources. There’s not even a minimal ‘moat’ to manufacture a watch with hand-assembled Swiss movement; you just need to acquire or fabricate some brand name. That’s just a minor example, but it’s a continuing and pervasive trend among consumer products.
A few years ago I would have predicted that ‘brands are dead’. Now we see that brands can survive, though at the pleasure of their few major customers. They provide a pricing reference point for consumers (Oreo’s are Oreo’s, and consumers can compare value propositions). As Walmart has demonstrated, branded suppliers can also provide reliable sources of cheap inventory financing that can’t be obtained from private label sources. Brand owners can also be compelled to absorb inventory risk. Increasingly, these owners can be allowed to survive, but are increasingly manipulated and perhaps abused by their handful of life-blood customers.
Jumping to Coke - part of the long-running appeal of Coke is that, unlike most other beverages – premium whiskeys, wine, beer, even bottled water - there so far has been no higher-level aspirational brand of cola. Virtually anyone can purchase and enjoy it, but even a billionaire doesn’t have access to a more premium brand. And an appeal of colas among soft drinks is the rather unique complexities of the flavor – which also helps it cross into adult consumption – unlike, say, a premium root beer, where one serving might be ok but many adults’ taste buds couldn’t handle a six-pack or more of that alternative soda's less-complex flavor. (Plus we’re probably pretty sure any Coke is safe to drink, regardless of country of origin.)
As long as longer-range trends don’t eventually bring people to universally question the health or other aspects of drinking sugared water – never will happen, right? – Coke should be ok. Even if the unthinkable eventually does happen, we should get a long, long (even tobacco-like-time-frame) warning.
Unlike Pepsico’s products, Coke has a more developed and stand-alone distribution network to reach its global customers (while Pepsico enjoys clear market dominance in its primary product line, snack foods, it has a high concentration of its sales to a just handful of unaffiliated customers). That is worth something in assessing its moat, for sure.
So far, we have just covered consumer products. But does this translate to say, services, including financial services? As someone noted, cost (or difficulty) of transfer may constitute a moat. There’s no reason that someone couldn’t try to crack ADP’s or Iron Mountain’s dominance, but it would be a monumental undertaking. Maybe we can call that a moat. If these companies are eventually supplanted, it won’t likely be from a head-on assault, but rather some unanticipated or under-appreciated technological shift.
Similarly with Amex. They probably won’t be damaged by a head-on assault by some premium card upstart. It's conceivable that they could possibly misfire somewhere along the way in the post-plastic world in some simple way that will look obvious in retrospect. Until some inventive kid or someone at Google opens our eyes to alternatives, Amex looks good for now, though.
Looking at financial services companies in terms of moats, we might ask ourselves, how much of their advantage is a product of a their leadership – the strength of current management – versus some inherent advantage in their business model? Who didn’t think at one point that AIG, Salomon, or Lehman had something approaching an area of competitive strength that we'd refer to as a moat?
Might it be that if we swapped the top half-dozen executives between some even large Wells-size institutions, we’d see some reversal of performance? Maybe Wells has Goldman-like depth of talent and strength of culture. More frequently these days, though, we’re referring to relative competitive strength, or even solid strategic-thinking management, as a kind of moat. Of course that's often transient.
My favorite moat-in-the-making company in recent years? A prime contender would have to be privately owned Alvarez & Marsal. They have emerged as premier providers of financial services, carving out a solid niche. They are head and shoulders above anyone else, with impressive depth of talent. Too bad there was no way to get a piece of that.
