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Steven Chen
Steven Chen
Articles (205)  | Author's Website |

The Technology-Proof Consumer Businesses

While technology undeniably benefits society, it can be a major disruptor for certain businesses

In today’s increasingly digitalized world, investors need to be ultra-cautious about their investment theses. While technology undeniably benefits society and users in a big way, the introduction of new tech can all too often destroy a business or industry..

Just take a minute to think about how long-time incumbent Gillette’s brand equity that was quickly diluted by Internet upstart Dollar Shave Club. America’s iconic department stores have sufferred from e-commerce, while the funeral service industry's pricing power was disrupted by comparison websites.

In this article, we will explore three categories to help find technology-proof consumer businesses that could be immune to threats from the ever-expanding digital space.

Significant mindshare

When a brand earns significant mindshare among its target consumers, the distribution of products has become much less of an economic moat. The brand would worry less in terms of competing for channels to reach consumers. Instead, consumers would find every way to buy the products, as they would see few alternatives.

In today’s fast-moving world, such cases are admittedly rare but do exist. Examples in our investable universe include the ultra-luxury brands like Hermes (XPAR:RMS) and the prestige beauty brands like Estee Lauder (NYSE:EL). It is unlikely that the wealthy will get tired of their status-conscious preference for century-old heritage brands any time soon.

Un-replicable experience

Our second group involves consumer experiences that are difficult to replicate online. For instance, off-priciers TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST) have every compelling reason for their customers to frequently visit their brick-and-mortar stores by offering a discovery-based “treasure hunt” experience that is almost impossible to imitate on the Internet. No wonder both companies keep earning high returns on capital while those more traditional department store businesses struggle.

In comparison, it is getting more and more common for large-scale retailers like IKEA and Pandora (OCSE:PNDORA) to make every attempt to enhance their offline shopping and omnichannel experiences to fend off competitions from digital disruptors. Of course, the outcome is a wait-and-see, in our view.

Uneconomical (online) business

Lastly, we think that some business models, if taken online, are far from being economical for now and the foreseeable future. Take a look at Tractor Supply (NASDAQ:TSCO), the only major retailer serving the rural life in the U.S. The company operates stores typically selling bulky items with a limited ticket size across locations that are far away from city centers and less dense in population. It would not be cost-effective for online platforms to compete for the market share here.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Hermes.

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About the author:

Steven Chen
Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


Rating: 4.6/5 (5 votes)

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Comments

Searcher_of_Value
Searcher_of_Value premium member - 1 month ago

The operating margin and net margin of the stocks you mentioned are very low, which indicate lack of pricing power. How do they have wide moat with weak pricing power?

Although you offer logical arguments, qualitative analysis needs to be completed by quantitative analysis.

Steven CHEN
Steven CHEN - 1 month ago    Report SPAM

Thanks for the question! Obviously, gross margin is one of the best indicators for pricing power. And apparently, both Hermes and Estee Lauder have one of the strongest pricing powers on this planet, from both a qualitative AND quantitative perspective.

Retailers are supposed to have a thinner margin, due to their business model (buying and selling goods mostly from brands). The more correct approach is to judge a low or high margin from an industry perspective. For example, ROST has one of the highest margins in the retail industry - and hence, not that simple as you just described above.

Searcher_of_Value
Searcher_of_Value premium member - 1 month ago

Thanks for the reply, I don't have the figures for Hermès, but EL certainly has consistently had a very high gross margin, but its annual net margin has consistently been less than 20. My personal preference is for companies with consistent net margin of 20 or above. EL's net margin has been expanding though, which is a good sign. It's on my watchlist. I'm not buying it because it is not being sold at a discount (ie no MOS).

Regarding retail, maybe it's not worth investing into that sector if companies in that sector generally have thin gross, operating and net margins.

Steven CHEN
Steven CHEN - 1 month ago    Report SPAM

For more regarding pricing power, check out: https://www.gurufocus.com/news/1114972/urbems-quality-strategy-series-pricing-power

In general, retail is a tough business. As Buffett once puts it, it's a "you have to be right often" type of business instead of "you have to be right once" one.

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