“Don’t try to be all things to all people. Concentrate on selling something unique that you know there is a need for, offer competitive pricing and good customer service.” – Lilian Vernon
In nearly every field all over the world, competition is part of daily existence. Little kids grow up keeping track of their games at recess. They then adopt a preferred team in their favorite sport and begin to root for winning seasons or even championships. The market in education is ultra competitive to enter the best schools, starting in high school and becoming even more fierce for college and graduate school. Competition in business is extreme in almost any industry and now extends all over the world. Why does this matter to those of us looking for promising potential investments? The answer has to do with profitability, as the more competition, the harder it is to maintain a sustainable margin. The best example is what has happened to the general retail landscape with the emergence of Amazon.com. The whole world knows to price check Amazon on nearly any item before buying. It used to be you checked Wal Mart for the lowest price. Both have enormous scale and buy in such quantity to demand massive breaks from vendors. If you are Macy’s, Kohl’s, Penny’s etc, the margin erosion battle is relentless. It is a prime reason why I think you want to avoid these kinds of industries for long term investments. Instead, I think you are looking for situations with absence of competition, dominance, and above all, big margins. Margin, margin, margin. Easy to say, much harder to find, especially on a sustainable basis. Get hunting.
In the capital markets this week, the earnings parade continued as soft drink and snack behemoth Pepsi spewed a sweet taste for investors, as did credit giant Transunion. Godaddy, known for its interesting commercials (as opposed to just the web site biz), hosted a nice result. Wyndham Resorts, a vacation and hotel company, proved yet again it is a consistent operator. Cisco has been the ‘big daddy’ for years in communications and remains so, as its figures last week displayed. T-Mobile posted very strong subscriber numbers and late Friday it appears the parent company of Sprint will make a bid for T (owned by parent Deutsche Telekom). Also in the deal world, Kraft-Heinz made a bid for Unilever, which summarily turned down the $50 price offer. Let’s take a closer look at this situation because it is quite interesting, although I am referring more to the corporate cultures versus the current market values.
Unilever is an enterprise where the bulk of its competitive advantage resides in emerging markets like India, Africa, Asia, and various parts of Europe. It is known as being very outspoken in favor of sustainable environmental practices and have incorporated this ethos throughout its systems, particularly the supply chain. You could call it one of the leaders of the ethically conscious corporation movement. Kraft, its pursuer, was a spin off of, drum roll please, Phillip Morris. In case you aren’t familiar with PM, that would be the largest provider of tobacco related products, you know, cigarettes. Uh, that might be a little issue with the rank at file at Unilever, right? Well, the largest owner of Kraft-Heinz is 3G Capital, who has a big partner named Berkshire Hathaway, led by, Warren Buffett. Berkshire also is the second largest owner of Kraft as well. So, with Buffet sitting on 100 billion in cash at Berkshire, it could be used to help finance the deal. Of course, the brass at Unilever turned down the 50 buck offer, but 3G is well known for it’s, shall we say, tenacity. Having owned Unilever for over a decade, I suspect their management team is not keen to be taken over by Kraft. Get the popcorn out because this one is worth watching.
In the never ending drama of the political world, the Trump Administration continues to set records for it’s, ahem, lack of convention. Democrats continue to look at a Trumpian world as unacceptable, to the point of having their party leaders quoting made up tweets and explain to the world what a scape goat means. Much of the tension has to do with the competition for power and the never ending struggle to emerge victorious. Imagine that, competitive forces apply to the rough and tumble world of politics.
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