Sustainable Competitive Advantages: Consumer Preference
By Baijnath Ramraika, CFA and Prashant Trivedi, CFA with assistance from Ms. Siddhi Gujar
August 2, 2016
This article first appeared on Advisor Perspectives.
In this article:
Understanding how to analyze a moat is critical to evaluating the value of any business, and subsequently an important factor in knowing whether you should invest in a particular business. In this article, we explain why we believe terms like “brand moats” or “intangible assets-based moats” are misleading and will set up investors for behavioral errors.
It’s not enough to call a moat by its right name. We delve further to see whether this moat is a sustainable competitive advantage. Discover the two elements that need to be present and form the primary components of an analytical framework to identifying a consumer preference moat, along with ancillary factors such as pricing power and product differentiation. You’ll understand our rule of limit to the pricing power of the incumbent through examples of companies like Parle-G. You’ll learn why investing in emerging markets and specifically consumer companies needs to be treated with caution.
To help you understand our framework better, we take you through a step-by-step analysis of Colgate
“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.” – Warren Buffett (emphasis ours)