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Cola and Oatly. Both are great products. However, when you look at the chart in comparison, it immediately becomes clear that one company has a moat and the other does not. Yes, hello and respect for learning again. I'm Arnold, the finance teacher, and today we're going to look at moat characteristics .
In English, moat. Yes, moat basically means that a company, like a castle, has a moat around it to keep the competition out. The concept of the moat as a metaphor goes back to Warren Buffett, arguably the most famous investor of the 20th and 21st centuries, and he explained it to Fortune magazine as follows: "The key to investing is not to assess how much impact an industry will have on society or how fast it will grow, but rather to identify a particular company's competitive advantage and, most importantly, the durability of that advantage." Two essential characteristics of the moat that a company should have already become clear here.
The company uses this moat to protect itself from the competition, insofar as competition always represents a certain threat to a company. And he says that, ultimately, regarding company characteristics, quality is more important than growth. Warren Buffett continues by saying, "What we are trying to find is a business with a wide and durable moat around it, protected by noble knights who are honest and capable, and filled with piranhas and crocodiles." From this perspective, one could say that the CEO acts as a kind of noble knight who must be able to protect the company from external influences.
Furthermore, he believes that the company must have specific characteristics that function like piranhas in a moat. But let's break down this image; what are these properties actually? Write in the comments which company you particularly like and we'll consider later whether it meets this competitive requirement.
The first possible characteristic a company can have to demonstrate a moat is so-called intangible assets. These could be statutory licenses, or they could be patents that a pharmaceutical company holds to keep the competition at bay. However, it could also be regulatory hurdles that prevent others from entering the market, or strong brands with high pricing power.
An example of a strong brand with high pricing power would be Apple, and it can definitely be said that Coca-Cola has a strong brand that generates high customer loyalty, since most people prefer to drink the branded Coke because it has a specific taste and the recipe has always been protected. However, it would be too simplistic to consider only the brand as a characteristic of the overall competitive advantage, because a company with a competitive advantage may also have the characteristic that customers cannot simply switch to it , as it is so deeply integrated into the business processes that it is almost impossible to get out.
Examples of this would be software companies like Microsoft or SAP. SAP has ventured so deeply into enterprise software in the B2B business sector that replacing this software would effectively paralyze companies for extended periods of time. The same applies to Microsoft, which, with Azure, its cloud, Microsoft Teams and its 365 simple Word and PowerPoint solutions, is very deeply integrated into the work processes of educational institutions and other organizations.
The next truly defining characteristic of moat-based companies is network effects. This means that while the network remains available, virtually every user uses the same network, and the company becomes increasingly profitable with the number of users. In technical terms, this is also called the hockey stick effect.
An example of this would be the company Meta, which now has almost 3 billion people as customers through its various social media platforms and manages to keep them engaged through daily use . The next characteristic that moat-based companies might have would be cost advantages. This can arise simply from the size , as size can often lead to efficiency .
However, it could also be unique access to raw materials or patented production processes that allow a company to operate more cheaply. The most well-known example is probably Amazon, which, with its gigantic logistics structure and very fast delivery, has built a network that has a subscription system and from which customers can no longer easily get out .
Have you ever considered cancelling your Amazon subscription? This gigantic logistics infrastructure ultimately allows Amazon to operate more cheaply and offer free shipping. Since they then ship more products through that channel, they manage to achieve at least a sufficient profit margin. In addition to intangible assets, one could more generally mention market entry barriers .
Otis, Schindler and Kone function almost as an oligopoly in the market for elevators and escalators. They share a large part of this market. Since a new elevator system cannot be developed overnight, and the elevators are usually already installed and maintenance is also carried out by these companies , there are high barriers to market entry.
This not only ensures the survival of the companies, but also a high profit margin. Of course, not every company has all of these moat characteristics, but these characteristics often allow the companies high pricing power, i.e., adequate margins and a high return on invested capital. But why is Coke better than Oatly, especially when it comes to the stock market?
Because, purely in terms of taste, I don't think Oatly is so bad at all. To understand this, let's look at a quote from Pat Dorsey. "Never confuse a great product with an economic moat. A good product will bring you the first customer, but only a moat prevents a competitor from copying it tomorrow and offering it cheaper." And that's exactly what happened in the case of Oatly .
If you go to the DM store today, you'll find numerous imitation products, some of which are cheaper and taste almost the same. Whereas Coca-Cola can prevail against all other Coca-Cola providers due to its unique taste. Of course, by its very nature, capitalism is not designed in such a way that moats last forever .
So let's summarize: Your customer contact with the product, the taste, may be a first impression. As a second step, you should definitely find out if the company also has a moat, because this secures the actual existence of the company and makes share profits more likely.
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