Jump to content

Moat Erosion


KFRCanuk
 Share

Recommended Posts

I was watching CBC news last night and they had a report of urban decay that has afflicted Detroit.

 

Detroit/Michigan was once the Auto capital of the world. The Detroit Institute of Arts is a legacy left behind from more prosperous times. As is the dilapidated architecture in city/state.

 

I would tend to think that 50 years ago, most people thought that Detroit/Michigan/auto/manufacturing had a solid moat. Slowly but surely the moat eroded.

 

Another example would be the 1st minivan the VW Microbus. VW pretty much owned the small van market. 40 years later, VW Touran is a re-branding Chrylser minivans and can't even manage to sell those in North America.

 

Mismanagement over a long time can destroy moats.

 

I'm not sure if I have a question at this point but I'd like to hear comments and/or further examples.

Link to comment
Share on other sites

Moat is not necessarily domination of a market. Buffett talks of giving someone a billion dollars and seeing if they could do damage to a company.

 

for example:

1)Coke and Pepsi are not products that people are generally willing to substitute with other drinks, let alone colas (I for one LOVE Coke, and will virtually never drink Pepsi)

 

2)Motorola used to have something like 1/3 the cell phone market, and now, they are down to something like 5%...

 

3)Alta-Vista is now unheard of (I don't even remember using it as a kid), but used to rule the search market.

 

4)FNM and FMC had huge, government sponsored moats-they just screwed it up because management (and the government) were/are inept.

 

The bottom line is that you need HUGE barriers to entry; things like a government created monopoly/duopoly (even though legislation can change quickly), great management, and the hearts/minds of the public (which still, can change). Infrastructure to make your product isn't enough. A billion dollars could not do a thing to example 1 and 4. Obviously, the iphone and google screwed the middle 2 examples.

 

This is not to say that you NEED a moat to invest-cigar butts, for example, are generally the antithesis of a moat stock... SNS is an example of a company that has great brand recognition, but if it would go under, wouldn't cause the end of the world-even though I am a shareholder of SNS, I wouldn't say they have a HUGE moat.

 

With that said, all good things will come to an end-and eventually, even Coke will not be a company anymore...

 

50 years ago, GM did have a moat, but it was eroded in a way that you could have seen pretty readily over the course of time-selling out your position at a moment of overvaluation, and if nothing else, when it was trading over 30 bucks a share roughly a year ago-when it was the most painfully obvious that they had a negative moat!

Link to comment
Share on other sites

Moat is not necessarily domination of a market. Buffett talks of giving someone a billion dollars and seeing if they could do damage to a company.

 

for example:

1)Coke and Pepsi are not products that people are generally willing to substitute with other drinks, let alone colas (I for one LOVE Coke, and will virtually never drink Pepsi)

 

I can count on one hand the times in my life when someone ordered a Coke in a restaurant and the following dialog happened:

 

"I'll have a coke."

"Is Pepsi OK?"

 

Did not end in "Yes."  And I do have a fair number of data points.

 

Personally, I don't drink either anymore, though I did like RC Cola for a time.

Link to comment
Share on other sites

I could absolutely tell a difference between Coke and Pepsi even though I don't drink normal Coke anymore.  Luckily, I don't have to turn drink Pepsi very often for not much Pepsi is sold in establishments here in the South.

 

 

Link to comment
Share on other sites

My response is usually "Do you have unsweetened ice-tea?"  If the answer to that is also no, (and the place doesn't server beer) I'll just have water.

 

I like Coke, but even that is bordering on the too-sweet for me.  Pepsi is like sticking my tongue into a bowl of sugar.  Yuk...

 

 

As far as GM goes, you can have all the manufacturing capacity in the world, but if you produce crappy products that no one is willing to buy, your capacity is not much of a moat.  It would only be a moat if it allowed GM to produce products that were better (or at least as good) cheaper then its competition.  Obviously (to anyone that has had the unfortunate experience of owning one) that wasn't the case.  A moat can work in your favor as one of your defenses, but you still need to produce a good product or service at a reasonable price to defend your moat.  If you leave your moat undefended, it will be crossed.

 

--Eric

 

Link to comment
Share on other sites

Moat is not necessarily domination of a market. Buffett talks of giving someone a billion dollars and seeing if they could do damage to a company.

 

for example:

1)Coke and Pepsi are not products that people are generally willing to substitute with other drinks, let alone colas (I for one LOVE Coke, and will virtually never drink Pepsi)

 

I can count on one hand the times in my life when someone ordered a Coke in a restaurant and the following dialog happened:

 

"I'll have a coke."

 

"Is Pepsi OK?"

 

Did not end in "Yes."  And I do have a fair number of data points.

 

Personally, I don't drink either anymore, though I did like RC Cola for a time.

 

 

I was going more in the direction of when people have the choice between the 2 products... I don't remember the last time I bought Pepsi in the store-even if it was on sale.

 

Granted, if KO stopped advertising for 5 years, things might change-as has been pointed out, you need to defend your moat by putting crocodiles and sharks in it!

