Does your portfolio have a Competitive Advantage?
My portfolio is full of businesses that dominate their market. Is yours?
Businesses with sustainable competitive advantages not only dominate their market, they are also able to produce significantly better returns using the same amount of capital and effort. Such businesses make great assets if you are trying the build an investment portfolio full of only the best stocks.
Businesses with a competitive advantage can charge higher prices for their products and services because people are willing to cross the road for them, even though the guy on the other side charges less (think iPhone).
Why? The service may be so intimately involved with the daily business of another company or the daily lives of consumers that they cannot possibly leave (Reckon or the banks), or it may be that they are the lowest cost provider and competitors simply cannot match their prices (think JB Hi-Fi). What is the competitive advantage of each of the stocks in your portfolio?
Competitive advantages are a critical recipe for continued high levels of profitability for a business. The next time you are shopping for vitamins, consider why Blackmores products are priced at a premium to their competitors. Maybe its because BKL has a competitive advantage?
By Roger Montgomery, 24 September 2009
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Dylan
:
I know this is an old post but 3 years on, I would like to know what people think of Blackmores now and whether opinions have changed? Is its competitive advantage and moat been eaten away from the likes of new competition ie: Swiss or is it likely to stand the test of time and prospects remain bright?
Wing
:
A few years ago, I treated the share market like casino, but now whenever I’m buying shares I’m thinking of going partnership with that company.
One more thing about BKL, not sure if I’m right and feel free to correct me, so I can improve…
I think one of the biggest competitive advantages is its “stickiness”. Buffett once said ” habit is something too light to be felt but too heavy to be broken”, … (think of how hard to quit smoking)
I didn’t meant BKL’s products are addictive. However once people have associated health and energy when taking its products, it’ll become a habit and very hard to persuade them to swap brands.
People are willing to swap cheaper toilet papers, but normally people wont risk their health for taking cheaper vitamins unless they really cannot afford it. As people nowadays are much more health conscious, I can foresee enormous growth are still ahead in this industry. If management can continue the good work in product marketing, positioning and capital allocations, then I believe their moat will continue to grow.
Thanks Roger!
Roger Montgomery
:
Thanks for those thoughts Wing. I would be interested in hearing from anyone else with similar or even different views about Blackmores products. If anyone has insights from inside the industry, that would be very useful here too.
Wing
:
Hey Roger,
I bought some Vitamins today and want to share the experience.
I went to a Chemist and found there’re a dizzying number of brands on the shelves and I asked the staff which brand is a popular one.
Guess which one is it? Not to mention it’s Blackmore (their shelves need to be refilled, while other brands are still full of stocks!)
I did actually went to a couple of chemists 2 years ago, asking around the same questions before I bought BKL shares and the answers from the staff are still the same as today.
I think BKL has done a very good job at marketing and as you said they do not compete on price. I still bought it’s multi-vatimin even there are other cheaper ones available.
PS. I read an “analyst” report issued in 2008, claiming themselves using value investing approach, had a “Hold” or “Better value elsewhere” recommendation saying they are in unhealthy competition… Had I listened to them, I would have missed out my 100% gain including dividends in 2 years time… and I think there will be more people rather than less need BKL’s products in the future.
Thanks Roger! because of one of your speeches I’ve been digging deeper about Value investing.
Keep up the good work! :)
Roger Montgomery
:
Hi Wing,
Great work on providing everyone with these insights about BKL. Phil Fisher referred to it as ‘scuttlebutt’ and I think you are demonstrating exactly what Fisher suggested all investors engage in. Thanks also for your encouraging words.