CategoryGeneral thoughts

As an investor one of the key elements to analyse in a company is the durability of its competitive advantage. A durable competitive advantage enables a company to earn excess returns over its cost of capital. There are several examples in the indian industry like levers, Proctor and gamble , asian paints etc with strong and durable competitive advantages



One of the key elements of the sustainable competitive advantage is strong , well know brands. The examples above clearly reflect that. Companies with strong brand are able to withstand competition better and provide investors with superior returns. But how durable are brands these days ? Can we as investors be confident that consumers would be faithful to their brands and would pay that extra for their special brand.



Brands like surf, colgate, cadbury etc are well know brands for last 25 years. However these brands are struggling in terms of growth and retaining the existing customers and being relevant to the new ones. A lot of articles and studies do point to rampant brand switching among consumers . Have the consumers become unfaithful or these brands lost their relevance. I would assume partly both. Who gets excited with a new brand of toothpaste or soap. But mobiles / cars are a different matter. These product categories get a lot of consumer interest (brand loyalty is a different issue).



In the international markets, brand loyalty is at an all time low. Nokia is one of the most admired and liked brands. In 2003 i think they missed out on the trend of clam shell mobile phones and paid heavily for it ( they lost market share). I dont have tell what happened to the stock price. The new reality which marketers have to live with is this : What have i done for my consumer today ? Is my brand still relevant to my consumer



What does all this mean for an investor ? Very simply – Higher ad expenses, shorter relevance of existing brands, lower success rates of new brands. All this translates into one conclusion – The excess returns enjoyed by companies due to their dominant brands would reduce. They would still be good businesses (much better than commodity business). however investor will pay less for such businesses ( Lower PE’s).



The above has already happened for a lot of consumer companies. Several do not enjoy their historical PE’s. analysts keep fretting about monsoon and kharif crops and what not ? They have not been able to explain why Mobiles companies, car companies do well whereas FMCG companies continue to have poor growth rates. It would be critical for an investor to answer the above question before investing in a company. Try challenging the convential wisdom …the conclusions could be interesting

I work in the IT industry and keep travelling to US and other countries.



There is lot one can learn as an investor during one’s visit to these countries. Some of them are like



1. Power of brands / ideas

2. Intensity of competition

3. Pace of change

4. Level of innovation and impact on value creation

5. Consumer orientation towards ‘value for their money’ ( not limited to indians alone )

6. Trend in various industries like telecom , retail, Entertainment which could play out later in india Let me share what has been my observations till date.



1. Power of brands / ideas – The first thing that strikes you is the presence of brands in almost all sectors of business – industrial, consumer etc. Now one may say , that we have brands in india too ..so whats the difference ..well branded goods occupy a much larger share of the market than india where the unbranded / unorganised sector is equally prominent in several categories. So what does this signify – a) as an economy develops the share of branded goods increases as competition forces out the generic products b) powerful brands create a strong competitive advantage in most industries and high profit margins.



2. Intensity of competiton – What the developed countries like US are able to do is ensure that there level playing field, good infrastructure and open competition. This benefits the consumer but not an investor as high profit margins are rarely sustainable . So think about our current market favorities like auto component, IT, Pharma . If you think that their profit margins (and high return on captial ) is garunteed , then better think again. Not only is competition high , but the goverment does not interfere in closure of companies. So the inefficient die and the efficient survive. That is good for the society and also for an investor .An in-efficient competitor on subsidy can be really bad for the other companies



3. Pace of change – You literally see the business landscape change . In india the same is happening but in select industries . In the US it is pervasive. Is it good for an investor. Difficult to say , but generally too much competition and change is not good.



4.Innovation – Look at google . need i say more. In india telecom is a good example. What ITC is doing is a good example too. FMCG industry claims too be innovative , but their innovation are limited to buy one get one free schemes. So low innovation , low returns.



5.consumer orientation – This is same all over the world. People over the world want value for money. So if a company wants to make money they have to define and deliver value to the consumer. so watch out companies which work on cost plus pricing 6. Trends – This is very intresting. A lot of trends in US occur in india with time lag. For ex : growth of discount retailers, movement of the consumer to VOIP telephony ( this could impact the cellular industry ), trends in music retailing etc. The list is endless and a subject for another day.



i will come back again with more details on the points i have listed above.

The rupee seems to have started appreciating against the dollar ( or to be correct – the dollar is depreciating against the rupee ).



There seems to be a consensus that dollar would continue to lose value for some time ( i have no way of figuring it out as i am clueless on how to evaluate currencies , but going by warren buffets 20 B bet , i would not bet against it )