Link to comment
Share on other sites

Guest JackRiver

It's easy to forget when talking about GM that they are still the largest automobile manufacturer in the world.  That is to say, somebody is buying their cars.  I make this point because it is important to keep in mind when debating what destroyed their competitive advantage/moat over the years.

 

Now I don't know how wide their moat was and I don't know enough about the company over the years to tell you what their competitive advantages were, but with what little I do know, I'm pretty sure that bad accounting was a major factor in the erosion of the enterprise.  You know the old saying about knowing what your cost are.  Well, bad accounting allowed this company and the other U.S. autos to go along for decades not knowing or not accounting properly for their cost. 

 

So if GM had a moat, I suspect that bad accounting was a major contributor to its erosion.  And that can get hidden from you if you erroneously conclude that nobody wants to buy their cars.  Again, you can't be the largest auto company if nobody is buying your cars (note: I do understand that price plays a big factor in how many cars you sell and that if you continually sell at a loss you can gain market share).

 

As Munger might suggest, bad accounting is a sin.

 

Yours

 

Jack River

Link to comment
Share on other sites

Guest Broxburnboy

There is large gorilla in the room for some of these seemingly well moated brands.. Coke, Pepsi etc.

The evidence coming out supports the idea that the burgeoning epidemic of obesity/diabetes is almost

certainly caused by refined sugar and other carbohydrates and the body's insulin/blood sugar response to

these "sugar bombs". Artificial sweeteners have their own dangers... the story of how Aspartame got

FDA certified reads like a spy novel featuring no less a conniving villain than Donald Rumsfeld... but

that is a different story.

The problem with having all one's eggs wrapped up in a single brand, is the same problem of lack of diversification

in a portfolio.

Link to comment
Share on other sites

Guest JackRiver

Broxburnboy

 

I would suggest that a sedentary lifestyle is a larger contributor factor to the ills you speak of, but that's not to say that corn syrup isn't problematic. 

 

Coke and Pepsi both have responded, albeit slowly, to the drinking habits of consumers and are much more diversified today than just a few years ago.  The competitive advantages of shelf space, vending machines, fountain machines is still pretty darn strong.  The distribution and network is still darn strong.

 

Yours

 

Jack River

Link to comment
Share on other sites

Guest Broxburnboy

Although sedentary lifestyle is part of the self stoking obesity problem, type 2 diabetes (adult onset) can happen

to otherwise fit people... again it is related to refined carbohydrates and its effects on the insulin/blood sugar

response. Refined sugar may be the next tobacco... The good news is that the most efficient plant used in the production of

ethanol is sugar cane.

Link to comment
Share on other sites

Frito-Lay/Gatorade (owned by PEP) and Vitamin Water/Power-aid (owned by KO) are examples of product diversification...

 

HFCS may well be the next tobacco, but that doesn't mean a bunch of cash can't come out of the company in the mean time-with that said, I own no shares of KO, PEP, or any other company of the like... though, I will say that JSDA and DPS seem interesting at recent price levels-but there are a bunch of other things out there that I would rather buy at the moment... I would think that the MSG in doritos (from frito-lay/PEP) would be illegal first.

 

Hell, MCD, YUM, and SNS should be illegal before KO and PEP-as far as health effects-hi fat diets kill more people than sugar and such-heart disease is the #1 killer in the US (which I would assume is also true for Canada)

 

I know that I for one, will hang on to my bottle of coke till the day I die.

 

I would really like to see what Taleb has to say about moats, I am sure that he could come up with some interesting thoughts on the matter.

 

Krispy Kreme arguably had a moat, though, the low card diets came out and destroyed the company... and heck, who doesn't like Krispy Kreme doughnuts? They are freaking delicious!

 

I would imagine that alcohol companies probably have pretty sustainable moats... for similar reasons that tobacco companies do-and probably won't ever have their product made illegal (again).

Link to comment
Share on other sites

  • 4 weeks later...

Two points - I looked at pepsi and coke last year and pepsi had far better numbers. However, coke is doing very interesting things. They have a new aluminum bottle that keeps coke colder and hence has a much crisper taste. They also have a new pop dispenser that will serve 200 flavors of beverages.

 

The war gets interesting. I bought coke shares this year when the price was down.

Link to comment
Share on other sites

 

With moats its always usefull to keep at least 3 things in mind:

 

You're really looking for an 'idiot' proof moat, & unfortunately it doesn't exist. To overcome the capital 'barrier' you simply require an idiot banker willing to do an over-leveraged LBO. To overcome the off BS business 'barriers', all you need is a short-term orientated incentive system. Both are common.

 

All moats have 'best before' dates. There's always a new technology, new approach, better way - best buggy maker in the land is worth squat, when nobody is buying buggies any more. Softdrinks, tobacco, booze, electricity, etc. may all have great moats - but they also have active social movements (diabetis/obesity, cancer/second hand smoke laws, MADD, conservation/green power) working to shut them down. Eventually the social wins.

 

A moat is simply an investment portfolio of intangible operating assets. To grow the portfolio you freshen your product lines through breakthrough R&D & higher risk marketing investments. You run it down by letting the lines age, & always sticking to the lowest risk highest return strategy.

 

Most companies fail badly at re-invention.

 

SD

 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...